January 16, 2012 by Steven Krause

Caught in the pincer between escalating entitlements and a defense industrial establishment transitioning from denial to panic, President Obama announced on January 5^th the U.S. Defense Strategic Guidance for 2012 that sets the conditions for a decisive shift in favor of the former.  In doing so the President positioned himself firmly among the American majority, according to Rasmussen, Reuters, Harris and others, who favor defense budget reductions – an alignment that becomes even more pronounced when poll participants learn the actual level of U.S. defense spending.

The upcoming FY2013 budget request will begin to identify winners and losers in this new scenario.  A peanut butter spread of cuts is traditionally selected as the safest political strategy, but it is not the only possibility.  Senator John McCain, no particular supporter of the Obama team, responded to the January 5^th announcement ominously:

“I understand the need for reduction in defense spending, but we must also address the broader cultural problem plaguing our defense establishment:  the waste, inefficiency and ineffective programs…”

However they are applied, reductions announced on Thursday equal the elimination, roughly, of one Lockheed Martin or a General Dynamics plus a Raytheon – every year for the next 10 years.  And if post-Supercommittee-failure sequestration unfolds as current law requires, the resulting industrial carnage will more than double the total announced on Thursday.

What does this mean for firms in the defense and security business? This new normal can spell terrific opportunity for firms that are willing to shed comfortable habits and plunge into the maelstrom with courage. Some of the outlines of the new future may already be emerging, including these possibilities:

– Next generation DoD programs may be more numerous, smaller and of shorter duration, making them more addressable for smaller U.S. firms and for a growing number of international defense and security contractors — whose home markets are even more stressed than the U.S. market. These companies that have traditionally prospered in the second, third and lower tiers of the U.S. government procurement system may find themselves bidding and performing as prime contractors.

– These same firms whose order books have been typically been satisfied by U.S. government purchases may increasingly attempt to turn to international markets to replace revenues lost from a shrinking U.S. base.  These companies will quickly discover that doing business overseas, although it may initially appear similar to their familiar U.S. business environment, is different.

– The U.S. Defense and Homeland Security Departments may place an increasing premium on solutions that are more proven and much more rapidly deployable to the forces and first responders who need them.  Companies serving in this environment will have to find ways to eliminate risk and guarantee performance in a much more commercially oriented business environment.

Firms that embrace the coming chaos, that are willing to challenge their internal shibboleths, to continuously redesign themselves, and to immerse themselves deeply in the seemingly intractable decisions their customers must make can serve their customers, workers and owners and prosper in the years ahead.

On the other hand, incumbents entrenched in the 20^th Century may die.  They will sound like Arthur C. Clarke’s neurotic computer HAL, speech patterns deteriorating to an incomprehensible mumble as its brain cells were slowly deactivated:

“I know everything hasn’t been quite right with me, but I can assure you now, very confidently, that it’s going to be all right again. I feel much better now. I really do… I know I’ve made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal. I’ve still got the greatest enthusiasm and confidence in the mission. And I want to help you.”