Quick Hit – November 16, 2014

This Quick Hit is written while in LA having just attended the Reagan National Defense Forum at the Reagan Library in Simi Valley, CA. In its second iteration the RNDF has become the largest national security conclave of its kind, attracting a stunning cross-section of marquee panelists including sitting and former: Members of Congress; Senators; Cabinet and sub-cabinet officials; Service secretaries; Service chiefs; Industry CEOs, COOs and Presidents; Wall Street executives; and Venture Capitalists.

Some highly simplified take-away themes that ran throughout the event:

– Wall Street is not concerned about sequestration in defense. One analyst pointed out that Apple and Google each sit on enough cash each year to cover the annual sequester bill being debated (Apple year-end cash for 2013 was $40B; Google’s was $50B). It’s big to defense, but not big in their big picture.

– Defense stocks continue to defy gravity and perform despite the Washington rallying cry against sequestration. This will change when interest rates rise. Cost cutting and personnel reductions can’t continue as the only tool used by public defense companies to manage their stock.

– All DoD panelists expressed concern about sequestration; most citing it as their biggest concern. Recall, without a change, sequestration will produce a $50B cut to defense in FY16 through FY19. FY15 will have temporary sequester relief.

– The impacts on maintenance and readiness in all services directly attributed to sequestration have been extremely far-reaching and simply not well understood outside of DoD and a select few highly engaged Members of Congress.

– The President will formalize an executive order on immigration “before year-end” according to DHS Secretary Johnson. Congressional leaders suggest such action now will poison the well for a budget outcome.

– No clear signal on an Omnibus appropriation or extension of the Continuing Resolution for FY15 (current CR expires 15 Dec). Executive action on immigration will directly impact this Congressional outcome. Of the Members and Senators present, there was clear agreement that the timing is wrong for such an action.

– A small legislative package with incremental acquisition reforms will materialize in the Spring per presumptive incoming HASC Chairman Mac Thornberry (R-TX).

– This mid-term election was, above all, about the economy. The FY16 Presidential race will also be about the economy.

– Interesting fact…80 percent of the suppliers to Honda-jet come from the automotive supply chain…more cost effective and commercially-oriented suppliers.

– Another interesting fact. SpaceX, in its contracting with NASA, uses a much more objectives-based method of defining program requirements than the requirements process the DoD acquisition model demands.

– Secretary Hagel will be at Defense until the end of President Obama’s administration. He is rolling out a defense innovation initiative to help serve as a “strategic offset”…details to follow.
**** Update November 24, 2014 **** Secretary Hagel surprised many in defense circles by tendering his resignation nearly immediately following his innovation initiatives announcement at the RNDF.

Looking forward for FY16 and FY17 opportunities:
– The window is all but closed to get your product or program into the FY16 President’s Budget before it arrives in Congress in February 2015.
– FY17 budget drills are well underway in the Executive branch.
– How does your plan for FY16 and FY 17 align with the budget process?

 

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