About $500 million in business has been divested since June 2019, when Harris and L3 Technologies combined into a single, $17 billion company. That total came by way of three deals that shed the EOTech business, the night vision business, and the security detection and automation businesses.

“Out of the gates, we were really running at this,” said CEO Bill Brown, who noted in previous interviews the audacious goal for divestitures of 8-10 percent of total revenue. “We continue to make progress on others, but obviously with the COVID crisis and the financial impacts of that, it’s moved some opportunities to the right.”

The sale of the security detection and automation businesses to Leidos for about $1 billion will ultimately be one of if not the biggest divestiture for the company, said Brown, who declined to point to any specific portions of business as currently up for sale or likely to be shed.

Thus far divestitures have been driven either by overlap created by the merger — which subsequently raised the alarm bells of regulators — or by a desire to focus the portfolio even more to become what Brown described as a “powerhouse C4ISR company.”

Brown stopped short of stating any intention to exit the commercial or federal business altogether — even as the former took a significant hit from pandemic fallout: Commercial revenues are expected to be down around 35 percent organically for the year.

Also likely to suffer from the COVID-19 pandemic is international business. Foreign sales, which account for 20 percent of total revenue, will likely remain flat, versus the increase in low to mid-single digits previously expected.

“We identify that as an area where we think we can outperform,” Chris Kubasik, L3Harris chief operating officer, said during the interview. “Clearly the global pandemic applies some pressure, especially in the Middle East with the prices of oil and all the countries having their own bailouts or stimulus plans. Just like the U.S., I think the situation is going to call into question how those countries deal with defense going forward. It’s going to be one of these areas that we need to monitor, and are probably going to have to take market share to grow.”

An inability to travel has, however, opened doors to new ways of doing business around the world. Kubasik pointed to a particular deal with a customer in a Far East country that was negotiated via Skype.

“Nobody’s really closed for business,” he said. “We’ve just got to be creative and do it differently. You feel pretty good when you do a one- or two-hour Zoom , where in the old days it would have taken four days by the time you flew to the country, cleared customs, got a good night’s rest, held a meeting, met again and flew back.”

For L3Harris, year two post merger will focus on the remaining $1 billion in divestitures and see a continuation of company integration. In the longer term, those efforts will set the company up nicely for additional acquisitions, which Kubasik called “a clear expectation” for spurring growth.

And C4ISR is the area that will likely be the focus of potential buys.

“The value of those capabilities and technologies will be even greater in the future in a near-peer competition,” Brown said. “It’s not the platforms, but what the platforms do and how they interoperate that requires networks and new ways of communicating, which is in the sweet spot of the company. So I would imagine that anything we would do through acquisition would happen in that broad C4ISR domain.”

But for now, he added, the company is focusing on “the basic fundamentals.”

“And if we do that really well, then we build credibility to go and do another acquisition, another merger over time. The key is earning the right to do that — building the credibility and the muscle to go down that path, and that’s what we’re doing today.”

Listed under the ticker RTX, Raytheon Technologies began selling at $51 a share. With more than 866 million shares outstanding and a market cap of $74.5 billion, that price is bound to shift in the coming days, weeks and months. To put it in perspective, Raytheon closed Thursday at $122.43 a share, and UTC closed at $91.37 a share.

With the merger, UTC shareholders owned 57 percent of Raytheon Technologies, and UTC will control eight of the 15 board seats. Tom Kennedy will serve as executive chairman, Greg Hayes as CEO and Toby O’Brien as chief financial officer.

Planned divestitures will be completed post merger, though United Technologies did complete the spinoff of HVAC, refrigeration, fire and security solutions company Carrier Global Corp., as well as elevator and escalator manufacturer Otis Worldwide Corp. Both are now trading on the S&P 500.

Amid the stock market fallout from the new coronavirus pandemic, Raytheon saw a bigger drop than most pure-play companies, likely due to the increased exposure to the commercial market that came with the merger. However, that could be short-lived, said Byron Callan of Capital Alpha Partners.

“Raytheon has been the worst-performing stock [during the crisis] because they got tied into commercial aerospace through the merger,” he told Defense News in an interview. “But going forward, that may be the most interesting [stock] of all because there will be a degree of balance.”

According to a March 26 announcement from the DOJ, United Technologies Corp. and Raytheon will need to divest Raytheon’s military airborne radios business as well as UTC’s military global positioning systems and large space-based optical systems businesses in order to proceed with the proposed merger.

The divestitures would satisfy a proposed settlement from the department’s Antitrust Division of a civil antitrust lawsuit to block the proposed Raytheon-UTC merger.

BAE Systems agreed in January to buy Collins Aerospace’s military global positioning system business — which is owned by parent firm UTC — for $1.93 billion and Raytheon’s airborne tactical radios business for $275 million.

