There has been an uptick in industry consolidation and mergers and acquisitions activity in recent years. The recent announcement that Harris Corp. and L3 Technologies were coming together in a "merger of equals" is a notable example.
While mergers such as this are eventful for industry and financial markets, what does the trend mean for the Defense Department?
At best it may help it a little, but much more profound change across the entire industry is required to help speed technology and innovation to the warfighters--better, faster and cheaper. The department is hungry for real innovation. In the past, large mergers and acquisitions generally hurt innovation, agility and speed as large firms focused on protecting established business areas and large programs.
But is this time different? Firms of all sizes recognize the department's demands, and have been experimenting--some more than others--with more creative, higher-risk agile business models. They realize that if they don't deliver innovation the Pentagon is getting better at finding it from nontraditional industry competitors and smaller prime contractors.
The stakes are high, and with the nation's technological dominance being seriously challenged and threats growing more complex, the Defense Department is more serious about innovation. Underscoring threat complexity, the battlespace is now far broader--from the heights of space to the bottom of the oceans, in the cyber domain as well as the physical--a further blurring of military and non-military realms, and increasingly overt political and public opinion battlegrounds.
The department is determined to better engage industry to help deliver better results. Achieving these improvements requires commitment and investment by industry, deeper collaboration and a different framework of performance-driven financial incentive. Those contractors who are willing to transform their businesses to meet new demands will be the winners--regardless of their size.
While traditional prime contractors will and must protect revenue streams on legacy platforms, they must leverage the profits to invest and prepare for market disruption. Industry consolidation and strategic mergers and acquisitions can help support the mission but only with effective execution, a dramatic change in industry and government's view of research and development, and innovation in business models.
Large primes must find new and better ways to work with smaller industry primes...