PwC leaders recently sat down to discuss how businesses are approaching this increasingly dynamic market. For the full discussion, watch the webinar on-demand: Launching new approaches to US Military Space.
The US Department of Defense’s first new military service branch in over five decades, the United States Space Force, ushers in a new era marked by swift advances in technology and deeply-rooted changes in how the Pentagon not only defends the nation, but also how it interacts with industry.
The priorities are not platforms—a new fighter or aircraft carrier, for instance. Rather, priorities are speed, cost-efficiency, agility and resilience.
Q: What are some of the current and emerging mission needs you’re hearing about from the Space Force and other military space customers?
Scott Kittrell: We're seeing a very consistent message from the military space customers. They want speed, agility and resiliency. With the new Space Force and Space Systems Command, the Pentagon intends to centralize military space research and development, acquisitions and launch activities. And they plan to develop the technologies in a way that is more accepting of moderate and intelligent risk associated with innovation and experimentation.
Among the key factors is the next generation National Defense Space Architecture, which largely focuses on layering technologies in space to enable the US to identify and respond to an adversary’s threat much earlier, to protect against new threats and to deliver intelligence directly to the battle commander to plan and alter missions in real time.
This includes proliferation of LEO (low Earth orbit) constellations to build resilience. This is a shift from the traditional exquisite systems (i.e., a small number of enormous and powerful GEO (geostationary) satellites) to a new ecosystem of hundreds of satellites operating in LEO along with the GEO assets.
This presents both opportunity and some fundamental obstacles—including reaching the launch volumes—and an order of magnitude more in manufacturing capability.
Q: We’re seeing various architectural and acquisition approaches across space programs to meet mission needs. How do you envision industry supporting these requirements?
Michael Holland: There will likely be a mix of traditional and non-traditional acquisition approaches going forward. New funding types are accelerating innovation and encouraging non-traditional companies to enter the space value chain.
One of the main types of acquisition used over the last five years is the Other Transaction Authority, or OTA. With an OTA, the requirements are not set, and focus is on rapid development and fielding of a new capability rather than on specifications. While OTAs have existed since the Cold War, they’ve really exploded in use recently. In 2015, OTA contract funding was about $600 million, increasing to $8 billion in 2019 and then up to almost $16 billion in 2020. A lot of that was driven by the COVID-19 response, but much was also spent on space-based capabilities such as missile defense and hypersonics.
Most procurements continue to flow through FAR 15—or, in some cases, maybe FAR 12 procurements—but with an increased emphasis on speed and innovation.
Q: The new entrants to the military space environment bring with them a sense of speed linked to a consumer-based market. But what about the legacy companies? What is their role and how can they disrupt themselves to be faster and more nimble?
Scott Kittrell: As it relates to speed, companies need to be able to anticipate more frequent and faster proposals, potentially both solicited and unsolicited—and then be able to mobilize rapidly to develop a response.
The second element is to break the model of developing a clean-sheet exquisite design when the faster and more effective solution may be a combination of commercial, off-the-shelf elements and new developments.
Some of the other strategies we’re seeing are legacy companies forming alliances and partnerships with startups, establishing venture-capital arms to help startups or new entrants financially, or working cooperatively on technology or product development, mutually benefitting both the defense company and the startup. The government is applying some of the same strategies—working more cooperatively with allies, establishing incubators, funding quick response projects.
Then there is the execution of the work itself. We're seeing new organizational structures and operating models to facilitate faster decision-making and approval processes that push decision rights further into the organization.
And as a foundation competency, whether a startup or a legacy company, we’re seeing a “digital-first” approach. Having spent a lot of time recently helping clients digitally transform, I can tell you it's equally two parts—digital technology and tools, and equally (some would argue more importantly) the digitally upskilling component, which includes incentivizing, rewarding and giving employees the opportunity to learn new digital skills that can apply to their jobs.
Digital first is also critical to addressing the challenges the Pentagon faces in space. Companies are leveraging data and analytics to support decision-making, create new manufacturing processes, and develop a better understanding of the cost and performance of their products. Digital design, or model-based engineering, creates an entirely new way of work that allows for rapid prototyping, testing, demonstrating—long before delivery to the customer. This is an area with massive growth potential.
The last piece of the equation is cost, which is always going to be front-and-center with the military customer. Using a digital-first concept, legacy defense companies and new entrants have changed design and development in ways that drastically reduce cost. However, they’re also rethinking what is possible in cutting costs, whether it’s a reusable rocket or an on-orbit service to extend the life of the spacecraft or modify its operation.
Mike Holland: Overall, the space market’s growing at a rapid clip. There have been more than 30 launches to date for this year in the US alone, with a strong wave of small satellites launching into LEO, with SpaceX’s Starlink, Amazon Kuiper or OneWeb. The scale that's being achieved with both launches and manufacturing of small sats is directly applicable to the military space needs. And the growth isn't all about just launch, it’s also happening in manufacturing, systems and services.
Additionally, companies need to look at research and development spending. The current administration has a huge focus on R&D, a major part of which doesn’t show in the budget documents. These are disruptive next-generation technologies such as hypersonics, directed energy, artificial intelligence and numerous others—all with contributions that overlap space priorities and benefit the space industrial base, and many of which fall within the classified R&D portfolio.
There’s another point about growth: In recent years, we've seen companies pivot from a return of capital shareholder strategy to an investing growth strategy with targeted investments across the value chain to accelerate innovation, gain greater control over their technology roadmap and supply chain and improve their product affordability.
Investments have also included mergers and acquisitions. We have seen roughly $70 million of total deal activity this year, and a third of this has touched somewhere on the space value chain with companies participating in both commercial and military markets. Startups are going public, there’s venture capital funding and consolidation within the market.
Then from an organic standpoint, we're also seeing investment in upskilling for employees, making sure that they not only have the tools at their disposal, but also the training to leverage those new tools. We've created custom learning paths so that a company can rapidly scale learning across the enterprise.
Q: How is the industry responding?
Scott Kittrell: For defense primes, as mentioned earlier we have seen a focus on market growth and a pivot from a “return of capital to shareholders” strategy to an “invest for growth” strategy. Companies are making targeted investments across the value chain to:
Also, as mentioned earlier, we expect M&A to remain active as defense companies (who are largely well positioned to put cash to work) look to undertake portfolio shaping and several are investing in partnerships, particularly with technology companies and smaller players, in order to acquire digital capabilities and talent to compete with the commercial players.
Industry is also focused on building out skills and capabilities to accelerate the development of advanced technologies (hypersonics, 5G, autonomy) and we expect to see moderate increases in the levels of investment in R&D. With respect to “new space” and startups, we see them continuing to bring commercial approaches and innovating technologies to the market, and over time building out the requisite skills to serve the government customer from a compliance and controls standpoint.