“Today’s settlement protects the American taxpayer by preserving competition that leads to lower costs and higher innovation in critical military and defense products,” said Assistant Attorney General Makan Delrahim of the Antitrust Division. “The merger, as originally proposed, would have eliminated competition in the supply of military airborne radios and military GPS systems, and would have positioned the merged firm to harm rivals capable of making key components for reconnaissance satellites. These horizontal and vertical concerns are resolved by the Division’s structural remedy, which includes the divestiture of three separate business units.”

Under the terms of the proposed settlement, the companies need to divest Raytheon’s military airborne radios business, including facilities in Fort Wayne, Indiana, and Largo, Florida; as well as UTC’s military GPS business to BAE Systems or another approved acquirer.

The proposed settlement would also require the divestiture of UTC’s optical systems business, including a facility in Danbury, Connecticut, to an approved acquirer.

Raytheon and UTC announced in June 2019 plans to officially merge into a new entity called Raytheon Technologies Corporation, with the deal at the time expected to close during the first half of 2020.

Among the companies that announced cost-cutting measures tied to losses or potential losses from the COVID-19 crisis, CAE pointed to temporary layoffs — starting first with almost 500 unionized employees, but with more inevitably to follow, CEO Marc Parent said during a webcast hosted by RBC Capital Markets.

Parent and his executive team are taking salary cuts of 50 percent, with vice presidents taking cuts of 30 percent, managers and directors 20 percent, and all others 10 percent. The company is also taking capital expenditures as well as research and development investment to the bare minimum.

“We’re not Pollyanna here,” Parent said during the webcast. “We’re assuming a tough period, and we’re taking immediate steps to preserve cash.”

In terms of business disruption, “this is worse than anything we’ve seen,” including 9/11, he added.

GE Aviation, which already announced a hiring freeze, the cancellation of salaried merit increases and a reduction of nonessential spending, will cut about 10 percent of its U.S. workforce. CEO David Joyce will give up half of his salary starting April 1. The division also pointed to temporary lack of work impacting about 50 percent of its U.S. maintenance, repair and overhaul employees for 90 days.

Meanwhile, Airbus is looking to investor incentives to gain some cash, canceling one planned dividend payment and another proposed 2019 dividend payment of 1.80 euros (U.S. $1.90) per share to save the company 1.4 billion euros ($1.5 billion). It’s also lining up 15 billion euros in new credit to provide more cash to weather the crisis.

All three companies are big players in commercial aviation. Airbus ranked No. 9 on the Defense News Top 100 list of defense companies, but with only 17 percent of its 2018 revenue coming from the defense and security business. GE ranked No. 29, with 13 percent of business coming from defense, and CAE ranked No. 70, with 40 percent coming from defense.

The defense portions of the businesses are also feeling the impact, though less substantial because of the structure of contracts that often extend to multiple years. For CAE, programs fall under long-term contracts, versus “per sip” agreements more typical of commercial customers where revenue is driven by utilization. The company’s CEO, Parent, also pointed to a $4 billion backlog in defense.

Still, base access restrictions and the natural limitations on movement of people has made both training and order fulfillment more difficult for the defense business.

“And the general preoccupation of the crisis has impact on the speed of procurement processes,” Parent said. “We don’t see obvious structural impact, but we can anticipate short-term friction.”

Publicly traded companies with mixed commercial-defense business have also seen deeper losses to stock price, generally speaking, compared to more pure-play defense companies. While Lockheed and Northrop Grumman stock prices have dropped about 34 percent and 24 percent in the last month, respectively, CAE and GE have dropped 66 percent and 48 percent, respectively.

Boeing, with 66 percent of revenue coming from commercial and other nondefense markets, has seen a whopping 67 percent drop during that period.

Raytheon, despite being almost entirely focused on defense, saw a bigger drop than most pure-play companies of about 47 percent during the last month, likely due to the increased exposure to commercial that will come with its United Technologies merger.

But stock price can be a rather deceiving picture of impact on industry, particularly long term, warned Byron Callan of Capital Alpha Partners.

“A lot of these stocks are part of the S&P 500, where price movements have no relation to underlying fundamentals,” he said. “On the flip side, you could see rotation out of defense and into [those companies] that people think will recover. In other words, folks may be hiding out in defense stocks, but reallocate to markets that they figure are bound to recover eventually” — such as travel and leisure.

Looking at defense companies, “Raytheon has been the worst performing stock because they got tied into commercial aerospace through the merger,” Callan said, “but going forward that may be the most interesting [stock] of all because there will be a degree of balance.”

In other words, what’s true now on Wall Street could change considerably months from now. The same could be said about the long-term position of these companies, regardless of how grave the circumstances are today.

