Defense companies funding their own R&D have smoother ride in today's military market

Department of Defense (DoD) technology procurement is undergoing significant changes and reforms mostly driven by economical challenges and funding cutbacks. One change is to push the cost burden of research and development onto defense suppliers, often forcing these companies to employ more of a commercial model of development. In this Q&A with Andrew Teich, the new President and CEO of FLIR Systems, a leading designer and manufacturer of thermal imaging infrared sensors, he discusses how FLIR is navigating these procurement challenges and also discusses how thermal imaging technology will move beyond the military and into the commercial space. Edited excerpts follow.

MIL-EMBEDDED: Can you tell me a little about FLIR – where it’s located, number of employees, and the military applications its technology targets?

TEICH: FLIR Systems is headquartered in Wilsonville, OR, and has about 3,000 employees worldwide. It has two divisions – Government and Commercial. Each really refers to end use markets we call on, but there are areas where commercial customers procure our government division’s technology and vice versa. Fundamentally this division exists to address the diversity of the customers we are calling on. The government customer has a longer purchase cycle and the products themselves go through a rigorous qualification process and have a longer life cycle. On the commercial side the inverse is the case. It is higher volume and product life cycles are much shorter.

Our strategy is akin to four legs of a stool. Two legs are maintaining proficiency in government and commercial markets. The third piece is having good global coverage – we are more than 50 percent international. The last piece is being highly integrated vertically. We are most integrated in the infrared/thermal space and are expanding our product offering beyond thermal to include radar, sonar, and other sensing solutions. Maritime surveillance may be the most promising market going forward as demand for surveillance technology in this area continues to increase. Maritime platforms we are involved in typically use our SeaSTAR III multi-sensor, high resolution, large format 640x480 thermal imaging payload. It has ultra long-range thermal and lowlight TV cameras, multiple laser options, and a spotter scope.

MIL-EMBEDDED: Budget cuts, sequestration, and other events have forced Department of Defense (DoD) leaders to rethink how they fund technology. They no longer want to look at power points for future technology development they will need to fund. Program managers today want technology they can test right away and, if needed, deploy immediately. The days of the DoD cutting big Research & Development (R&D) checks are likely a thing of the past. How is FLIR navigating this environment?

TEICH: FLIR is suited to this environment due to its concept of Commercially-Developed/Military-Qualified (CDMQ) product development for military and government customers. We believe now more than ever that the CDMQ concept is co-linear with the customers’ desire to get more bang for their buck. They want to spend the highest percentage possible in procurement dollars on the actual price of the product rather than development – to get better value for their money. In this regard CDMQ is very much aligned with the DoD’s current model for procurement reform. CDMQ came from our own internal development where we continue to spend about 10 percent internally on R&D each year. The concept of being able to utilize our own funding to develop solutions deployed on a broad scale from an application and geographic standpoint benefits the customer. By having global deployment the coverage becomes much broader than with a single customer deployment – such as the DoD only. This results in higher volumes, which brings costs down. This also manifests itself in terms of quality as higher volumes of specific solutions enables a more efficient manufacturing process.

CDMQ is based on the principle of producing fully military qualified, mission complaint equipment under a commercial mindset. The military qualification component of this mantra is well understood, as the testing and qualification parameters of military products are typically very well documented. Conversely, the contractual components of most product development programs are where the problems arise. Issues such as cost overruns, recurring unit prices, scope changes, long-term supportability, and soft specification compliance have brought many well-intentioned military product developments to their ultimate demise. However, by self-funding the major elements of a product development, there is a constant focus on the end commerciality of the item, which includes recurring unit prices, performance, and supportability. These three parameters ultimately define the success of a product in the fielding and sustainment phases of a program.

MIL-EMBEDDED: It has been nearly 20 years since Secretary Perry’s memo requiring the use of Commercial Off-The-Shelf (COTS) equipment wherever and whenever possible. CDMQ sounds a lot like COTS. How do you define COTS today?

TEICH: I think COTS refers to something viable now, in production, and is non-developmental in nature. It refers to the state of the product evolution cycle more so than the funding. A COTS product to me is one that is done and does not require further development. In other words, if we respond to a bid and the product is not available today off the shelf then it is not COTS.

MIL-EMBEDDED: If commercial development is always the end goal, where is FLIR’s thermal management technology today in terms of commercialization?

