Commentary

How defense cost-cutting can spur innovation

For many years, most aerospace and defense companies’ innovation management capabilities were built on a reactive model primarily dependent on pursuing product development concepts and on plans dictated and funded by the Defense Department. That made sense during a time of large budgets and new weapons systems.

Today, new security threats and economic pressures have pushed the DOD to reexamine how innovation is funded and accomplished. This evolution will have profound implications within the supplier base for winning in this changing environment. While “evolution” connotes a work in progress, the key question is whether the DOD and its supply base can transition from the old customer-dictated innovation model to a new model that meets the DOD’s changing needs and funding constraints while allowing contractors to capture significant upside potential in line with bearing more risk from independent innovation. 

Potential benefits from a new innovation model include:

• Shortened product development times.

• Reduced reporting requirements.

• The potential to capitalize on innovation in commercial and international markets.

• The ability to use existing intellectual property in ways that leverage corporate expertise to better aligned to a company’s long-term strategy.

• The creation of a more dynamic workforce by reducing reliance on legacy technologies.

And the combination of these benefits offers the overall potential benefit of delivering innovation-enabled capabilities at affordable prices.

 

Particularly during this era of government belt-tightening, innovation management could be the path to short-term success and a long-term competitive advantage. Luckily, what was perhaps viewed as a liability is now becoming an enabler.

New approach to innovation

The DOD is no stranger to challenging times, yet it has weathered most previous economic storms without changing its approach to dictating innovation focus areas for the defense industrial base. What is changing with the belt-tightening of today, however, is the DOD’s stated position of embracing privately funded innovation. As it continues to outline for contractors the military’s innovation needs, it has also become more receptive to both considering and adopting independent development efforts from the industrial base.

Several major innovations of the past decade demonstrate non-traditional paths to fruition. For example, iRobot (best known for its Roomba vacuum cleaner) saw an RFP and recognized the government’s immediate need for an unmanned system to explore dangerous or difficult-to-access areas. Rather than wait to complete the paperwork process to begin innovating—and the potential delays—the company decided to go ahead and build a prototype that would meet the military’s needs and showcase it to leadership. Evaluators awarded the contact to iRobot, and the program’s success has ushered in major changes for the military, both in ground combat and air robotics.

Another example is Harris Corp., which was out of the competition for the Joint Tactical Radio System (JTRS) and decided to invest in developing a networked radio, based on its technology and its knowledge of the military’s operational needs. Working closely with the National Security Agency on security architectures, the company actually developed a working radio ahead of JTRS. The Army ultimately opted for the Harris radio over JTRS, and the equipment is currently used widely. 

Today, enterprising defense contractors, while facing a difficult environment, actually benefit from a customer more receptive to a new way of doing business. The increasing openness to innovation is akin to examples of reduced regulation that ushered in change in many U.S. industries over the past half-century. While companies in the transportation, financial services and energy industries were never as exposed to a single customer as defense contractors are, the effects of reduced regulation do offer a lesson on a path forward. More players were able to enter the market amid lower compliance costs.  Competition increased, M&A proliferated and the pace of innovation raised both the bar and the stakes. In transportation, for example, deregulation led to an increase in the number of trucking companies and the services they provided. An opening of the freight industry paved the way for innovations in express package delivery, where companies such as FedEx made significant gains.

Management commitment to invest in innovation management enabled forward-thinking companies in deregulated industries to translate customer and regulatory body openness into stronger returns.  At the same time, inertia caused by old cultures rendered others unable to address competitive pressures and to maintain market share. We believe a similar situation will follow for defense contractors.

In comparing innovation in the commercial sector to that in the defense sector, however, we recognize a distinction. Namely, in a competitive marketplace, innovation can sometimes create demand, and a companies’ success or failure in doing so is readily determined by customers “voting” with their dollars. In defense, with effectively a single customer, the ability to create demand akin to a commercial-sector marketplace is much more difficult and risky. In the defense innovation examples above, the DOD had signaled a need, and the innovator successfully changed the game as to how the need was satisfied. In the defense sector, innovation can lead to wins, but in response to stated or observed needs rather than pushing a new product into a marketplace where it can create its own demand.

Embedding innovation management

The growing reality is that the defense landscape will look quite different 10 years from now. Strategic needs will be different, speed-to-deployment will be more important and technology advances will be incorporated at lower price points. All of these changes require significant attention to how innovation is cultivated and managed. These evolutions, combined with the competitive implications stemming from the DOD’s increasing openness to organic innovation, mean that effective innovation is essential for survival in the aerospace and defense industries, yet it’s also an opportunity to grow advantage.

However, for many defense contractors, winning in this value chain paradigm will require embracing an innovation mindset they haven’t needed to rely on for some time—if ever. To make the transition to cultivating organic innovation, defense contractors can learn from successful businesses in other industries that have prospered in ultra-competitive environments. Understanding and adopting commercial best practices in innovation management to focus on innovation capacities, product strategy, and product cost optimization can provide a fresh perspective on how defense companies can take advantage of today’s opportunities.

So what are some lessons that commercial leaders offer for innovation management?

Innovation management is a tangible concept. It is not merely confined to developing the next generation of technology. Responses in recent years to A.T. Kearney’s Best Innovator survey indicate that leaders cultivate a bevy of innovation capabilities across multiple dimensions—processes, products, business models and organizational structure, among others—to sharpen their business continually.

Innovation leaders put a deliberate focus on innovation. These leaders usually identify six or more innovation targets to define success. They also create innovation organizations that report to C-level executives. The overwhelming majority of them involve their supply bases in a structured manner early on as a part of their own innovation strategy, and they take advantage of external sources (customers, universities, competitors and distributors, among others) in their planning. 

Leading innovators make sure the innovation process is broadly inclusive of various corporate functions and includes strategic value chain partners. The best innovators include many or all functional organizations across the various phases of the innovation process and are sure to involve top management earlier in the process to reduce expenses and risk. In addition, leaders enable and incent their strategic value chain partners to bring new concepts and capabilities to bear in a collaborative innovation process. All of these networking, organizational and strategic actions translate to real differences—including consistent improvement in time measures.

For defense companies, successfully adopting these and other commercial best practices for innovation management starts with deliberately articulating an innovation strategy that reinforces the overall company strategy—explained in implementable terms and taking advantage of the full organization. This requires transparency in decision-making, rigorous but efficient project reviews, an openness to new ideas and steadfast management support. As we have seen across multiple industries, creating the internal architecture for innovation, when followed with discipline and objectivity, has led many companies toward promising business avenues that deliver shareholder value.

The winds of change

The winds are clearly shifting. As the DOD embraces industry-sponsored innovation, the burden of shaping the next generations of defense solutions will increasingly fall on the industrial base. At the same time, the depth of technical and operational capabilities for aerospace and defense companies has never been greater. As history has shown, smart organizations that take advantage of such favorable environments and improve their overall innovation management capabilities prosper at the cost of the rest, both in the immediate term and in the long run. Even older, more established companies can reap the rewards. It just requires a new approach.

Defense Systems Update

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