“The world will return to normal. All crises will come to an end,” Parent said, pointing to the advantage of supporting a highly regulated industry. “We have staying power and stamina to weather the storm, but we’re not taking anything for granted. … We want to be ready when we come out of this.”

For the first time, NATO Secretary General Jens Stoltenberg unveiled his annual report with a virtual news conference.

“We live in an uncertain world,” he said. “It is more important than ever that we stand together, work together and support each other. That is what NATO is all about. NATO remains committed to its mission of providing peace and security.”

Stoltenberg conceded that allies will take a financial hit, though he was cautious to not predict any reductions in defense spending.

“There will be severe economic consequences of the coronavirus crisis,” he said. “And in the short term, consequences not only for the total economy but for government budgets. When we think about long-term consequences, that is too early to say anything with certainty. You have to remember that when NATO allies agreed to invest more in defense, they did so because we live in a more uncertain, unpredictable world. This has not changed; I expect allies to stay committed to investing more in our security. We also need to remember that by investing more in our security and armed forces, we’re providing surge capacity for all our societies to deal with unforeseen events, crisis and natural disasters, as we for instance see now.”

Some NATO allies are providing support to civilian populations with logistics, medical services, clearing of public places and control at the borders.

Looking at the past year, 2019 marked the fifth consecutive year of growth in defense spending for European allies and Canada, with an increase in real terms of 4.6 percent from 2018, according to the report.

Nine met the guideline of spending 2 percent of their respective gross domestic product on defense, up from just three a few years ago. By the end of 2024, European allies and Canada expect to contribute $400 billion to defense budgets, compared to $130 billion between 2016 and 2020.

“The $400 billion reflects that NATO allies all have increased defense spending significantly, based on national plans submitted to NATO, and I expect them to stay committed knowing they are facing a difficult situation, including the short-term, severe government consequences of coronavirus,” Stoltenberg said during the news conference.

In 2019, the United States accounted for 52 percent of the alliance’s combined GDP and 70 percent of combined defense expenditure. Total NATO military spending in 2019 is estimated around $1 trillion.

Allies also made progress on the commitment to invest 20 percent or more of defense expenditure in major new capabilities, with 16 meeting that guideline. Combined, European allies and Canada spent about $66 billion on major equipment as well as associated research and development.

I’ll say first, I never would have predicted even a week or two ago that I would be writing an editorial on the coronavirus. This was a situation that had global implications, but it was a health care crisis certainly, an economic crisis potentially. I lead a trade brand focused on defense.

There would be peripheral implications. But this was not our story.

Sure, as far back as February, some defense companies chose to pull out of international trade shows. But that was a workforce decision. They didn’t want to expose employees needlessly, nor did they want to spend money to go to an event where attendance would be down. This wouldn’t really filter to the bottom line, when you consider that deals rarely get made at these shows. They’re more a marketing and branding exercise, right?

So, we wrote a brief or two on those decisions by major companies to opt out. Done.

About that time our colleagues that work at Military Times began writing stories about coronavirus impact. And why wouldn’t they? They lead consumer brands, where reporting about risks to service members and their families is at the core of their mission. Defense News is about technologies and programs and policy. And the market is perhaps more insulated than others, considering the policies in place restricting sourcing from China. This was really a human interest story. That’s not what we cover.

Then we heard about the closure of two F-35 related facilities in Italy and Japan. The Global Aerospace Summit was postponed, and the Doha International Maritime Defence Exhibition and Conference – DIMDEX – was canceled all together in Qatar. Also cancelled was a string of military exercises around the world meant to in part test platform functionality and integration and AUSA Global Force in Huntsville – the very show where attendees were supposed to be able to read this editorial when they picked up the latest issue of Defense News.

At the same time, our team was scrambling to rework packages of content that we thought would cater nicely to a particular audience at a trade show — a trade show that was no longer happening. Our own IT staff was working hard to ensure the company has proper systems in place to support widespread teleworking as other major media outlets told employees to stay home. We were calling our travel agencies to figure out our options for refunds on trips that were canceled. We’re still doing those things.

So if we’re impacted, wouldn’t all other businesses be? Particularly those dealing with highly sensitive data? Clearly, this was most definitely our story. How on earth could I have thought otherwise?

Of course, now I join the rest of the world in wondering just how that story will evolve. Some of the largest defense companies are reporting – for now – limited direct impact on programs, even if their stock prices have plunged with the rest of the market. But that could change significantly if the outbreak further handicaps nations and by extension the supply chain.

So what does the collective market do?

The Pentagon put in place travel restrictions and leaders have said they’re watching the situation closely — a favorite response when asked what’s being done about a crisis, which tells us very little. Real talk of contingency plans isn’t happening publicly, though I’m sure (I hope) it is happening behind closed doors.

