Faced with these challenges, the Pentagon confronts two possible courses of action. It can adopt the most expedient path and reduce scope, which may include targeting specific programs to reduce volumes or capabilities, or outright cancellation. Mandating across-the-board budget cuts that would be required if sequestration occurs would be an even more draconian measure. This path puts our military personnel in harm’s way, reduces readiness and responsiveness, requires more costly recovery decisions later, and erodes the industrial base.

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Surrender is not an option. A better course is to change the way the Pentagon conducts business and maintains scope. We need to realize more value per dollar expended while maintaining readiness, capability, and performance—in other words, drive affordability. If successful, combat effectiveness, development and production processes, and support for critical industrial base capabilities should continue without substantial erosion.

Reducing scope is faster and easier because new conditions can be unilaterally imposed. Maintaining scope is more difficult. It demands significant business process and organizational change, requiring cooperation and collaboration among stakeholders across the value chain in an environment characterized by rigidity. This inflexibility, a pervasive impediment to improvement, creates a host of related barriers to increasing productivity or redefining solutions. 

Nonetheless, the defense industry—government and suppliers—must pursue the affordability path with a vengeance. It is hard to imagine a more urgent need than to undertake the transformational changes that real affordability requires.

Despite the value chain’s rigidity and other challenges and impediments, we suggest two compatible approaches to maintaining scope through improved affordability.

First, we must increase productivity. This means delivering specified product or service level performance by better leveraging labor or capital across the value chain. In short, the Pentagon must deliver existing products or services more efficiently.

Second, redefine the solution. Here, a new paradigm is implemented to meet a capability need. The paradigm may include developing and deploying a new product or service solution, new technology, or the adoption or adaptation of existing technology. In short, use innovation to change the nature of the “game”.

Arguably, a third option for maintaining scope exists. Simply attack supplier profit margins. However, this is a shortsighted, short-run strategy that ultimately results in “lose-lose” outcomes if the supply base enterprises fail to earn their cost of capital, leading to exits or underinvestment.

Numerous examples from the commercial sector have demonstrated that dramatic changes throughout the value chain are achievable. In charting a path forward, the Pentagon and the defense industry must start by understanding the attributes of top-performing corporations that leverage the contribution of all participants to improve productivity and generate innovation. These companies consistently exhibit three attributes—efficient execution, maximum contribution from supply markets as well as speed, agility and adaptability.

These attributes suggest a path forward for defense value-chain transformation in government and industry.

Efficient value-chain execution is a source of significant cost reduction and, when combined with high quality performance, provides a critical driver of superior value creation, competitive advantage, and ultimately improved market share. Value-chain partners with clearly defined roles and responsibilities operate as a collaborative network. 

Commercially, the scale and scope of the extended enterprise are leveraged to achieve cost advantage and operational complexity management. Suppliers are empowered to provide their best solutions to deliver requirements as opposed to responding to rigidly defined requests for proposals. Visibility, alignment, and engagement exist beyond the customer —prime level and incentives are established to promote these attributes.

Product development, production, and delivery cycle times are critical competitive factors. External innovators are identified and brought into the value chain early in the product development process. Commercial-off-the-shelf technologies are quickly adopted. Open-system architectures enable external developer contributions rather than heavy or sole dependence on sequential internal development. Value-chain configuration has the flexibility to meet changing customer requirements, exploit new opportunities, and mitigate emerging risks.

Given the pressures to reduce defense funding significantly, the status quo is unsustainable, forcing the Pentagon and the defense industry to act differently. All players in the defense industry have to make significant changes to their value chains—and they must do so in a far more collaborative manner than in the past.

The good news is that the commercial sector provides a path forward, demonstrating that that value-chain transformation is possible. This path, combined with prioritized affordability plans, will help ensure that the “maintain scope” option prevails as the most expedient, long-term remedy for the defense industry.  

Garber is a partner in A.T. Kearney with a focus on the aerospace & defense industries. Willen is a partner in A.T. Kearney and the leader of the firm's public sector, aerospace and defense practice in North America.