Transformation of warfare has been a constant throughout history. Technological advances—whether armor, longbow, catapult, machine gun, tank, or aircraft, to name but a few—have consistently spurred changes not just in the nature of conflict on the battlefield but also in the strategies and tactics that guide the deployment of combat forces.

We are currently on the brink of one of the most significant such transformations—applying software, communications, and systems technology to achieve a quantum leap in the accuracy, efficiency, mobility, and responsiveness of battlefield forces. The recent war in Iraq, and operations in Afghanistan the year earlier, provided just an initial glimpse of the potency of this transformation.

In its fullest evolution, the entire battlefield would be networked. Sensors would reside on virtually every weapon or piece of equipment populating the battlefield, information would be processed in real time using artificial-intelligence support to prioritize threats, and commanders could choose among a portfolio of weapons to attack targets.

Casualties would be minimized by the use of unmanned systems and the prevention of friendly fire

The promise of such capabilities is profound and far-reaching. The time between sensing, processing, deciding, and acting across the battlefield would fall dramatically, allowing forces to target the enemy before it could evade or respond. An offensive force would not have to rely on sheer mass but through greater accuracy and speed would be able to achieve the equivalent effect of large numbers. Casualties would be minimized not only through the use of unmanned systems but also through the prevention of friendly fire—which has accounted for a growing proportion of casualties in recent hostilities.

But such a change challenges the very basics of the culture and organization of the military. The armed services, which have traditionally defined and fielded their own dedicated weapons, operated by their own commanders, must now consider a world where the "sensor" and the "shooter" are different, challenging decision-making hierarchies and chains of command. The attributes and capabilities of weapons must now meet the requirements of interoperability across services, and even across coalition forces, rather than those of the favored mission of the parent service.

Moreover, the relationship between the military customer and the supplier base will also be challenged. Many new programs will potentially be smaller in size, evolve more rapidly, and be even more reliant on advances in commercial technology. As a result, new competitors, outside the normal defense contractor circles, will emerge, developing specialized skills. Many of these emerging players will be acquired by the larger prime contractors, creating a flow of new talent and investment into the industry.

Nonetheless, we are in the very early days, when the pace and nature of this transformation are being determined. It is not clear exactly what will happen, how it will happen, or how each of the parties within the complex government-industrial web will react and adapt. Our goal in this article is to clarify the forces driving change, examine their first-order effects on all the participants, and begin to think through how the nature of the government-industrial web will change in the new world of warfare.

The changing nature of warfare

Technology is changing the nature of warfare in two ways: by enhancing platforms (such as planes, ships, ground vehicles, and munitions) that have been in use for decades; and by enabling "network-centric" warfare, which combines the ability to sense and identify threats with precision attacks on the source of those threats in the shortest time possible. Platform enhancement has already had a dramatic impact on war, while network-centric fighting remains in its early stages.

Platform enhancement

Platform enhancement involves either grafting information technology onto existing weapons to transform their capabilities or developing new platforms that better exploit advances in information technology. Two good examples are in munitions: the Joint Direct Attack Munitions (JDAM) weapon, which represents the marriage of a standard "dumb" bomb with GPS satellite technology to create a precision-guided weapon, and unmanned air vehicles (UAVs) like the Predator and Global Hawk that hovered over Baghdad.

Upgraded munitions are particularly attractive to the US Department of Defense because they provide the ability to deliver precision attacks at a small fraction of the cost of new, more sophisticated weapons: less than $20,000 per unit for a JDAM, compared with more than $250,000 for more sophisticated self-guided missiles, or "smart" munitions. As a result, enhanced bombs have grown to make up the majority of the spending on Air Force air-to-ground munitions (Exhibit 1).