The situation, as well as the unknowns and this sense of widespread anxiety, are uncannily similar to those experienced during the government shutdowns. I remember the complete lack of understanding about what would happen. The unknowns unto themselves were rather crippling. The shutdowns, more than once, shined a spotlight on the very real failures of our systems that come when certain factions of the workforce can’t do their jobs, in turn impacting program schedules and funding, and ultimately the very ability for the smallest of companies to survive. I don’t believe we every came up with a clear solution to that problem.

But the difference is that then, the ability of people to work was defined by bureaucracy and politics. This time it’s defined by an epidemic.

So yes, this is our story too. But I don’t have the slightest idea how it’s going to end.

L3Harris signed a definitive agreement to sell the business unit to Leidos, according to an announcement Tuesday. The transaction is expected to close in mid-2020, barring any issues tied to regulatory approvals. Proceeds from the divestiture are expected to be used to repurchase shares and offset dilution.

The deal is part of a larger strategy to reshape the portfolio, focusing on what Brown described on a call with analysts as “high-margin, high-growth, technology-differentiated businesses where we can win and generate attractive returns.”

“Although this is the first and largest transaction we’re contemplating, our portfolio-shaping process is ongoing and may ultimately result in 8-10 percent of total company revenue being divested over time,” he said.

The company’s 2019 revenue of $18.1 billion could translate to as much as $1.8 billion in divestitures.

Brown told Defense News in June 2019 — one month before the merger of Harris and L3 Technologies was completed — about plans to divest a “pretty significant” piece of the business in the first six months as a single company.

“Anytime you put two companies with two portfolios together and you rethink what strategy you want to accomplish, there’s going to be some pieces of the portfolio at the back end of the bus,” Brown said at the time. “We have to look at where we want to put our management time, capital, and [research and development] investment. We can’t put it on pieces that might not be as strategic.”

Brown told analysts that the deal would not impact the company’s $3 billion free cash flow target in 2022. That in theory would set up L3Harris for a sizable acquisition down the road, should the company choose to go in that direction.

A company spokesman could not comment on the specific defense-nondefense split post divestiture, but L3Harris would presumably see a larger slice of the business focusing on defense opportunities.

In the 2019 Defense News Top 100 list of the largest defense companies, Harris and L3 reported 72 percent and 81 percent of revenue as defense-focused, respectively.

L3Harris reported $18.1 billion in fiscal 2019 revenue. Once the deal with Leidos closes, the airport security businesses’ $500 million in annual revenue would transition off the books. That said, L3Harris is forecasting 5-7 percent revenue growth in 2020 — so it won’t be a straight reduction.

Two factors have created an opening that could lure venture capitalists to defense investments: first, a few select venture-backed technology startups are gaining traction; and second, there’s been a strategic shift in approach to weapons development from the U.S. Department of Defense, focusing more on information warfare and, as such, software.

In the words of Mike Madsen, director of strategic engagement at the Pentagon’s commercial tech hub, Defense Innovation Unit: “We’re at a significant inflection point right now that will be visible through the lens of history.”

Nonetheless, for the tech startups, it’s been slow going, as discussed during a Defense News roundtable in California. For the second year, leadership from DoD and the tech community came together to discuss the state of the Pentagon’s efforts to attract commercial startups — this time digging into the challenges and opportunities that come with investment in defense development.

Click here for all the stories and videos from Culture Clash 2.0: An Economic Crossroads.

“We went into this eyes wide open, knowing full well that to the venture community, the math doesn’t make sense. Making the choice to contribute to the advancement of artificial intelligence for DoD represented for us more of a mission-driven objective,” said Ryan Tseng, founder of artificial intelligence startup Shield AI.

But early on, “we were fortunate to get the backing of Andreessen Horowitz, a top-tier venture fund. They’re certainly leaning in, in terms of their thinking about defense technology — believing that despite the history, there might be a way to find an opening to create companies that can become economically sustainable and make substantial mission impact.” Shield AI has raised $50 million in venture funding since 2015, with more rounds expected.

Indeed, a few key Silicon Valley investors have emerged as the exceptions to the rule, putting dollars toward defense startups. In addition to Andreessen Horowitz, which counts both Shield AI and defense tech darling Anduril in its portfolio, there’s General Catalyst, which also invested in Anduril, as well as AI startup Vannevar Labs.

And then of course there’s Founders Fund. Led by famed Silicon investors Peter Thiel, Ken Howery and Brian Singerman, among others, the venture firm was an early investor in Anduril, as well as mobile mesh networking platform goTenna. Founders Fund placed big bets on Palantir Technologies and SpaceX in the early days, which paid off in a big way.

