Driving a new business model in defense electronics.

• Author: Aslett, Mark
• Position: VIEWPOINT

The U.S. defense industrial base is undergoing a major transformation. Domestic political and budget uncertainty, geopolitical instability and evolving global threats have all become constants. Defense spending now stands at the lowest percentage of national GDP in modern history, and is in danger of being crowded out by other pressing domestic needs including social programs and the servicing of a growing national debt.

In an effort to address this effectively and within budget, the Defense Department is continually examining and issuing new and updated directives, such as its Better Buying Power initiative. This mandate, first launched in 2010 and updated most recently as BPP 3.0, is the department's effort to increase productivity, efficiency and effectiveness of defense acquisition efforts. BBP encompasses a set of acquisition principles to achieve greater efficiencies through affordability, cost control, elimination of unproductive processes and bureaucracy, and promotion of competition.

Mercury Systems supports the principles of BBP 3.0. Addressing firm-fixed pricing, a redefinition of "commercial items" and procurement practices that encourage open architectures will help make BBP 3.0 a reality.

Firm-fixed pricing contracts shift cost and pricing risk to sellers, driving them to innovate and optimize to remain both competitive and profitable, while encouraging the defense industrial base to build technology solutions that are standardized, modular, based on open systems architectures and that leverage reusable technology elements. This has become a pressing issue as the department--and companies supporting the platforms and missions that are of national and global importance--need to engage in business practices that can make the model a success.

In the context of procurement and pricing, a commercial item should be defined in terms of which party bore the risk and cost of developing and marketing the technology. Current defense procurement regulations determine commerciality based on answers to questions such as: Who else bought it? What did they pay? What was it derived from? How close is it to what's in a catalog?

These inquiries are not relevant to effective technology investment decisions or cost-effective procurement. Instead, officials should be asking: Who supplied the investment in R&D? Has the technology provider invested in open systems and modularity and standardization? How can these technologies be applied across...