UAVs, such as the Predator and Global Hawk, represent new platforms that are specifically designed around information technology capabilities. The initial purpose of these remote-controlled aircraft was to carry out surveillance and reconnaissance, which they did with great success in Afghanistan and Iraq. Armed with small payloads, Predators were modified to attack time-critical targets of opportunity, as they recently did in Iraq. The next generation of UAVs includes combat aircraft that do not even require a remote pilot but instead can be programmed to fly and attack a target themselves. New unmanned aircraft, such as the unmanned combat air vehicle (UCAV), are in development and incorporate sophisticated capabilities, including stealth and the delivery of large payloads at ranges exceeding 2,000 nautical miles. While some of the new platforms, including the UCAV, have characteristics of a traditional manned aircraft, many new UAVs are far cheaper than traditional platforms. The cost can be significantly lower, partly because these small aircraft escape the design constraints of a manned system. The comparison is stark, as the Joint Strike Fighter is estimated to cost $42 million per unit, a UCAV between $13 million and $17 million per unit. Prices drop even further for simpler platforms, such as the Predator, at approximately $3 million. Moreover, UAVs can tolerate fewer system redundancies and lower performance levels than manned craft can because losing a UAV does not result in the loss of human life. Although current UAV operations require a suite of individuals to pilot the craft remotely, the cost efficiency is still great.

While it is obvious that inexpensive UAVs, like many other innovations in defense, represent a truly disruptive technology, the way they will ultimately be used and their impact on manned systems probably won't be clear for several years. Still, the challenge that less expensive technologies pose to more expensive ones clearly parallels earlier developments in enterprise computing, where distributed networks of lower-cost servers and storage devices replaced mainframe-based systems.

UAVs underscore the impact that disruptive technologies can have on the competitive dynamics of the defense industry. Today it would be inconceivable for a new fighter or bomber to originate with any company other than Boeing, Lockheed Martin, or Northrop Grumman. Yet many small, innovative companies can develop these new low-cost platforms. For example, the Predator was developed by Leading Systems. This small company was subsequently acquired by General Atomics, itself not a traditional aircraft manufacturer. With new UAVs expected to take market share from manned aircraft, the defense industry, like others experiencing technological discontinuities, probably will see a proliferation of suppliers and concepts that will shake out over time as winning platforms become apparent. The historical leaders in aircraft manufacturing will need to decide what roles and what risks related to these new platforms they will seek out.

Although UAVs provide an accessible example of technologies bundled into a completely new platform, much more pervasive will be the upgrading of existing weapons systems in the inventory. Given the long life cycles of military weaponry, it is prohibitive to create a wholesale change-out of platforms. Instead, most existing large-ticket platforms, such as aircraft and ships, will go through generations of sensor and communications upgrades.

Network-centric warfare

At a higher level, advanced IT and communications capabilities, if resident in a more universal architecture, make possible a shift to network-centric warfare, which involves the linkage of sensors, decision makers, and combatants through open architectures and standard interfaces to substantially reduce the time between the observation of a threat and action against it. Such a network would incorporate a disparate array of military capabilities, from ground vehicles to individual troops, aircraft, ships, surveillance systems, and satellites. In a network-centric world, intelligence will replace mass of force. Fewer personnel and less equipment will be necessary, because of the more precise and efficient way in which networked forces can strike, and forces can be lighter and more mobile, allowing for rapid dominance of the battlefield.

Some of the precursors to network-centric warfare were on display in Iraq but were far from delivering the true promise of defense transformation. Radar on the US Navy's Aegis cruisers detected distant Iraqi missile launches and then transmitted that information to US Army Patriot missile batteries in Kuwait, which intercepted the Iraqi missiles. This system, however, did not deliver optimal results, as it was not always able to differentiate between friendly and enemy targets. Examples such as this are relatively simple to achieve, as they connect only a limited number of systems and do not provide broad interoperability across a network.

Truly transformational steps still lie ahead. The army's Future Combat Systems program, slated for deployment in 2010, links key army force elements, including command and control, surveillance, reconnaissance, ground vehicles, airborne platforms, and infantry. This program underscores the lower force requirements associated with network-centric warfare; some estimate it will require less than 10 percent of the force mass used by today's operational approach to achieve the same effects. In addition, Future Combat Systems is intended to enable much more distributed decision making, with more information made available to each war fighter. The implications of such changes are clearly profound, and many differing points of view remain regarding the ultimate impact on force requirements and the concepts for operating the army's forces.