Some of the early successes of these startups have “done an excellent job of making investors greedy,” said Katherine Boyle, an investor with General Catalyst. “There’s a growing group who are interested in this sector right now, and they’ve looked at the success of these companies and [are] saying: ‘OK, let’s learn about it.’ ”

Take Anduril: The defense tech startup — co-founded by Oculus founder Palmer Luckey and Founders Fund partner Trae Stephens — has raised more than $200 million and hit so-called unicorn status in 2019, reaching a valuation of more than $1 billion. As the successes piled up, so did the venture capital funding. According to Fortune magazine, those investors included Founders Fund, 8VC, General Catalyst, XYZ Ventures, Spark Capital, Rise of the Rest, Andreessen Horowitz, and SV Angel.

“I started my career at Allen & Company investment banking. Herbert Allen, who’s in his 80s, always said: ‘Hey, you should run into an industry where people are running away,’ ” said John Tenet, a partner with 8VC as well as a co-founder and vice chairman of defense startup Epirus.

“There’s so much innovation occurring, where the government can be the best and biggest customer. And there are people who really want to solve hard problems. It’s just figuring out where the synergies lie, what the ‘one plus one equals three’ scenario will be.”

Also attracting the attention of Silicon Valley investors is the growing emphasis by the Pentagon not only on systems over platforms, but software over hardware. Boyle described the shift as the “macro tailwind” that often drives innovation in a sector. Similar revolutions happened in industrials and automotive markets — both of which are also massive, global and slow-moving.

That emphasis on tech, combined with some recent hard lessons, also provides a glimmer of hope that the typical hurdles associated with defense investments — lengthy procurement cycles and dominance by traditional manufacturers, for example — could be overcome.

Consider U.S. Code 2377, which requires that commercially available items be considered first in procurement efforts, said Anduril’s Stephens. He also noted court decisions in lawsuits filed by SpaceX and Palantir, which ultimately validated claims that defense agencies had not properly ensured a level playing field for major competitions.

“These types of things are now at least in recent memory for Congress, and so they have some awareness of the issues that are being faced,” Stephens said. “It’s much easier now to walk into a congressional office and say, ‘Here’s the problem that we’re facing’ or ‘Here’s the policy changes that we would need.’ There are also enough bodies like DIU, like In-Q-Tel, like AFWERX, like the Defense Innovation Board, like the [Defense Science Board] — places where you can go to express the need for change. And oftentimes you do see that language coming into the [National Defense Authorization Act]. It’s part of a longer-term cultural battle for sure.”

For now, all these factors contribute to the majority of skeptical investors’ decisions to watch the investments with interest — even if they still take a wait-and-see approach. And that places a lot of pressure on the companies that are, in a sense, the proof of concept for a new portfolio segment.

“My fear is that if this generation of companies doesn’t figure [it] out, if they don’t knock down the doors and if there aren’t a few successes, we’re going to have 20, 30 years of just no investor looking around the table and saying we need to work for the Department of Defense,” Boyle said. “If there aren’t some success stories coming out of this generation of companies, it’s going to be very hard to look our partners in the eye and say: ‘We should keep investing in defense because look at how well things have turned out.’”

SIMI VALLEY, Calif. — Dual-use technology — that is, tech that can be adapted from the commercial market to serve the needs of the military — is core to the U.S. Department of Defense’s innovation strategy.

But those willing to put money toward big ideas argue it’s the wrong approach.

“In terms of how to build a startup and how to scale really fast, you can’t have two missions,” said Katherine Boyle, an investor with venture capital firm General Catalyst, during a Defense News roundtable in California. “You can’t be a 10-person startup saying: ‘OK, we’re going to sell to the DoD, but we’re also going to sell to these commercial customers, and it’s just going to work out magically.'”

For the second year in a row, Defense News hosted the roundtable to dig into Pentagon’s efforts to engage with the commercial tech community — this year digging into the challenges and opportunities that come with investment in defense development.

Click here for all the stories and videos from Culture Clash 2.0: An Economic Crossroads.

To the Pentagon, dual-use technology offers an attractive means of drawing new players into the military fold, while also leveraging the more rapid development that happens on the commercial side. But the model is evolving, said Mike Madsen, director of strategic engagement with the government’s Silicon Valley outreach hub Defense Innovation Unit.

With DoD, “it takes two years to get to a ‘yes,’ when a lot of companies need a ‘no’ in 30 days because they don’t have the capital,” he said. “So we flipped it. Now we start with the DoD problem set and take it out to industry. And we’ve lowered a lot of the barriers to entry — we negotiate [intellectual property] for each contract, we negotiate auditability, we move quickly. We look to award prototype contracts in 60 to 90 days.”

