Deloitte questions innovation in sobering defense outlook report

After spending a week visiting Disney World and Lego Land with a bit of historical sightseeing around St. Augustine and Savannah, I probably shouldn’t have read Deloitte’s 2016 Global Defense Outlook on my first day back in the office.

Some of the numbers are stark reminders of the dangerous world we live in:

• SubSaharan Africa saw the number of terrorist attacks grow by 836 percent from 2005-07 to 2012-14.
• The 144 persistent terrorist groups in 2012-14 is the double the number from 2005-07.
• No nuclear agreements have been signed by all nine of the nuclear powers.
• The global vulnerability to cyberattacks has grown by 43 percent from 2010 to 2014

The report identifies five emerging fault lines:

• Russia and NATO
• China and the Pacific states
• States and Terrorist state threats
• Mature and emerging nuclear powers
• Information economies and emerging economies

Each one represents unique and serious challenges and for each fault line, Deloitte explores implications for policy makers. I’m not going to go into detail on each. You can read the report here.

But one implication jumped out to me. Deloitte is recommending that countries focus more on productivity rather than innovation.

Led by efforts from the United States, many countries are pursuing advanced technologies to gain the advantage over adversaries. The U.S. Defense Department calls it the third offset. “But this approach may not be well-aligned with emerging global defense postures,” the report states.

The innovation approach may offer limited advantages and divert resources from other investment opportunities.

“In an environment of relatively flat budgets, defense organizations might find more value in productivity improvement and human capital-related initiatives. For example, personnel incentives to raise the quality of recruits and improve retention of skilled specialists have emerged as key budget concerns for nations including the United States, Japan and Germany,” Deloitte writes.

The value of innovative military technology is declining, the company wrote.

The level of advanced technology on either side of the fault lines is converging with fewer differences in precision guidance, stealth, satellite navigation and nuclear warheads. “If the conference trend continues, then it may be productivity, rather than novelty, that conveys actual military advantages,” the report states.

That’s some interesting food for thought. When you have limited resources, where does your money make the biggest impact?

Another area I want to highlight is the growth of the defense export market. Nearly all U.S. defense companies and others around the world see exporting defense technologies and platforms as a growth business. The home markets are flat, so exporting is an enticing prospect.

But if everyone is exporting, who is going to buy? That’s a question Deloitte is asking. It is easier said than done.

It’s a sobering report for sure, but well worth the read, even if you aren’t in the defense market.