May 2012

Small is Bigger, Better and More Innovative?
By Bob Pinato, Owner, ICCS, LLC.

Here we are four years into the worldwide economic crisis, which to date has yielded one of the worst financial downturns the western world has seen since the 1930s, and still there is debate whether or not we are facing a long anticipated election year upturn. Military budgets are being scrutinized carefully for the proper balance between the costs for national security, secure jobs in key congressional districts, pet pork programs and the cost of the war efforts. Worldwide, the cost of security in troubled economic times is being reviewed, with the investments of emerging economic powerhouses increasing and those of the great economies flattening and even decreasing in response to the economic pressures at home.

Albeit, a small, short-lived upturn in the USA was welcomed by the current government. With stock markets reflecting record returns, and corporate coffers flowing with hordes of underinvested profits, proof in some eyes that the downturn and the uncertainty it brings are still not resolved. Even though the corporations are bringing in record profits, mostly due to the downsizing and razor sharp cuts made to overhead budgets, budget shortfalls in state and federal government bureaucracies are a keen reminder that while the corporations and stock markets appear to be stabilizing, the government is still in major disarray. Inefficiency has always been an earmark of our capitalistic democratic form of government; it was a kind of source of pride that the government could not make quick, major moves without the consensus of the people. However, the track record in times of crisis was just the opposite and the people and government would come together to effect change quickly, concisely and effectively when needed. All the while generating confidence in the system and stability for the vision and economy moving forward.

This unfortunately has not been the case this time around. For some reason, a gridlock occurred at the highest levels, making efficient effective policies not only difficult to decide upon and initiate, but also creating uncertainty in the capability of government at a time when the people needed the vision and stability the most. In our type of system, faith and stability for the vision of the future is the key central element driving our economy and our form of government. Setting the proper sustained tone so that everyone— corporations, stock markets, educators, bankers, foreign investors, customers and our own populace of consumers— can identify with and plan with the environment provided. Some countries have more organized “5 year” or “10 year” plans. In the USA we have vision led by the people and the markets, stabilized by government non-interference, but at the same time government leadership in the form of future regulatory and incentive environments set by spending and tax planning.

The year of 2012 brings with it some very heavy baggage. Baggage in the form of not only how our economy is doing and providing for our own people, but also how our own people think about their roles in the formation of policy and direction for the future of our country. The baggage is also laden with the role of our country as an inspiration to the rest of the world.
This inspiration has been and is one of the reasons why the rest of the world, in their own ways, has sought to emulate the patterns of the USA in many fields such as education, innovation, economic growth through capitalism, stock market growth and in the very end selling and buying of goods in the world markets. Creating an ever-flatter trading market around the world, but at the same time increasing communications throughout the planet.
This baggage we carry is a result of the leadership we have provided and examples we have sought to make so that others will follow and grow in our footsteps. The weight and bulk of this baggage may seem to be taking its toll due to our financial condition, but it is something more that drives us. It is the spirit which we have founded and the pride we have to see our compatriots (students, if you will) around the world emulate our systems, make them their own in their own cultures and methods, set new rules of engagement and break old cultural and business paradigms which have existed for generations.

How does all this affect the military way of existence, thinking and planning? Well, as the countries grow, they trade, their people travel and work in far-flung locations around the world.
Sea lanes and the population have to be protected. All strong reasons why the USA has expanded our roles since WW2 by establishing security in key venues around the world. Now our students, recent economic powerhouses, seek to fill similar roles in their own micro-spheres surrounding their regions and spheres of influence. And they are all stepping up by building upon their commercial expertise, newfound wealth and investments in an educated and more “communicationally” aware (not a real word, think “communications savvy”) populations. People everywhere want security for themselves, their families and what they have built, hence the heavier investments in new infrastructure: telecommunications, roads, bridges, airports, as well as military and other government spending around our planet.
Military investments over the eons have usually generated oodles of new whiz-bang technology, which in turn generated innovation for commercial ventures, systems and gadgets. We have for the most part relied on and welcomed the technology nudging ventures brought forth by the likes of DARPA, SBIRs and the military. This time around it is more of a mix of commercial technology leaping ahead and lending itself to new ways of re-innovation in the form of communications equipment, flying platforms, vehicle technology and computer systems. All with the benefits of lower costs, ubiquity and availability worldwide, driven by the commercial innovation and consumer demand for similar systems and gadgets. This is the very essence of what COTS was supposed to be in the early ‘90s, by dragging low cost reliable products into the military sphere for use by the “team” and reducing outrageous runaway costs that the government was facing at the time.