If network-centric warfare sounds familiar, it should. Similar advances in computing capabilities and communications technologies have surged through the business world over the past decade, enabling distributed operating environments and the remote handling of decision making as well as service operations such as call centers and software services. But experience in commercial computing should also give pause to those who expect a smooth transition to a broadly integrated network-centric future in defense. Many companies have found the grand vision of a common-systems approach across functional applications such as finance, manufacturing, human resources, and purchasing too difficult and expensive to achieve. Instead, they have deployed targeted solutions that are less technically complex and involve just a narrow organizational slice.

Networking systems across weapons platforms and branches of the armed forces so that they can make decisions and wage war in real time is significantly more challenging than the steps taken to transform commercial enterprise computing. In fact, delivering network-centric warfare is so difficult that the military has reached out to defense contractors to help shape the future of many aspects of war fighting through the creation of the new contractor role of "lead systems integrator." The insights that these LSIs and their subcontractors generate will help determine the future of defense transformation—provided that the unique characteristics of their relationship with the government allow them to do so.

Impediments to transformation

Promising as this new kind of warfare sounds, neither the industry nor the government is currently configured to deliver it. Defense transformation requires a dramatic shift in priorities from military hardware to software and systems. It also places a premium on joint weapons development and on their deployment across branches of the armed forces. While both of these shifts are possible, the unique economic and organizational models that define collaboration between the industry and the Department of Defense are working against them.

Unusual economic arrangements

Large-scale contracts to produce platforms and parts traditionally generated the greatest profits

A distinctive set of economic arrangements guides the collaboration between defense contractors and their customers, the various branches of the armed forces. Key elements of this model include mechanisms to offset high-risk development programs (with most R&D efforts being funded on a cost-plus basis), government ownership of the intellectual property developed, and strictly defined returns on programs and products. Large-scale contracts for platform and parts production have traditionally generated the greatest profits. As a result, the major players have built their businesses on hardware—aircraft, ground vehicles, ships, weapons such as bombs and missiles, and sensors such as radar and electro-optical systems—and the most attractive R&D investments are those tied to a production "tail."

Transformational change threatens to disrupt this economic ecosystem. Increased intelligence will reduce the mass of the force structure by an order of magnitude, slashing demand for many legacy products that have been the backbone of the industry. As hardware declines in importance, the software and communications systems needed to enhance platforms and knit together networks will take on ever-greater importance. New competitive dynamics will emerge in response. But unless the return economics between the military and the contractors adjust to compensate for the new mix of investment, it will be difficult for the industry to fully deliver what the military needs.

The industry's largest defense contractors (Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon) will experience declining platform revenue if network-centric warfare takes hold. All of the large defense contractors have already responded by strengthening their positions in systems and software. Yet the transition will still be challenging because in the near term it requires companies to compete for many contracts that are small as compared with those of traditional platform programs. Systems and electronics production and early-stage R&D contracts are currently much smaller than platform production contracts (Exhibit 2). The last time demand for platforms dropped was in the early 1990s as the cold war ended. At that point, the major contractors undertook aggressive consolidation, rationalizing production capacity and improving their near-term margins.¹ Similar restructuring might become necessary again, particularly as power shifts within contractor organizations from hardware- to systems- and software-oriented business units.

The large contractors will be competing not only with each other but also with smaller defense players that focus solely on software and systems. Examples of such companies include Anteon International, Veridian, and Science Applications International Corporation (SAIC), the largest defense player without hardware production. Defense transformation creates new opportunities for these companies and new entrants, which can establish positions in software and systems more easily than in the production of complex platforms. A single contract can support a new company with a small number of people, who often will have broken away from established contractors. In addition, increasing opportunities are opening for commercial software companies to take on greater portions of the value of new systems. BEA Systems, IBM, SAS, Silicon Graphics International (SGI), and many other such commercial companies have active and growing efforts focused on the defense industry.

