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The Coming End of the Defense Spending Party, Or The Next "Last Supper"?

Strategy advisors at every major defense company have been crunching numbers and producing white papers for almost a year, looking at what most of them assume will be a significant drop in defense procurement spending in the next administration.

One company analyst told me several months ago that his company expected to see a substantial whack of as much as a 20 percent cut in procurement spending by the second budget of the next administration.

Now one of the top defense consultants has published an analysis of what this may mean internationally. "The end is in sight. Which companies will survive the downturn in spending? Which strategic changes will be generated by the new Administration? Which industrial players will prove best positioned and most agile in making the transition?" asks Robbin Laird in the June issue of the Royal United Services Institute's Defence Systems publication.

The short version of Laird's piece: companies that make systems -- not platforms -- will probably be most agile as governments increasingly buy modular systems to place on several platforms, instead of designing systems exclusively for a platform, Laird argues. Consolidation may well accelerate, leaving an even smaller number of companies to compete for government money. John Young, the Pentagon's top buyer, and even the avatar of consolidation, Norm Augustine, former CEO of Lockheed Martin, have voiced doubts about whether further whittling down the number of companies is effective policy and in the country's national interest. Augustine, who attended what became known as the Last Supper where then-Deputy Defense Secretary Bill Perry told executives that the country could not afford half of the defense primes that did business in 1993, spoke at a lunch hosted by the Aerospace Industries Association recently and made clear his unease with further consolidation.

And Congress will play an important role in all this as it weighs what legislation will be needed and how far consolidation should proceed.

Laird believes commercial companies stand to gain increased business as cyber warfare grows in importance, along with what would normally be considered homeland security threats. Key to managing all of this turmoil, Laird argues, will be government policies that allow companies to act "in a cost-effective and timely manner."

That was a central concern after the Last Supper and we may be seeing a less drastic, but still significant, reordering of the defense industry over the next five years.

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