The current driving force in the military and defense environment is to keep legacy systems operating longer, or the replacement of legacy systems with new systems that emulate one or more legacy systems with commercial-off-the-shelf (COTS) technology. However, there is insufficient budget to fund development of these COTS systems, and the burden of development falls upon private industry. The current sequestration environment adds another burden on industry to perform to the needs of the military, but without the benefit of nonrecurring engineering (NRE) costs being reimbursed. Programs although already funded (but not the NRE, as it is not initially funded) are being put on hold, cancelled, or are in a state of non-deterministic outcome.
Military and defense program managers and private industry face an uphill battle to find the intersection of needs, available resources and the expenditure of development costs. Small companies are at a distinct disadvantage when they develop technology to support the replacement of legacy systems when they are forced to use their own development resources without compensation and are not awarded a contract for production.
Whether a fixed-price, cost-plus, or IDIQ contract, the above scenario is increasingly commonplace in the face of budget constraints and sequestration. The burden on small companies doesn’t stop there; military program managers are also demanding engineering support without compensation for engineering-sustaining efforts, again without the presence of a production contract.
Although many systems are characterized as COTS, there are demands on the developer to perform military environment qualification testing, again without funding and no guarantee of a production contract.
Notwithstanding the above, military and defense program managers are demanding more and more burden be placed on private industry. When a small- to medium-size company quotes engineering support or development costs anywhere close to GSA Schedule rates, the reaction is swift and negative. Burden rates for engineering, test, evaluation, qualification and prototypes have less and less meaning because there is no available NRE funding in the first place.
No matter the environment of military and defense budgets, spending or sequestration, there is a cost for the development of replacement systems. Admittance to this game requires small companies to invest their own money for development and qualification.
Approximately 95 percent of all businesses in the United States are classified as small businesses. These small businesses have the technological ability to develop COTS systems that are more reliable, cost less and are more maintainable than the legacy systems they replace. But how can a small business afford the investment without NRE, or a production contract?
Small companies are faced with a business decision to invest development resources based upon a reasonable return on investment. A return of investment in less than 18 to 36 months for development costs and at least a 10 times multiplier of revenue to investment during the product life cycle is one criteria. Although each company will have its own set of return on investment criteria, these decisions will become more common and result in fewer risks being taken and less support being provided.
In today’s environment, small companies will be forced to be more selective in their decisions to undertake and support development efforts for COTS systems to replace legacy technology. The end result is a less effective warfighter.
This of course is not an acceptable scenario. Companies that demonstrate superior technology development capability coupled with realistic analysis of costs, versus return on investment, will weather the sequestration storm.
Michael Carter is the Chief Executive Officer of Sabtech Industries. As a C-level executive, Mr. Carter has a 25-year history of accelerating the growth of leading military and defense, biotechnology, telecommunications, wireless, medical, industrial and consumer product companies over his career.
The views expressed by our guest bloggers are their own and do not necessarily reflect the views of AFCEA International or SIGNAL Magazine.