Why Increasing the Value of Defense Primes is Good for the Country

Making primes more valuable with less revenue

Both the Pentagon and industry primes are not currently meeting their collective potential. In yesterday’s War on the Rocks piece, I argue that the counterintuitive way to deliver greater innovation at lower cost to the Defense Department is to give the primes the opportunity to earn higher profits:

Primes must rotate their business model away from cost-plus and toward privately funded (that is, non–government reimbursed) research and development to build up intellectual property and product portfolios that have commercial item pricing. In doing so, their revenue may shrink as they focus on higher margins and product-driven work, but their valuation will increase as the stock is re-rated (meaning they will have higher price-to-sales multiples). For example, if Lockheed Martin’s revenue was cut in half but its multiple tripled, its valuation would rise 50 percent. And that means there is $35 billion of additional defense budget to invest in more capability delivered through innovative product companies, like new entrants in defense tech ecosystem. But it also means that Lockheed Martin’s investors would be very happy, as would the warfighter.

Read the full piece here.