What Sequestration Means for the Defense Industry

I was working on Capitol Hill in August 2011 when sequestration was dreamed up as part of the Budget Control Act. I remember thinking, “I don’t see how these guys will negotiate their way out of this one.” As horrible as the sequestration mechanism is, it just didn’t seem horrible enough to prompt politicians in Washington to let go of their sacred cows, roll up their sleeves and start compromising. It appears (for once) I was right … unfortunately. Congress has failed to exploit all previous opportunities for a “grand bargain” and they appear poised to do so once more this summer. Defense News quotes my former boss Senator Richard Shelby as saying, “There’s always hope there will be [a deal]. But as time moves on, it begins to wane.” It’s true—we’re living under sequestration and, to the average American, life seems to be moving along pretty much status quo. Where’s the burning platform that will cause Congress to change now? I do not see many politicians running successfully in 2014 on a platform to undo the defense cuts.

The more relevant question now is how will the defense industry be impacted by sequestration over the near and far term? More specifically, which programs are going to thrive and which are going to be stretched out, cancelled or deferred?

It seems to me that the programs that are going to feel the greatest pain from sequestration, especially in the short to medium term, are those that are underperforming expectations—particularly if they are doing so in publicly visible ways. With OSD comptroller, OMB and Congressional staffers all looking for cuts that are “easy” to justify to their bosses, going over budget, failing to hit schedule milestones or experiencing a major test failure are all likely to put crosshairs on a program. If I were a program manager right now, either in the government or in industry, job number one would be staying off the front page of Defense News.

And staying out of the industry rags (or at least only getting in with good news) is all about controlling risk—the risks that you’ll blow through your cost estimate, overrun your schedule or experience major hiccups during test and evaluation. Generating exquisite performance is not the only measure of merit in this world where, as Ash Carter has said, affordability will be mandated as a requirement. A recent study by the consultants at McKinsey and Company offered this advice to defense companies looking to thrive in a post-sequestration world:

“Companies must ‘break the cost curve’ by keeping nonrecurring development costs and recurring production costs in line with budget … They must position themselves as agile, cost-efficient providers that deliver good-enough solutions quickly, with less risk and with more certain outcomes.”

At GE, our customers are increasingly coming to us because they want to minimize development costs and de-risk their programs by using components and subsystems that are already field-tested, integrated and ruggedized. Just as the government is less interested today in sacrificing affordability to gain performance, prime contractors are becoming less concerned with holding onto workshare at the expense of program's ability to execute.

Where a PM in the past might have been willing to accept some extra risk in his or her program in order to keep a subsystem development project in-house, that seems like a bad bet today when NRE is tight, engineering staffs have been cut to the bone and most of us have enough on our minds already. Buying a high TRL COTS or modified COTS hardware product allows our customers to take something off their plate and focus on the core task: platform-level systems integration.

Our website is packed with info about the different ways we can help you deliver on your commitments—on time, on budget and on target. Take a look and let us know if you have any questions.

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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