The approach also attempts to rebalance the gradual shift in research and development investments in the last couple of decades. As noted by Tom Foldesi, DIU’s commercial engagement director, one-third of worldwide R&D was tied to the Department of Defense in the 1960s. That percentage has since tanked to 3.7 percent.

A separate business line allows R&D to continue to iterate to the next generation of technology so the DoD can “go back to the cookie jar” and tap into the technology to solve future problems, Foldesi said.

But to Trey Stephens, a partner at venture capital firm Founders Fund and a co-founder and executive chairman of Anduril Industries, the model ensures the large, traditional defense contractors continue to dominate as the small businesses only “dabble in defense.” It also means the DoD won’t bear sole responsibility for the economic growth of these small tech startups.

“Where I’m not on board is where a traditional defense company is being asked by the government to integrate dual-use capabilities as a way to prevent that oligopoly from being shaken,” he said. “We have to break this oligopoly. We can only do it if we find companies that are willing to own their responsibility for execution on programs.”

To be clear, Stephens acknowledged cases where commercial technology companies can be primes. Lawsuit aside, he’s “on board” with awarding the Joint Enterprise Defense Infrastructure contract to a commercial business — Microsoft — “because the capability is similar enough.” Microsoft was awarded the Pentagon’s JEDI cloud contract, but Amazon Web Services has asked a federal court to block the department and the company from beginning work on the project, according to a Jan. 13 court filing.

In terms of new capabilities, Stephens advocates for turning the model on its ear: Enable startups to first development a solution to a problem faced within the DoD, then turn that around and sell it to commercial industries.

“The commercial industry is oftentimes looking to the government for aspirational solutions to some of its hardest problems, whereas the inverse doesn’t really work,” he said.

General Catalyst, which counts The Honest Company, Snapchat and Airbnb among its portfolio of companies, has invested in two pure-play defense companies: Anduril, and Palo Alto machine-learning company Vannevar Labs. The latter is developing a product that would bring natural language-processing technologies to support counterterrorism missions.

“We actually think this is a better model,” Boyle said. “If you’re scaling rapidly, you have to be very focused on your customer set. And if you’re going to have to sacrifice a customer, even if you’re a multibillion-dollar company, you’re going to sacrifice the one who’s moving the slowest. And that’s usually the government.”

The official leading those efforts is Dana Deasy, the Defense Department’s chief information officer. The former top IT executive at JPMorgan and BP, Deasy is leading what some might call a transformation at the Pentagon to modernize enterprise IT and better arm the war fighter for the future fight.

He spoke recently with Jill Aitoro, executive editor of C4ISRNET and its sister brand Defense News, about the tech priorities for the department — and how that Amazon protest of the department’s enterprise cloud contract award impacts his plans.

C4ISRNET: Since you’ve started, what areas have needed your undivided attention?

Dana Deasy: It started way back when I first interviewed with Secretary Mattis, and then Deputy Secretary Shanahan. They kept referring to this national defense strategy and gave me a copy of it to read. There was something that was going to need to be done obviously around the lethality space.

I realized, “Hey, cloud was going to need to be a substantial part of our future.” It could handle the need for speeding up the speed of procurement of infrastructure.

The other thing I noticed was the way that we were building software was very much the way that we had been building software for the last 25, 30 years. Cloud really forces you to think differently about how you want to build applications. So I saw, hey, there was an opportunity for speed of procurement. There was an opportunity for speed of delivering applications. Then finally, it really hit home for me when I took my first trip out to Afghanistan. I always knew that cloud could impact the tactical edge, but it wasn’t until you went out to the tactical edge and you sat down with the war fighter and they showed you what they had to do and the various systems, the data that they had to pull together.

I came home from that trip and basically said, “We have to double down on cloud. We have to do this as fast as possible.” The fourth reason I thought cloud was going to be important, and I kind of went back to my private sector days, for AI, artificial intelligence, for it to really work, it needs three fundamental things. It needs massive compute power. It needs the right data, and you need to have the right algorithms.

As I looked across Department of Defense, it became very clear there was no large scale infrastructure that was available for all the services to quickly take advantage of that they could start to port either experimentation of AI onto, or fielding AI onto.

C4ISRNET: So how disruptive is the current state of your cloud procurement JEDI?

Deasy: We’ve obviously been through this very long drawn out process now with the protest. We’ve gone from GAO to federal claims court, to the IG. In all cases, we’ve come out in a very positive position, which we always felt very strongly we would. It has been really exciting now to finally be able to focus on [starting] to build the cloud capabilities. We recognize that we have to do this alongside of the protest that’s going on with Amazon right now. I’ve told my team, “Let’s not get distracted here.” We have a set of people that are focused on working on the protest, and we have a set of people that wake up every day now and are just getting ready to stand up our unclassified environment, which we hope will be ready by mid-February.

