Opinion: Western Defense Contractors Risk Losing The Tech War

aerial view of Silicon Valley
Credit: Patrick Nouhailler

Technological innovation is transforming modern warfare, as it has changed the operating models of so many industries. Whether it is autonomous systems or high-energy lasers, technology is widely influencing the evolution and deployment of new weapons systems. It also has kicked off a contemporary arms race with foreign adversaries such as China and Russia over development in hypersonics and space warfare—competitions in which the West is having trouble keeping up.

Where does all this leave leading Western defense contractors? It could force them to play catch-up with both rivals overseas and private-sector technology companies eager to enter the military marketplace.

Until now, legacy players have chosen to focus on their roles as original equipment manufacturers and integrators of complex weapons platforms. They could evolve by broadening their value proposition through differentiated solutions that enable increased performance and interoperability of a weapons platform. But when it comes to development of cutting-edge technologies, they have often needed to rely on either the military or tech innovators to provide the R&D necessary for breakthroughs. This is especially true when it involves the expanded development of technologies that have commercial origins. Given that the U.S. finds itself behind on certain pivotal technologies, that approach does not seem to be working as well as it once did.

Retaining market share 

Legacy defense players also face the challenge of keeping pace with technological change if they want to hang onto their share of future defense spending. As military budgets boost funding for innovative high-tech systems, incumbents will find themselves increasingly up against commercial sector innovators, despite the direct access to end users that incumbents typically enjoy. Although their contracts still represent the bulk of defense spending, incumbents would benefit from taking a more innovative posture now to help ensure their market position and relevance in the future.

This presents an opportunity for senior executives to consider the effectiveness of their company’s R&D spending and return on innovation. Whereas commercial technology companies typically allocate upward of 15% of revenue to new technology development, internal R&D spending by defense companies is usually closer to 2-3%. Without a commitment of sufficient resources to R&D, incumbents have too often depended on dividend payouts and share buybacks rather than innovation to boost their corporate valuation.

But it is not just about spending more money on R&D. Companies also need to be less risk averse when making tech investments. Instead of waiting for military customers to define future requirements and to fund their own R&D programs, major contractors should consider making calculated bets on what will come next on the battlefield. They need to solve for their customers’ unmet—and possibly unrecognized—needs rather than focus on their current product inventory.

Creating a new environment

Committing the money necessary may be the easy part. The biggest hurdles for established players may be changing the culture to become more competitive and recruiting a workforce fluent in the latest technologies—whether it is artificial intelligence, machine learning, autonomy, cybersystems or whatever the next technological breakthrough turns out to be.

To position for the future, legacy defense players will need to create an environment within their organizations where innovation and disruptive value propositions can flourish. This will involve committing more resources to devops, fostering co-creation approaches with customers and shielding innovation activities from day-to-day operational constraints, to name a few prerequisites. It will mean avoiding common pitfalls, as well, such as terminating projects too soon or hanging on too long to ones that yield little return.

Creating the new environment also will help the incumbent attract the next generation of engineers and computer scientists with expansive skill sets in advanced technologies necessary for technology development efforts to succeed.

More partnerships

One way to establish a bridge to the technology community and absorb some of its culture is through partnerships with innovative companies, particularly startups that incumbents could consider acquiring. While some of the biggest contractors already do this in one form or another, the outreach is not nearly enough to help refocus incumbents on innovation.

In the end, altering the priorities and culture of large, established organizations is never easy. But this time, the threat to U.S. dominance may finally augur a change. 

Randy Starr is a senior partner for aerospace and defense at
Oliver Wyman.


The US military-industrial complex has figured out that the best way to get lots of government money is to fall behind in some area deemed vital to US national security. When this happens the government will throw unheard of sums at "private enterprise" in order to reestablish parity of not supremacy.

So keep those share buybacks and dividends flowing instead of self funding internal R&D. It's a sure win-win-win for the shareholders, executive and military. Only the taxpayers of America lose.
While Mr. Starr isn't wrong, he fails to provide a business case for companies doing this. They're doing quite well maintaining the status quo, and they don't have any incentives to change it. A threat of highly unlikely existential crisis won't do it; they know we won't be getting conquered any time soon, even if we were to lose a war. Only profit talks.

"Their payment will be the honor they feel to serve! ...wait, who's paying me to yell at this guy?"
The better solution would be government-owned contractor-operated teams in major technology areas (like the Lockheed Skunk works). Private corporations will always value shareholder returns over R&D spending.