We’ve been thinking about the current budget dialog (including sequestration) and the havoc it is causing on internal defense contractor financial/strategic planning, as well as the potential resulting impact on the attractiveness of available M&A targets that address capability gaps in the implied strategic growth areas outlined by the current Administration—particularly cyber.
From our perspective, the 2012 US Defense Strategic Guidance implies a sustained interest level in growing capability within ISR, SOCOM, Missile Defense and Cyber. A tally of Budget Authority figures for Procurement, R&D, O&M and MILCON in these areas from the current Green Book (shown below) yields a blatant mismatch between strategy and investments, underscored by a summation of these areas accounting for only 25% of the total DoD budget and the balance as an Area for Compromise by lawmakers. If one is looking for protected areas to offset the looming downturn of major programs of record, the current budget profile, on the surface, doesn’t appear enticing for strategic investments to be the savior. But, is that really the way to think about it?
Let’s take cyber, for example. First, this profile is based on open source data. Second, there is an argument to be made that cyber is a key discriminator for other strategic growth areas (especially ISR, SOCOM). Third, to the same point, cyber can be applied to the Area of Compromise and be used to modernize potential “at risk” programs thereby extending utility and making cyber an integral function.
We believe there is a need to expand the definition of strategic capabilities, think more broadly about how to apply the defense strategy concepts to the Area for Compromise and accelerate the pace at which the Defense Strategic Guidance is operationalized.