Can you size up the downsized defense budget?
How defense contractors can survive and thrive in a budget-conscious climate
- By Zach Noble
- Mar 12, 2014
Defense industry experts agree: the pain is here.
As you’ve heard, the president’s proposed budget trims defense spending by 0.4 percent.
Defense leaders have made pessimistic pronouncements, with Defense Secretary Chuck Hagel warning of “tough, tough choices” and House Armed Services Committee chair Buck McKeon saying the Pentagon should not expect to get the extra funding it says it needs.
“When you look at the big player on the block, the DoD, you’re seeing a lot of reduction,” said Ray Bjorklund, president of BirchGrove Consulting. “Services are getting cut way back, the operations tempo is down.”
But contractors with the right adaptive, cost-conscious strategy – especially if they’re tech-centered – could come out on top.
Despite the lean defense fund, “there are pockets of opportunity throughout” the proposed budget, said Deniece Peterson, director of federal industry analysis at Deltek.
The military will be performing a “balancing act,” Peterson said, as leaders seek to trim down active-duty personnel numbers and scrap old vehicles while modernizing and patching up some of the deep cuts made during sequestration.
“It all feeds back into force readiness, which was challenged during sequestration,” Peterson said.
The budget puts the emphasis on smart warfighting capabilities, with fewer soldiers in boots and more investment in cyber capabilities.
Military agencies will be seeking “modernization that will be more cost-effective,” Peterson said.
“There will be much more focus on performance and outcomes,” she said. “With all the scrutiny these days, the DoD cannot afford the project waste, the schedule delays, problems that have happened in the past, because at the end of the day all of those things cost money.”
What’s a contractor to do?
“It’s all going to come down to market intelligence,” Peterson said, stressing the need for contractors to enlist professional help in adequately assessing the needs of budget-conscious customers – and then catering directly and efficiently to those needs.
Lloyd McCoy, DoD consultant with immixGroup, emphasized the need for tech innovation.
“Tech is huge and saving money is key (for defense agencies),” McCoy said.
Contractors will need to offer more than just new tools -- they may also need to recommend smart cuts.
"Agencies will be saying, 'If you have a solution, you'd better be able to tell me what I can take out of my inventory,'" McCoy said. "It's all about cost avoidance."
If he had to pick “winners and losers” in the proposed budget, McCoy said he’d say the biggest losers are systems integrators.
“Big weapons systems have always been attractive to budget hawks,” McCoy said, saying systems integrators will see the platforms they administer lose funding.
“IT people are definitely the winners,” McCoy added.
As defense agencies seek to expand into analytics and virtual spaces to achieve cost-savings and increased efficiency, contractors could win big by positioning themselves to anticipate and meet their needs, McCoy said.
BirchGrove’s Bjorklund echoed the call for anticipatory strategy, saying contractors should assess the military’s evolving needs.
“(Defense contractors) need to think about what the ‘Pivot to the Pacific’ means,” Bjorklund said, saying long lines of communication, stretched across the vast Pacific Ocean, and radically different, possibly Chinese military threats will call for a different military toolkit than was required over the last decade.
Contractors should also consider the force structure associated with information, as cyber and traditional warfare become ever-more blurred.
“Companies that build armored vehicles, not to pick on them, but if your claim to fame is churning out tank turrets, that’s not going to be a growth area,” Bjorklund said.
He said that there will always be a need for armored vehicles, troop support services and other contracts that companies supplied during the wars in Iraq and Afghanistan, but he said truly successful companies will position themselves to provide a new breed of supplies and support.
Operations and support contracts will be drying up, since the fact of the matter is, Bjorklund said, “as (the military is) pulling troops back from southwest Asia, they don’t need as many contracts to support them.”
Tech remains solid.
“There is more investment in tech tools for conducting warfare,” Bjorklund said, citing upticks in spending on command and control, UAVs and cyber.
Nevertheless, agencies will likely be skittish when it comes to handing out awards.
“The first year of the sequester was very disruptive, very painful,” Bjorklund said. “It caused a lot of angst and caution when it came to awarding contracts, and that (angst and caution) still exists.”
How will the cuts, particularly to Army manpower, impact the ability of the military to do its job?
“Can we put out multiple ‘brush fires’ at the same time? Yeah,” Bjorklund said. “Can we sustain multiple wars, as we did in Afghanistan and Iraq? Probably not.”
Bjorklund compared the current situation to the military reductions at the end of the Cold War, which forced military leadership to think hard about force structure worldwide.
“The sequester was the poison pill people said they’d never swallow,” Bjorklund said. “Well, they did (swallow it). And it caused people to rethink force structure.”
As the defense landscape changes, experts seem to agree: contractors need to look and think two steps ahead.
“Some (contractors) are in self-denial about these seismic shifts,” Bjorklund said. “Some companies thought about the handwriting on the wall, others chose not to.”