Defense Contractor Longevity Hinges on Agility, Cyber Expertise
Nov. 30, 2020
[With $597 billion at play, our analysts have created your guide to the 200 government contractors changing the federal market in fiscal year 2019. Download the full report.]
Defense spending continues to see robust growth, propelled by a $98 billion increase at the Pentagon from 2015 to 2019. Between 2018 and 2019 alone, defense contract spending grew by $30 billion, as part of a $404 billion budget.
Of the major military branches, the Navy added $12.4 billion, the Army $9.7 billion, and the Air Force $6.6 billion to overall defense spending.
Interoperability Demand Grows
Across growth areas, demand for complementary services, spanning interoperable systems and cybersecurity, saw an uptick in demand.
In this realm, defense industry experts see heightened interest in “advanced software to connect advanced military systems,” said Mark Russell, chief technology officer of Raytheon Technologies.
Similarly, experts have witnessed a greater focus on “joint all-domain operations” that ensure various networks, as well as weapons systems, ships, airplanes, and training platforms, are interoperable and can share data, noted Garry Schwartz, president of Huntington Ingalls Industries’ Technical Solutions Defense and Federal Solutions group.
[Huntington Ingalls landed at No. 9 on the BGOV200 list this year, coming in as seventh among defense contractors.]
Another growth area is intelligence, surveillance, and reconnaissance (ISR)-as-a-service, “where the government sets a general intelligence requirement and then looks to industry to collect, analyze, and package intelligence products,” Schwartz said.
Faced with these wide-ranging customer demands, defense contractors must “be an integrator in every sense – combining their solutions and capabilities with a partner network and vendors,” said Allen Deitz, executive vice president for Salient CRGT’s growth enablement team.
Cybersecurity Spending Soars
With defense systems, the shift toward greater interoperability also spurs heightened demand for security.
In short, defense customers continue to expect data to be shared safely. This expectation persists, “regardless of operating domain or the military service that owns the platform,” Schwartz said.
In keeping with this assessment, cybersecurity spending grew to $7.8 billion in 2019, up $1.4 billion from the prior year.
This trend will continue, as the Defense Department issued a new mandate this year for all applicable contractors to attain a new cybersecurity certification, the Cybersecurity Maturity Model Certification (CMMC), by 2026. The requirement will affect 300,000 DoD supply chain companies.
“Cybersecurity and supply chain issues are growing in importance for DoD,” said Robert Levinson, senior defense analyst for Bloomberg Government.
“Companies that can demonstrate compliance with all standards and the transparency of their supply chain will be at [an] advantage,” Levinson added.
In this regard, contractors must think of cybersecurity as a competitive differentiator.
“Firms that invest in novel cybersecurity capabilities will be better positioned than firms that only meet the bare minimum,” said Christopher Cornillie, federal market analyst for Bloomberg Government.
$597 Billion at Play
Good news for professionals who are government contractors after an onslaught of challenges in the first half of 2020 – contractor spending is up from last year. Examine the list of the top government contractors.
Focus on Agility
To boost market standing, agility also remains critical, industry experts say.
Larger global changes, such as the creation of the U.S. Space Force, the realignment of forces in Europe, and the drawdown of troops in Afghanistan deepen this focus, noted Deitz of Salient CRGT.
In this environment, contractors that are agile and can adapt will stand apart.
“Successful companies will be the ones that can quickly deliver the technologies [to] military customers,” said Raytheon’s Russell, citing advances delineated in the National Defense Strategy, such as hypersonics, space-based missile warning systems, and directed energy.
Agility also means increasing delivery tempo and affordability, Raytheon’s Russell said.
To advance customer goals, defense companies must embrace the use of “modern software development practices, like agile and DevSecOps [development, security, and operations] to streamline design, development, manufacturing, and fielding,” Schwartz said.
“[This focus] also suggests defense contractors will need to make more upfront investment and accept increased development risk if they are to [remain] competitive,” Schwartz added.
Leveraging technologies such as advanced processors and 5G will also prove vital to remain agile, Raytheon’s Russell said.
Beyond technology adoptions, the defense industry must modernize its bureaucracy, experts say.
“It is increasingly important to avoid the bureaucracy and stagnation often seen with traditional defense firms, where corporate politics [require] use of internal delivery capabilities at the expense of innovative solutions offered by emerging providers,” said Deitz of Salient CRGT.
“For further agility, contracting must effectively leverage best-in-class vehicles,” Deitz added.
Speaking to this imperative, the Office of Management and Budget and the General Services Administration increasingly promote the use of best-in-class, or BIC, contracts. Until recently, these contract vehicles mostly occurred on the civilian side, Cornillie noted.
Yet BIC contracts are advancing into the defense industry. Recent examples include the Air Force’s NETCENTS-2 shift to a blanket purchase agreement on Schedule 70, Cornillie said.
“There will still be a role for stand-alone contracts for unique products and services, but contractors should expect the Pentagon to keep bringing more and more spend under management – keep an eye on so-called ‘tier 2’ contracts like the Army’s ITES-3S and ITES-4H as well,” Cornillie added.
“Prior to [the] Covid-19 crisis, the administration had requested a real decrease in the defense budget for fiscal 2021 and basically a flat budget for the years following,” Levinson said.
However, emergency measures to combat the pandemic have led to more spending across nearly all government agencies, including defense.
As with other sectors, the pandemic has forced large swaths of the defense industry to adapt to a telework environment.
Offering employees more flexibility such as telework could bolster recruiting and retention, Raytheon’s Russell noted.
“The biggest differentiator is the people side of the equation,” Cornillie said. “Especially as we see the commercial tech giants entering the federal market – all of whom have deep pockets – competing to hire and retain the best and brightest will become more of a challenge.”
Moreover, travel restrictions caused by the global pandemic have led to “delays in deploying and redeploying staff from OCONUS [Outside Continental U.S.] locations,” Salient CRGT’s Deitz said.
The DoD has struggled to process staff in a timely manner during the pandemic. In this way, defense companies are finding new business opportunities.
In the case of Salient CRGT, this means expanding “partnerships with in-country sponsorship companies that assist in expediting visas and other in-country logistics,” Deitz said.
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Experts expect the pandemic to influence M&A activity across the defense sector.
“In the wake of Covid-19, some smaller defense companies may be in a weaker position and be ripe for acquisition by larger firms,” Levinson said.
This trend “will only accelerate as companies start to feel the pressure from Covid and as requirements like the CMMC increase the costs of doing business,” Cornillie added.
Furthermore, the “DoD may take on more of a role in preparedness for the next pandemic,” Levinson said, “and some traditional defense companies could look for acquisition targets in the medical space.”
Yet expect some slowdown ahead, experts add.
Tensions with China are driving defense growth, buoyed by bipartisan support for additional defense spending to combat the “Chinese threat.”
“Still,” Levinson noted, “the exploding debt and deficits will put somewhat of a damper on major increases in defense spending.”
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