Already, the smaller players have made inroads into the R&D role of the major contractors. Even though the top ten suppliers retained their share of overall production when they restructured during the 1990s, they lost R&D share (Exhibit 3). This loss was due in part to the pressures for cost reductions as the large companies focused on postmerger consolidation of production operations. In such a cost-focused environment, it is not surprising that the importance of long-term positioning in R&D declined.

Today, participation in R&D, particularly early-stage R&D, is critical because network-centric warfare is still in the concept-development stage. Playing an early R&D role helps players determine how the basic concepts of network-centric operations will evolve and how program contracts will be structured. Falling R&D concentration means that a broader group of companies can shape defense transformation.

As in other industries, the growing presence of new and smaller players brings benefits, particularly the potential for more rapid innovation. But in the defense industry there are costly hurdles—the need to have specialized facilities and to conform to rigorous defense contracting requirements, for example—that new players must overcome to participate. Even for larger companies, the burden today is particularly heavy because of the uncertainty surrounding defense transformation, with its high share of early-stage R&D, the emphasis on unproven systems, and ambiguity regarding future platform direction. An economic model has not yet emerged to compensate companies for the risks they are bearing. So the Department of Defense is in effect asking players to make major bets on early-stage development efforts without knowing whether the military will ultimately pursue the goals toward which the work is directed.

The contradiction between the industry's traditional economic arrangements and the demands of defense transformation comes to a head for companies as they seek to attract the talent needed to carry out cutting-edge software and systems work. Currently, most of the software expertise in the United States and Europe resides in the commercial sector, not the defense industry. Attracting these individuals requires overcoming cultural differences and gaining the security clearances needed to work on new systems with classified elements. However, it also poses a major economic challenge. Commercial engineers are accustomed to large risks and large rewards, but regulated returns and government ownership of intellectual property limit the financial upside for defense contractors and their employees. As one Pentagon official put it, the contractors "are having trouble getting the right people today. I don't know how they are going to ramp up to deliver on the new programs." If these fears prove prescient, delays and execution challenges could hamper the development of critical systems.

Yet there are few simple solutions. Given the potential consequences of lines of communication, decision-making information, or sensitive algorithms falling into the wrong hands, security requirements are as important as ever, if not more so, in a world of network-centric warfare. And it would be very difficult to allow companies to monetize intellectual property rights, because the most valuable ideas would be precisely those that the Pentagon was rightly uncomfortable making available to others.

Organizational configuration

Network-centric warfare involves joint operations across branches, interoperable systems, and a shared vision of the new warfare

Evolving successfully toward a new economic model is only half the battle for the defense industry and the Department of Defense. Defense transformation also requires changes in the nature of their organizational collaboration. Network-centric warfare involves joint operations across the branches of the armed services, systems that are interoperable, and a shared vision regarding new fighting approaches. Since most of the insights into technologies that will reshape defense come from contractors, broad collaboration between the industry and the Department of Defense is needed.

Today, despite moves to create new organizational structures, each major contractor continues to be primarily organized around relationships with specific branches of the armed forces (or commands within those branches). Rather than pushing toward joint war fighting, these branch-specific industrial relationships tend to reinforce the traditional organizational structure of the military. Furthermore, few incentives are in place for one contractor to open up its systems to enable compatibility with the systems of another contractor.

If a shared vision of network-centric warfare existed throughout the Pentagon, these organizational issues, while inefficient, would not be serious threats to the progress of defense transformation. In fact, though, large differences of opinion exist both across and within the branches of the armed forces. Some are skeptical about the reality of broad transformational efforts and would rather see money spent on traditional programs. Others are simply hedging their bets, recognizing that they will be around long after this administration is gone and will need traditional war-fighting tools if future political winds move the Pentagon in new directions. This attitude results in tacit support for revolutionary concepts and real support for narrower actions that will advance capabilities, whether or not they fit directly within transformational agendas. Furthermore, in the grandest vision, transformation promises to remove from the battlefield the mass that has traditionally provided security and offensive superiority to the combatants. Therefore, repeated demonstrations of effectiveness will be necessary to change the tried-and-true methods of waging war.