Military investments are measured in pure dollar terms or as a percentage of GDP. These have been traditional values of measurement, probably initiated by the guys who have been at the top for decades, who may not truly value the “bang for the buck” which is realized. Some countries have not had to invest as much in R&D and are able to just buy what they need, or emulate it in their own way, with local cost structures. Thus saving many billions that countries like the USA invest yearly in R&D and innovations. How much does the next closest country to the USA spend on military budgets? Could you even venture a guess in these non-Cold War times of rural terrorism and regional mini-conflicts? Remember the days when the Soviet Union was the number two economy in the world? When its military budget was within earshot of our very own and it was building more tanks, missiles, submarines and aircraft than the USA and all of NATO? Its expenditures on big systems to protect it and provide jobs drove it to the point that it went bankrupt!

As you can see from the chart, the gross expenditures of the defense budget in the USA are still about equal to what the rest of the world spends combined. This is about 8X what our nearest competitor spends in a given year, when looking at budgets in real dollar terms, not accounting for all the expenditures over the past decades which have yielded some of the best hardware money and technology can afford. The USA leads the world in many areas of hardware deployment, such as ships, submarines, aircraft, missiles and vehicles. Never mind the boggling number of troops deployed, providing a presence in far-flung non-combat and stabilizing regions of the world. The bang for the buck factor is something that needs to be given more thought, but in essence it is the amount spent versus the PPP (purchase power parity) of the country’s currency. While not an exact science, as some costs are affected by external drivers such as oil, it can provide a more accurate representation of the amount of budget impacts on the annual hardware purchases. From all appearances, using the best estimates of the effects of real money internally in each country and the PPP approach, the world is catching up. As an unanticipated aftereffect, it now seems that the rest of the world, especially those in growing economies, has benefitted from this commercial mentality for military equipment and systems. Our troops are even facing some of these very same obstacles when fighting for our security out in the field. Fortunately there are ways that our many firms in the defense infrastructure have developed methods to fight back and succeed while doing so. Yes, innovation is our key driver in the USA and it is our broad innovative nature with a capitalistic fervor, driven by revenue generation and a large investment community, which enables our long-term successes. All driven primarily with deep pools of venture capital that are managed by smart money entrepreneurs and driven deep thinking and quick acting inventors who recognize a need for a solution far in advance of a centralized planning structure common in many systems houses and government think tanks.

It has been brought up in written media that the USA needs to reevaluate its form of contracting, systems development and expenditures. Look at ways to drive down costs for programs and figure out new ways to resolve mission needs while at the same time retaining leadership in areas we chose to do so. Drones have proven to be a major lever for use in combat as well as for security purposes such as border control. With new innovations in low cost over the horizon RADAR, which are portable, lightweight and consume minuscule amounts of power when compared to their aircraft brethren, showing their capability, we will see even more Drone ready products coming out. Driven by the smaller, more nimble and hungry firms.

As all of our readers know, what makes the USA very different is the fact that many of the smaller firms are filled with innovators and entrepreneurs who went off on their own to make a difference in the smaller, more nimble firms. The true creators make major contributions and a difference every day to the strength and variety of the capabilities of our leadership in this area. The very same smaller firms in the USA (and some set up in other places around the world) who are designing and manufacturing for the government and military (worldwide) are still the most viable force in our arsenal. It is the smaller firms that generate the majority of the innovation, jobs, manufacturing base and investment in new approaches to innovation. Yes, the delicate balance of key technology funding, investor seed money and confidence and entrepreneurial spirit and innovation all are the recipe needed for defining a better approach for the future.

A methodical approach taking into account the limited budget resources where we can no longer afford to dump wasteful amounts of money into long, drawn out, expensive projects will win over. Replacing the old ways of doing business will not be easy, but in the end a more cost effective technology driven approach will benefit the troops in the field and provide for a maximum bang for the buck we need. Yes, there will still be the “must have” factors for new technology development, which only demanding programs can drive, and these too will spin off new opportunities to the smaller firms. Yes, the large systems houses will still be necessary for the very backbone of our industry and development of the big systems that only they can do. But they, too, will be the recipients of the innovation and technology developments, partnering with the smaller creative firms dispersed all around our great country.

Many in the media question the viability of our economic and commercial system to still compete in today’s world, leaving a lingering doubt daily as to our national will and ability to reform as we have in every crisis before us. The very competitive commercial, political and yes, even the military environment internationally, which is facing us daily in the news, on the web and television and in every periodical we read, makes it appear that the USA is facing a crisis unlike any it has before in its history. As the beacon of innovation, political leadership, economic power and military might for many around this planet and while politicians talk about economic tools and fixing the economy, we all are beginning again to realize that it is through the will and drive of the people and the force of the individuals, entrepreneurs, banks, creditors and innovators among us that make the difference. We all know that the world is catching up with many measures, such as GDP, military expenditure, steel and oil purchases and pollution generation. This is not the issue, as it is expected that true competitors will eventually get better at what they do and the true champions will strive to emulate and overtake the leader one day.

As we reflect: What is it that makes us so good? It is our belief in one another, our friends, capabilities, spirit, capitalism and leadership. It is one thing that binds us together as a nation and that is the belief of ourselves as one!

ICCS, LLC.
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