L3Harris explains investment strategy to get new tech to market faster

L3Harris Technologies' thinking behind starting its partnership with venture investment firm Shield Capital was to identify and foster companies whose solutions potentially have both defense and commercial applications.

A second big idea L3Harris has on its mind in the partnership is breaking down the barriers to entry that startup businesses often bump up against when trying to crack the defense market.

During L3Harris' first quarter earnings call with investors Friday, CEO Chris Kubasik acknowledged that "it's hard for these companies to get programs of record, so we're embracing and working with them."

"These are mainly Silicon Valley high-tech startup companies who have great commercial technologies that want to support the Department of Defense," Kubasik told analysts.

"We will make investments, either co-invest or through Shield in these companies, which is secondary to the goal of making this strategic investment," Kubasik added. The priority is to get the "technology into our systems quicker, faster, more affordable and meet the warfighter need."

(NOTE: Friday's call was the first L3Harris conducted under a new two-part format my Defense One colleague Marcus Weisgerber outlines here, plus compares to other defense earnings calls)

One subtext of Kubasik's remark on the difficulties startup face is the often-used "valley of death" adage representing the gap in acquisition and budgeting cycles that prevents innovative prototypes from becoming funded programs of record.

The above scenario often coincides with the other "valley of death" that can prevent startups from moving from their next fundraising round and achieving positive cash flow.

L3Harris' newly-unveiled Agile Development Group will be a lead participant in the partnership with Shield as an innovation acceleration and collaboration-focused team. Kubasik said the announcement was to give an entity that existed pre-announcement more branding and recognition.

ADG and its nearly 2,500 engineers focus on the front end of technology and systems development, after which they hand the creation off to another part of the company as the contracts move into production.

While Kubasik said giving examples is difficult because much of the activity is classified, he did note that the group is initially focused on the air domain and is active in "some interesting development on new and creative weapon systems."

The Friday call also gave analysts an opportunity to ask L3Harris about how the company is getting a handle on inflation. Supply chain and materials are certainly a watch item for L3Harris, but Kubasik also said the leadership team is "planning for wage and labor inflation as well as the job market gets tighter."

Nearly one-fourth of L3Harris' contracts are cost-plus cost reimbursable, which means the added costs flow through to the end user.

Many of those pacts have escalation clauses, however Kubasik also acknowledged "those indices are probably less than the real inflation" even though the clauses can help manage company costs.

Some of the tools in L3Harris' arsenal include those the company has already been using amid its three-year integration effort, including its self-touted "E3" efficiency effort focused on supply chain and facilities.

"We've doubled down on that effort and are going to have to continue to find ways to be more efficient," Kubasik said.

"We're really embracing and rolling out digital engineering. We're investing in more machinery and tooling to be more efficient. So that's going to be the challenge."

L3Harris reiterated the 2022 financial guidance released in January.