The military training and simulation industry has been very good for participants for the last decade as the need for hardware and software to train for many operations increased. But as budgets decline, many of these providers began to offer training and simulation services to offset declines in hardware and software. This trend is now starting to reach the oversupply stage where mergers and acquisitions will start to take place.
So what does training and simulation services mean exactly? In general, it means that instead of the military services buying equipment, developing course-ware, running the training and simulation operations and performing the ongoing maintenance and upgrades, it is turning over these tasks to industry. This trend is well established outside the US, where training and simulation centers are set up by the industry providers and the armed services contract for time at these facilities.
This has a number of key benefits for both parties. For the military, they can lower costs by not having to procure, develop and maintain these facilities. And, they are likely to get the most up to date technologies. From the industry side, they get to spread the cost of building, facilitating, maintaining and operating these facilities over many facilities and many customers, thus lowering costs for the end users. Also, it creates a new revenue stream to offset declines in selling equipment outright. Rockwell Collins, Boeing, CAE and Lockheed Martin and others are now offering this model.
There are likely to be far fewer new simulator purchases in the future – but more upgrades, which is why the services trend has been ongoing for a few years. Some now think that with everyone rushing in to do this, an oversupply situation is developing. When that happens, bigger companies gobble up smaller ones to maintain their market share.
As evidence of this, industry analysts point to the recent acquisition of two government services firms, Dynamics Research Corp. and TASC, by Engility. Engility was itself a spin-off from L-3 to focus on government services.
In a keynote address at I/ITSEC 2014, Anthony Smeraglinolo, Engility president and CEO, said that there is an over-saturation in the services market and a correction may be coming. “Consider that in 2001 the Government services market was a $100 billion dollar market with 45,000 contractors. Today, it is a $200 billion dollar market with 135,000 contractors. It is still a great market but there are too many of us addressing it. When there is more capacity than demand, something needs to give and I think we have begun to see that in terms of industry consolidation”.
In an article in Defense News, Gene Colabatistto, group president for defense with CAE, warned that acquisitions may be limited, the result of a small pool of companies that would make sense for a larger firm to acquire. His point was that many of the companies that are targets are small businesses with set-aside contracts. If they get acquired by a larger company, those contracts go away, diminishing the value of the acquisition.
“I think there will continue to be acquisitions”, he said. “But to make a large play in the market is difficult with budget uncertainty and then in the smaller companies, the way they are classified makes it very risky”, Colabatistto said.
Furthermore, small companies can quickly bring disruptive technology to market making them more nimble than big competitors. This will also temper M&A activity.
But the underlying factor in the M&A and services trends is the tight budget environment and the need to deliver more for less.
In a keynote speech at I/ITSEC, the top general for the Army Forces Command, Gen. Mark Milley told attendees, “Those here today must expand training options across the entire spectrum of war. We need to do this now and in a time of fiscal constraint. … Threats are multiplying, not going down. We are committed to training and investment. Simulations and realistic training are fundamental to what we do. Combat training centers and the training that takes place there are effective because they provide simulations that are repetitive, enduring and relatively speaking, they are inexpensive”, Milley said.
He concluded his remarks by noting, “As the battlefield becomes more complex and 371 happen more rapidly we must leverage simulation tools and gaming mechanisms [so] all leaders at all levels, from sergeant to general, can hone their decision-making skills and the art of war. We must stay on the cutting edge of the simulation world”.