Then our secret environment is approximately six months thereafter. Then our top secret … a lot is going to depend on not only how the protest plays out, but how well and quick and smoothly the unclassified comes up and then the secret comes up.

C4ISRNET: What I’m hearing from you is more, “We need to grasp it now and we need to figure out where it fits and how it can be rolled out in an appropriate way.” Kind of kicking the tires.

Deasy: We are spending a lot of time now getting ready to stand up our first “unclassified” JEDI environment. It’s going to have a whole variety of services. What do we need, what’s the bare minimum we need to be able to stand up a real capability that the services can use come mid-February, but it won’t be the full complement. We will add on more and more services as time goes on. This is a really good example of not waiting until you have a whole complement of services done, but let’s get a capability out there that the services and the co-comms can start to use. We’ll learn about what they need second, third order, fourth order. AI’s the same way. We are putting out there first generation, second generation solutions where the data’s going to get more refined. We’re going to bring in better data and we’re going to refine the algorithms but we’re not trying to get the high degrees of perfection. That is new for the department.

C4ISRNET: I think there’s been confusion in terms of how JEDI ultimately will be used, and whether this is primarily enterprise technology or also for military on the ground. What’s your vision?

Deasy: What the Department of Defense has never had is an environment where you can stand up, unclassified, secret, top secret data. This will be the first and only environment inside the Department of Defense. It’s not three distinct environments. We’re building what’s called cross-domain solutions, and this is the ability to move data, ensure it sits in its right classification. Remember that problem, what I saw in Afghanistan, where they were trying to bring in secret data, unclassified data, top secret data from these disparate standalone siloed solutions? To the war fighter, all they want is what it takes for them to make a decision.

C4ISRNET: Were there any lessons learned?

Deasy: People grabbed hold of [the claim] that this was a 10-year, $10 billion contract. Which has never been the case. This was a two year initial contract of which the only money we put out initially is $1 million. The rest is all dependent on how fast Department of Defense starts to consume the capability.

I’ve seen cloud technology in the last 10 years dramatically change every two to three years. It became very clear to me we needed these breakpoints in the contract to be able to reevaluate.

By the summer of 2018, we [released] the DoD Enterprise Cloud Strategy, which said all of this mess, all of these individual clouds were not a winning hand. I have said from day one we are a multi-cloud environment and we will continue to be a multi-cloud environment.

C4ISRNET: How will there be opportunities for other companies?

Deasy: There is no such thing as one technology that can serve all the diverse needs of the Department of Defense. So there are cloud contracts that have been stood up already inside the Department of Defense. Navy has one for their SAP environment. Air Force has one that they call Cloud One. There are ones that we’re evaluating right now with other vendors that we’ll be making awards on that will all be serving specific needs. We are going to need more than one cloud provider to satisfy the needs of our unclassified environment. It’s too big, it’s too broad for any one vendor to handle.

C4ISRNET: What’s your role in having a more productive relationship between the tech community and DoD?

Deasy: Over the years, we’ve seen a tremendous acceleration of innovation take place in the private sector, to the point where the DoD clearly recognizes that this is not something that we can do on our own, ignore the outside world and just build great innovation.

[The Joint Artificial Intelligence Center] is working with R&E, working with the academic world, working with large established technology firms, and working with small startups.

If you look at the projects that we have underway right now, some of the origins of the algorithms come from the academic world. Some come from small startups, and some of them come from the larger technology players. So I think AI is going to be a space that’s going to accelerate and help to mature how we bring all of this together.

C4ISRNET: Rather than a lot of the small business contracts, can’t DoD put more money into fewer? Invest in 10 rather than 50, for example, but give them bigger contracts to build on?

Deasy: That could be a little shortsighted, because as soon as you start to do that, you may be ignoring three or four or five brand new ones that are coming up that could be doing something really special that the DoD could truly leverage.

The things that government as a whole needs to learn how to do better is how do you bring in small startups. How do you in the procurement processes make sure that you don’t find yourself in these elongated protest periods? How do you get them in the door, on the books so to speak, and allow them to start to innovate? Then finally, even if we could bring them in quicker, and we can set up the right environment for them to innovate faster, we have to solve for how quickly we can field. And field the next and the next. AI is going to force us to solve for that, because you don’t roll out a solution to the field and then walk away and go to the next thing. You are going to constantly reiterate with new data and new algorithms. Small companies are very, very good. They are very adapted to this highly automated rollout, and we’re going to have to learn from them more and more.

C4ISRNET: Can we go back to what you saw in the National Defense Strategy?

