5 for 2015

5 for 2015

Happy 2015 everyone! It’s nice to have gotten through 2014 still alive and intact. The last 12 months of life under sequestration were supposed to have seen the defense industry rocked, the U.S. military rendered toothless and our enemies emboldened. There have been some real challenges, to be sure, but it hasn’t felt as bad as all that.

Due to smart moves made in anticipation of this downturn, the Tier 1 prime contractors have actually outperformed the market over the past 12 months and seem to be looking forward to 2015 and beyond with something approaching optimism. So if sequestration and budget calamity aren’t going to be the key stories of 2015, what will?

Here are the five trends I see exerting the biggest influence on our industry over the next 360 days (or so):

Commercial Outreach: I’ve written previously about the Defense Innovation Initiative and the effort underway at the Pentagon to reach out to companies that are not considered part of the traditional defense industrial base. Those efforts have accelerated with the release of an RFI last month soliciting commercial solutions to some of the thorniest warfighting problems we face. Some have expressed skepticism around the heavy technology focus in the current messaging around “offset” and commercial innovation.

Other Transaction Authorities (OTAs): OTAs are a type of contracting mechanism designed to work around Federal Acquisition Regulations and get the best technology into the hands of warfighters for evaluation, fast. Oftentimes OTAs are implemented through cooperative arrangements between a government agency and a nonprofit, the latter of which will then be responsible for reaching out to industry and finding opportunities to leverage the OTA. Two great examples of this approach are the Commercial Technologies for Maintenance Activities (CTMA) contract from the Office of the Secretary of Defense, executed by the National Center for Manufacturing Sciences (NCMS); and the Technology Domain Awareness initiative, launched by the DoD Information Analysis Centers and executed by the National Security Technology Accelerator (NSTXL). As the focus continues to sharpen on leveraging commercial R&D and innovation for defense purposes, OTAs will become increasingly popular.

Acquisition Reform: 2015 will see the ascendancy to power of two of the most vocal and longstanding proponents of Pentagon acquisition reform—incoming Secretary of Defense Ashton Carter and incoming Chairman of the Senate Armed Services Committee John McCain. It is not clear the extent to which these two reformers hold compatible visions or priority lists for the year ahead. Carter clearly has more flexibility, as the leader of an executive branch agency, to implement his convictions around “Better Buying Power” but McCain has a powerful bully pulpit and the ability to pass powerful legislation (if he can convince others to go along). Hold onto your seats.

Mergers and Acquisitions: 2014 saw an increase in defense-focused M&A activity and many expect the trend to accelerate in 2015. Ash Carter has discouraged / prohibited mergers among the big prime contractors but has declared open season for those large entities to gobble up smaller tech companies. The level and type of consolidation is likely to vary sector by sector, but one area that certainly seems ripe for big moves is the increasingly challenging services market, where L-3, SAIC, Northrop Grumman and others have all spun off big stand-alone companies in recent years.

COTS: In a world where the commercial world is innovating considerably faster than the military can, COTS vendors perform a vital function by finding the best of that commercial technology and packaging it in a way the military can use. Products like GE's rugged HPEC systems deliver performance that is consistent with the state of the art in Silicon Valley but is deployable into the harshest environments. The combination of a focus on affordability and contractor performance through acquisition reform and the increased interest in what the commercial economy has to offer should only strengthen the market for COTS hardware in military applications in the coming year.

So there they are…my bold predictions for 2015. I should include some sort of safe harbor disclaimer about forward-looking statements and so forth but then I’d have to call our legal team and they’d probably just make me rewrite this whole thing. Take them for what they’re worth, and let me know if you have anything to add, subtract or modify. And: have an amazing year!

Todd Stiefler

Todd joined GE from the world of Washington politics, and in no time at all has moved on to his second assignment, which sees him managing business development for the services GE is increasingly looking to offer to customers, including the Proficy SmartSignal predictive analytics software.

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