The tight relationships between contractors and specific command structures within each branch of the armed services magnify the importance of these mixed messages. At a time when changes to the nature of warfare require the industry to place big new bets, uncertainty within the Pentagon makes it difficult to know where to place them. Moreover, even sensible individual initiatives might not add up to joint, network-centric warfare. Since it is ultimately the contractors that will provide the technological insights to make defense transformation a reality, these challenges have the potential to slow the rate of change. And since technology development and acquisition cycles are lengthy (generally greater than ten years), we may be a long way from achieving the transformational vision.

Looking forward

The technology-driven transformation of warfare is still in its infancy, yet it is possible to narrow the range of potential outcomes. Certainly, the transformation will continue, at least to some extent. Platform enhancement and the implementation of near-term networking solutions will continue because the military has experienced favorable results with such initiatives to date, and contractors can profitably develop and deliver them in the industry's current configuration. As such initiatives become more common, it is likely that the number of systems or the value of systems, or both, will continue to rise, as will electronics production and early-stage R&D contracts.

However, that could be the beginning and the end of a broader-scale defense transformation for the foreseeable future—the better literally being the enemy of the best. Ambiguity in direction from the Pentagon, talent shortages, or implementation challenges all could inhibit the shift to network-centric warfare and the reduction in force mass it implies. If events were to unfold in this way, traditional platforms would retain their value, and the major contractors would continue building that side of their business. The contractors would also be likely to make targeted advances on the systems and software side, either through in-house activities or through acquisitions of specialist players. But continued traditional platform growth would reduce the urgency of rapid change and facilitate the peaceful coexistence of major contractors and smaller competitors, with each playing the roles to which it is best suited.

The attractiveness of software and integration opportunities would make large defense companies acquire smaller, specialist firms

On the other hand, the vision of a transformed military that costs less, achieves its objectives with fewer casualties, and responds to the changing nature of today's threats is so compelling that it may drive the resolution of the economic and organizational impediments to its realization. The achievement of a network-centric vision would drive even greater growth in software and systems spending while reducing the importance of investing in existing platforms. Both major contractors and smaller, more focused players would fight for systems and software work that enables network-centric warfare because of its lucrative position in the industry value chain. The attractiveness of software and integration opportunities, and the paramount importance of obtaining software skills, would also make the large defense companies more likely to try to acquire the smaller, specialist players and will increase the need to work with commercial software companies.

Reality will probably lie somewhere between these two extremes because contractors will play a central role in driving transformation but currently labor under competing visions of what network-centric warfare will ultimately look like and how they will be compensated for delivering it. As a result, contractors have little choice but to hedge their bets by maintaining their profitable legacy-production capabilities, pursuing network-centric initiatives, and opportunistically building their software and systems skills. New partnering tactics—to acquire needed skills and share development risks for uncertain new programs—will probably accompany such an approach.

The next few years will determine the speed and extent of this transformation, as new programs are fielded and network-centric architectures are applied beyond the Department of Defense, to areas such as homeland security and intelligence monitoring. These represent important new markets for traditional defense contractors, and each market has its own constellation of organizational impediments (multiple agencies, entrenched information systems, disparate constituents such as local police and fire units), similar to those that face defense transformation. Therefore, the models of success for transformation are critically important not just for the military battlefield but for the broader war on terrorism as well.

Continued leadership is required on both sides. The US Department of Defense must continue to challenge traditional thinking, move toward a common vision, and align the budget to reflect the new priorities. As long as organizational hierarchies, staff support, and spending are supporting the legacy approach, transformation will occur in a piecemeal fashion. However, industry has an important leadership role as well. Properly enabled, lead systems integrators can be objective with regard to technological effectiveness, relatively independent of bureaucratic and political agendas, and able to bring new concepts for employing network-centric capabilities to accomplish traditional defense missions. Both sides must create the conditions for long-term success.