Deasy: Inside the NDS is a really interesting statement that says artificial intelligence could change warfare. Under Dr. Griffin in R&E, they are doing some amazing things in basic research of AI. So are a lot of the services. But when you look across the DoD as a whole, what you didn’t see was fielding being done other than in small pockets. There was no attempt to do fielding at large scale and to take that fielding and be able to scale it up across multiple services.

So that is why we created JAIC. If the department is really going to be serious about building and being a world leader on AI, then we have to practice and learn how to accelerate fielding of AI and be able to do that at scale.

C4ISRNET: How is that moving along?

DEASY: We’ve gone from an organization that you could count on two hands to about 110 people today. That is now delivering its second and third sprints, meaning its second and third iterations of the HADR and the preventative maintenance that we talked about before. We are ready to start our first lethality project in the joint war fighter targeting space. We’re looking to do something in the health space as well.

C4ISRNET: Can you give any kind of preview on what we might see or expect to come out of the IT budget for the Pentagon?

Deasy: The spend is about $47 billion. What we’ve done this last year is we’ve put out guidance for the first time that specifically called out the digital modernization program and said in the matter of cloud, AI, C3, and cyber, these are specific things that we want you to put money aside on.

That’s been delivered to the field agencies. That’s been delivered to the services, the combatant commands. So it’s really exciting, because now for the very first time [we are talking] a common language about delivering against a comprehensive strategy.

C4ISRNET: Can you give an update on what DoD is doing to fortify security in the supply chain?

Deasy: When we find companies that we have clear evidence that they’re problematic from an adversary standpoint, we have the ability today to have them stand down. We are starting to take advantage of that. There is this whole complicated problem: how do ensure as you move from your first tier to your second tier- down that chain. Is there technology we can apply to that? I know that this is work that folks like DARPA are looking at. We’re in constant conversations with the NSA. How do we use their tools and their art craft to help us evaluate? We don’t have all the answers. This is the space that I think we’re going to have to spend a lot of time iterating and get smarter and smarter on.

C4ISRNET: There has been talk about DoD embracing more of an agile approach to technology. But others say procurement doesn’t necessarily reflect it. Have you made progress?

Deasy: For years, we have had this very well thought out rigorous process of how you define requirements, how you prototype, how you build, how you test, and how you deploy. When you start using the term and the phrase “agile” all that comes together in a much more compressed set of sprint approaches. It is a different mindset and it is a different set of technical skills you have to be able to use to deploy that.

We have great examples inside Navy Research, inside, for example, Kessel Run over in the Air Force, where we’re starting to show that we can move from small pockets to start to do this at a lot larger scale. We’re going to have to also solve for how can we test and field faster. So for me it’s a procurement issue, it’s infrastructure, t’s culture, it’s training. All these things have to be brought together.

C4ISRNET: Can you talk about the potential for 5G in supporting DoD infrastructure?

Deasy: This is now the third leg of the digital modernization command and control and communications. What you’re really trying to solve for is if the fight needs to occur and you’re bringing together all the services and the right assets, that you have to make sure we’re going to be able to fight through. If we’re spoofed, if we’re jammed, if you’re fighting through a highly contested environment, how do you make sure that’s going to happen? And how do you make sure that as you’re using new technologies where you’re going to use full motion video, where you’re going to use AI, where you’re going to use massive amounts of data, you’ve got to push that out to the tactical edge. You not only need secure, robust communications, but we’re going to need bandwidth.

This is why people are so excited about 5G. It’s the potential of improved throughput and bandwidth, but we’ve got to get the security right. But the use cases are really exciting, and this is why the work that R&E’s been leading through Dr. [Lisa] Porter [to define] the right way to start our experimentations [is so important]. So the work that we’re going to be doing with dynamic sharing, which is one of the pilots, and the work we’re going to be doing with the warehousing, really will start to allow us to understand — can we truly deliver on all the promises of 5G? What if any limitations are going to exist? What new type of security are we going to have to wrap around it that may be very different than we’ve used before?

C4ISRNET: Is there anything else that you feel is important to mention?

Deasy: Every time I talk about the digital modernization, people tend to focus on a part of it. Like the cloud or the AI or the cyber. I truly believe that people will look back on it and say it was truly the integration. It was the fact that we had the foresight to think about massive computing through a cloud, that we knew that AI was going to be a very powerful and very much a game changing technology. All of that doesn’t matter if you cannot get it out to the war fighter. So this next generation, command control communication through things like 5G is really important.

And we can never lose sight that we have a lot of technology that we have used for 20, 30 years that was never designed around a cyber world.

In a perfect world, we would’ve done cloud years ago. We would’ve had an enterprise cloud already in place. But we don’t, so now we’re needing to stand up an enterprise cloud while at the same time learning how to do AI at scale, while at the same time doing next-generation command, control and communication. Yes, it’s risky. But I firmly believe we don’t have a choice.