TEICH: Technology developed for the military typically goes through four phases before it becomes a commodity product used by average consumers. GPS is an example of this. In the first phase it was developed for military use. Then dual use surveyors began deploying it for applications such as commercial shipping. The third phase is broad commercialization with the commercial market being the main driver. Eventually volumes tend to explode and then it enters the last phase, which is commoditization. Once a military-only product, GPS can now be bought by anyone for use with their car, their watch, or their smartphone.

Thermal imaging is further back than GPS technology, but is on the cusp of moving from the dual use phase to the broad commercialization phase. What’s happening today is that we have emergent applications driving infrared and sensing technology. It is already heavily deployed in Unmanned Aerial Vehicles (UAVs) and thermal weapon sites. It is also likely at some point that every warfighter will have a thermal imager.

There is also a tremendous amount of interest in the commercial space for this technology. In commercial circles we have developed thermal imaging sensors for vehicle vision systems through FLIR’s commercial division. It will first be deployed on high-end automobiles and will be able to see five times further than high beam headlights – enabling drivers to see and safely avoid pedestrians or animals. If you look at general situational awareness applications for thermal imaging at the vehicle level there will be opportunities to equip vehicles in any of these environments with an array of cameras for all light weather conditions.

Consumer awareness also must be overcome for thermal imaging to reach commercialization and commoditization phases. Most people in the military know about thermal imaging, but few in consumer markets know about thermal imaging.

MIL-EMBEDDED: Are there barriers to entry in the commercial market?

TEICH: In the commercial business there are two key barriers to non-linear growth: price and awareness. By lowering our cost we can lower our prices. We pass those cost savings on to our customers. If we lowered our cost by 30 percent we believe these prices would be elastic. Prices come down and volumes go up in a non-linear fashion.

Price is the key issue here – if you’re taking someone else’s money, you have to do exactly what they want. To be able to sell that technology to someone else you must use commercial revenues to fund broad base technology development and feed it to a broad base of customers.

MIL-EMBEDDED: Has thermal imaging technology evolved to the point where it can be designed into a modern handheld computer or smartphone?

TEICH: GPS only needed to answer one question – where am I? Thermals need to answer one simple question too – what’s out there? Every soldier wants to know the answer to those two questions all the time. However, right now there does not exist a handheld device with thermal imaging that can provide those answers.

MIL-EMBEDDED: How are reduced Size, Weight, and Power (SWaP) requirements affecting your development process for thermal imaging products?

Figure 1: The Star SAFIRE HDc from FLIR Systems uses completely redesigned components to achieve large-gimbal performance at half the weight in a 10-inch gimbal.
(Click graphic to zoom)

TEICH: One thing we are good at is managing SWaP. Our products over time have gotten smaller and lighter. For example on our Star SAFIRE HDc we redesigned everything inside to get the performance of a large gimbal at half the weight or better in a 10-inch gimbal. We enhanced the resolution and performance of the system without increasing size or weight. We were able to do this because we make all the sensor components ourselves, which also enables us to keep cost down and commercialize the product for other applications (see Figure 1).

MIL-EMBEDDED: FLIR is involved in military systems and programs worldwide – exporting highly sensitive technology to many different countries for civilian and military use. All of which means U.S. export regulations such as the International Traffic In Arms Regulations (ITAR) need to be closely followed. Currently the Obama administration is reforming export regulations to make it easier for U.S. companies to do business internationally. Will the reforms help or is it just more government bureaucracy?

TEICH: ITAR is a big issue for us. We tend to develop technology in certain limits to keep it listed as dual use on the Commerce Control List (CCL) rather than on the U.S. Munitions List (USML), which covers technology strictly developed for U.S. military use and therefore more rigidly controlled for export. What we’re hoping from export reform is that the effort underway will stick to its outlined principles and build a higher wall around the high-end military-only technology and put the other technology under Commerce control. The result will be a more robust and more deterministic definition of how U.S. companies can export their technology to the international market. The ITAR has a degree of uncertainty, so if the government follows through, on principle doing business internationally will be more predictable. We’d also like to see policy makers be well aware of what foreign technologies are available because what we want in the end is a level playing field.

Andrew Teich was named President and Chief Executive Officer of FLIR Systems, Inc., in May 2013 and elected to FLIR’s Board of Directors in July 2013. Teich joined FLIR as Senior Vice President, Marketing when FLIR acquired Inframetrics in 1999, where he served as Vice President of Sales and Marketing. He joined Inframetrics in 1984. He holds a B.S. degree in Marketing from Arizona State University and is an alumnus of the Harvard Business School Advanced Management Program.