‘The Trail Has Been Blazed’
CEO Tom Kennedy sat down in his office at the company’s Waltham, Massachusetts headquarters with Aviation Week Editor-in-Chief Joe Anselmo and Managing Editor for Defense and Space Jen DiMascio.
AW&ST: Cyberdefense is becoming an important part of Raytheon’s business.
Kennedy: With the Internet of Things, cyber is pervasive in everything we do. The entire globe has become essentially a cybereconomy. The tip of the iceberg is really the information technology, but below the waterline there is a significant amount of concern about cybersecurity on the operational technology side of the business—the factories that are automated with robotics, and how those are tied back to the original equipment manufacturers so that they can update and maintain them. That interface, unless it is secure, can be a concern. It goes all the way to something called vehicle-to-vehicle, where autonomous cars will be talking to each other. The big concern is that somebody gets into a car, plugs in their iPhone to listen to their favorite music, and somehow that iPhone was infected. And then it is spread vehicle-to-vehicle across all of those automobiles.
Raytheon’s cybersecurity business, Forcepoint, has to compete against the commercial sector, the Ciscos and Symantecs. Has that been harder than you thought it would be?
No. Raytheon started off as a commercial electronics company 95 years ago. We have learned that when you are running a commercial company and a defense company you have to separate the operations. But you do not have to separate the technology. So we believe what separates us from our competitors is that we have defense-grade solutions that are tried and true. We get attacked from all elements: nation-states, criminals, activists. We have protected ourselves against those and have created an unbelievable capability that we are taking to market. Forcepoint started off as a $250 million-a-year business in 2015 and it is already up to $600 million in revenue. It’s growing in double digits and making a profit. What is very interesting to me is that the insider-threat capabilities we have provided to our government customers have now become an emerging market on the commercial side. We’re very excited about that marketplace and tying it in with some of our data loss-prevention capabilities and offering the insider threat [competencies] combined with some behavioral analytics.
Is it really going that great?
I think it is. The reason we went into this is that the threat just mushroomed around 2007, almost overnight. So we reassessed our company in terms of technical gaps relative to cybersecurity, and since 2007 we have acquired 14 cybersecurity companies and integrated them into our business. But we did not have the market channels. We had just sold off the last big commercial part of the business, [business aircraft producer] Raytheon Aircraft. That’s one of the main reasons we bought WebSense [in 2015, for $1.9 billion]. We broke out our cyberproducts group and combined that with WebSense, and that became Forcepoint. All of these products are used in Raytheon. We have an automated data site, so I can see in real time how these products and solutions we are offering in the commercial marketplace are operating in our [defense] environment.
Raytheon saw the cyber and international markets as avenues of growth after sequestration budget caps caused U.S. defense spending to decline. Is sequestration dead now that Republicans will control the White House and both houses of Congress?
Sequestration is still the law. The new [Trump] administration has talked about revisiting it, so we’ll see what happens. But Raytheon’s strategy is to make sure we are a vibrant business despite sequestration. We put that into place back in 2014. At that time, 26% of our revenue was from the international marketplace. We moved that all the way up to 31% in 2015, and 44% of our backlog is international. Another area we worked heavily on was the new technologies we thought thewas going to be interested in. We made some significant investments in hypersonics, high-energy lasers and undersea.
If you look at [the Pentagon’s] Third Offset Strategy, we got a little bit ahead of the game. One of the [payoffs] was a recent contract from DARPA [the] for the Hypersonic Air-breathing Weapon Concept program [to enable an effective and affordable air-launched hypersonic cruise missile]. We would not have won that if we hadn’t altered our strategy to take the right focus on hypersonics.
There are so many new technologies that are becoming pervasive: automation, artificial intelligence, 3-D printing, autonomy. How much change are we going to see, and how fast?
Give me a pen and a piece of paper and I’ll draw you a graph [see illustration]. This is how we’re looking at it. One axis is time, and the other is level of technology. We have been on a linear path, but we believe we are getting pretty close to a big inflection point—an exponential curve. You just named most of the technologies. Artificial intelligence has been around for a lot of years. When I was getting my Ph.D. 30-plus years ago, I had somebody sitting next to me working on artificial intelligence.
What is different is that it is now being applied to real-life problems. Machine learning is an element of it, as is behavior analytics. The difference is that these things have been perfected to where they can be applied. Another example is nanotechnology. It is not going to create new elements on the periodic table, but it is going to change the behavior of those elements. There is some unbelievable stuff we are seeing. So we’re preparing. Companies in the future that don’t embrace technological change are not going to survive. With this inflection point, you are not going to be able to stumble, because there will be less time to catch up.
You’ve expressed concern that U.S. adversaries are catching up in closing the technological gap.
Think of the OODA loop: you observe, you orient, you decide, and then you act. [The U.S.] has been able to complete that loop faster than anybody else for years, based on our technology. We have also been able to slow down somebody else’s OODA loop better than anybody else out there. But our adversaries are getting smarter on how to protect their OODA loops, so that we can’t affect them as much. They’re also figuring out ways to increase their speed—one of the things we are seeing is the use of hypersonics by some of these countries. We need to be able to slow them down and make sure we have the ability to degrade their observations, or be sure their observations are not as accurate as ours. We also need to orient ourselves faster. That’s where things such as machine learning can come in.
Is the U.S. Air Force’s T-X trainer competition a must-win for Raytheon and teammate Leonardo the way it is for some of your competitors?
We don’t get into a competition to lose. When we go after something, they are all must-wins. This is serious for us. I think providing a solution that is low-risk in both schedule and cost is something that should be very attractive to the Air Force and the Defense Department. It is very safe, with two engines. Its cost of operation is low and has already been proven in several air forces. We are making some upgrades to meet the requirements, but essentially it is an off-the-shelf system.
It really depends on how the government emphasizes risk and cost versus cutting-edge, no?
How many brand-new products can the department take on? They have a lot on their plate. I think that having a solution that meets their needs and is time-certain and cost-certain is pretty attractive.
Raytheon’s OCX [the Operational Control System for GPS] has experienced some major cost increases. What happened? Was it a case of the Pentagon and Raytheon not talking to each other? Was it a management issue?
It was a first-time issue. The first time defining what cybersecurity means, defining how we were going to test it to say we passed, and getting that defined to the complexity of a GPS OCX system that has so many connections outside of its main command-and-control structure. It was not in the functional elements, it was in doing those in a 100% cybersecure way, and then getting the definition on what 100% meant. This does use commercial hardware, and it turns out that anything you buy has open source software in it. So how do you go off and remedy that issue? That has never really been discussed before. It’s all behind us now. We are off and running. But these are breakthrough technologies and ways of thinking about cybersecurity. The trail has been blazed, and we have developed some very unique processes and procedures that the department will be able to use on future programs. It definitely has made Raytheon’s cybersecurity toolbox significantly stronger.
You talked about 31% of your sales last year being international. How is the market in Europe?
Europe has picked up significantly due to some of the concerns in Eastern Europe relative to some of the activities in Ukraine that have occurred in the last several years. We are also hearing that several NATO countries are looking to get back to 2% of GDP defense spending to support their commitments. That is creating additional demand, as they increase their readiness and then look for next-generation systems.
U.S. President-elect Donald Trump has threatened to punish American companies that offshore work to other countries. Could that affect Raytheon’s international partnerships?
A majority of our work for the U.S., our allies and coalition partners is done in the United States. As a defense company, there are certain things you just can’t do in other countries. We’re not really affected by that, just due to the nature of the business that we are in.