Faced with uncertain budgets and demanding customers, defense executives are pushing hard to drive cost-effective technological improvements. With generous government-funded research and development (R&D) now scarce and defense customers calling for Silicon Valley-style technology breakthroughs, Western defense firms are looking to two sources of external innovation: commercial firms and foreign defense industry counterparts.

While the potential is clear, challenges abound — from differing business environments and clashing corporate cultures to onerous contracting and security rules.

To better understand the role R&D-driven innovation will play in shaping the defense sector, Avascent surveyed more than 200 aerospace and defense executives. Our interlocutors were unambiguous: Success in leveraging commercial or foreign-derived R&D for defense purposes remains sporadic. Nevertheless, the defense sector is slowly but surely signaling a sustained shift in business processes.

But the question remains: will they leverage new sources of R&D soon enough to maintain the leading edge their government customers demand?

Ninety percent of our respondents cited the vital importance of R&D-driven technological innovation for their home country's national security. It is a sentiment that already registers among potential adversaries. China's leadership, which for decades counted on the sheer mass of the People's Liberation Army, is now cutting personnel in favor of technology investment.

Stakeholders surveyed supported the commercial and international pathways to innovation, though more tentatively on the latter. The survey noted the impressive impact of commercial technology on cyber and information technology, while foreign defense industry counterparts were seen as a source of innovation across C4ISR, unmanned, training and simulation, weapons, and other technologies.

Despite much emphasis on the role commercial start-ups may play, industry observers placed greater confidence in large, established technology players. This theme was magnified on the international front — national champions, rather than new entrants, were seen as the forefront of tech innovation.

Does this reflect the limitations of unproven technology, or a lack of awareness on the part of the defense industry establishment? And are established firms always looking for the optimal outside contributions, for instance an innovative or low-cost design approach, rather than seeking to replicate familiar subcontractor roles?

So if it is sold on commercial and foreign-derived technology, what is holding the defense industry back? One challenge stood out: 90 percent of those surveyed said burdensome contracting requirements are a major obstacle. Real or perceived intellectual property restrictions companies encounter were a close second.

Similarly, foreign content restrictions driven by national security concerns were the biggest obstacle to integrating international R&D innovation. In both cases, reforms are in the works, but they will only partially redress challenges.

Defense firms must not only address these hurdles, they must also keep pace with innovation outside their relatively insular domestic national security complex — no more so than in the long self-sufficient US. Given a sliding scale of capabilities, roughly 75 percent of firms were convinced they could effectively monitor the commercial sector for new technologies, but confidence eroded as respondents were asked about their firms' ability to formally evaluate and exploit emerging opportunities.

The situation was even less rosy when foreign-derived innovation was on the block; only a third of respondents were confident their organizations could adapt and exploit technology from abroad. This need not be a permanent obstacle — most defense-relevant innovation reportedly stems from Western trading partners such as the UK, Japan, Germany and France.

But what is the best way to effectively leverage commercial or international technological innovation? Interestingly, partnership and joint offerings were the strongest contenders, followed by IP acquisition or licensing, and then mergers and acquisition (M&A) activity and joint ventures (JVs). The survey also revealed less appetite in relative terms for JVs and M&A activity in the international arena, echoing the security and ownership complexity of cross-border defense investment. Equally telling was the relatively weak support for internal investment to replicate the technology in-house.

Hurried by impatient defense customers, harried by a public demanding technology as an alternative to casualties, and slowed by funding uncertainties, the defense sector needs to make existing and non-traditional R&D innovation go further. Firms will have to undertake a number of actions, including:

  • Effectively identifying and vetting commercial and foreign defense R&D.
  • Convincing potential partners and their government end-customers of the financial and technological wisdom of this move.
  • Integrating and exploiting the most promising innovations across the development lifecycle.

The defense sector has no choice but to innovate. Customers demand it. Adversary threats require it. The question that executives and policymakers must consider is that when they uncover the next compelling technology or process innovation from abroad or in an unfamiliar market, what will they do about it?

Jovovic is a principal at Avascent, a management consultancy focused on public sector markets.

Email: ajovovic@avascent.com

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