Modeling, Simulation Sector to Undergo Change.

Technologies will help defense planners adapt to new geopolitical realities

In the movement to transform the U.S. armed forces--and in their ongoing efforts to fight an unconventional war against terrorism--the modeling and simulation industry will play a critical role. The industry also will have to transform, to adapt to this changed world.

From the game of chess to today's computer models, modeling and simulation (M&S) technologies have played an increasingly important role in defense planning.

The end of the Cold War, which rendered some Pentagon combat models obsolete, led some experts to doubt the future of M&S as a key decision-support tool in U.S. military planning. We believe the contrary to be true.

Four major drivers will ensure and expand the role of M&S services and the contractors who deliver these services to the U.S. Defense Department. Those drivers include:

* New domestic and international security threats;

* Bush administration emphasis on restructuring U.S. armed forces into a leaner, more agile organization, more responsive to strategies and threats in the post-Cold War world;

* Recent technological advances, including better commercial-off-the-shelf (COTS) software, broadband/high-speed Internet access, distance learning and advances in super computing;

* Increased near-term procurement spending.

These factors were present well before the terrorist attacks on New York and Washington, but they were magnified by the tragic events of September 11. U.S. defense planners have undergone the same profound shock as our society. The shock will strengthen the movement to transform our armed forces to fight a new and, by Cold War standards, unconventional conflict. M&S itself will play an integral role in shaping this change, but M&S will have to transform, to adapt to this changed world.

There are four key trends reshaping the future of the M&S industry: War-fighter focus, broader usage, consolidation and globalization.

War-fighter Focus

Much like commercial enterprises in the l990s, the Defense Department caught the technology bug. Technology advances, rather than the user applicability, drove M&S procurement. The Defense Modeling and Simulation Office (DMSO) now is seeking to turn around that thinking. A core part of the DMSO's master plan refocuses the Pentagon's M&S efforts on the needs and requirements of the war-fighter/end-user.

A key aspect of this war-fighter focus is the current effort for breakthroughs in simulating and forecasting human decision-making. War-gaming engines are good at tracking the motions of large-scale forces, the interactions of weapons systems and abstract tactics and strategies. But they do a poor job when it comes to simulating the influence of human psychology.

Virtual commanders don't make misjudgments in the heat of combat; virtual soldiers don't improvise on the battlefield. Each element follows its programmed script.

The Defense Department and contractors are striving to create technologies that do a better job incorporating human variability into war-gaming. One solution has been to graft real land, air and sea forces in actual exercises onto computer-generated simulations.

Along with continuing breakthroughs in raw computational power and improved simulation algorithms, distance-learning and broadband technologies are playing key roles in expanding the use of these solutions. For example, Distributed Mission Training (DMT) is being used to track actual pilot behavior to capture the missing human element in existing M&S systems.

Broader Usage

The new DMSO master plan should, at a minimum, increase M&S standardization, as well as its effectiveness and efficiency However, M&S activities will no longer remain limited to warfare systems.

Simulation-Based Acquisition (SBA) will play a growing role in enabling planners to determine future platform needs, as well as assist in the procurement of extremely complex platform assets. This form of M&S already is being used heavily in joint procurements, either between U.S. service branches or among NATO partners. The Joint Strike Fighter program stands as a case in point. It is expected that SBA's adoption rate will accelerate as the program managers become more knowledgeable of SBA's benefits, while struggling under macro pressures to boost procurement output without significant increases in funding.

Even before the events of September 11, the Bush administration had envisioned dramatic structural changes in our national defense. M&S has an important potential role in enabling planners in the OSD and the Joint Chiefs levels fulfill this sweeping mandate. Further, M&S may play a "business process reengineering" role as the Defense Department's infrastructure is evaluated and the next rounds of base closures are considered.

Computer simulation, of course, is no substitute for the structure, commitment and focus necessary for real-world military success. Nonetheless, thanks to advances in broadband and wireless Internet technologies, productive distance learning finally has become a reality.

Political and environmental concerns also will serve to propagate M&S and the need for further advances in the technology. An increasing number of today's military operations are so-called "operations other than war."

Examples include policing, peacekeeping and drug interdiction, all missions that can take place in urban areas (where civilians exist). M&S can enable military and other governmental authorities to test and evaluate methods of dealing with hostile threats, including biological attacks, without alarming civilian populations.

Consolidation

Despite unprecedented contractor consolidation over the past 10 years, the domestic market for M&S services--namely, model design and programming-remains largely fragmented. It is true that M&S services remains a niche business because of its inherent need for deep domain or mission-type expertise on one hand and sophisticated technology capabilities on the other hand.

Nonetheless, larger players have continued to supplement their leading market positions with strategic acquisitions in the space. Among others, acquirers have included Northrop Grumman's Logicon division, Lockheed Martin and L-3 Communications. These acquisitions have typically been sought to broaden domain expertise and technical depth as the demands and opportunities for future M&S rise.

Globalization

The United States is far ahead--perhaps too far ahead--of its NATO allies with respect to M&S. Foreign governments, however, are waking up to the benefits of M&S for military as well as civilian operations. French contractors Thales (formerly Thomson Simulation) and EADS (European Aeronautic Defense and Space Company) already have established M&S expertise.

Standardization will encourage further catch-up by the Europeans. NATO and the United States have committed themselves to M&S software based on the High Level Architecture (HLA) standard. HLA has some significant advantages over the Distributed Interactive Simulation (DIS) protocol used by the Europeans. HLA allows for a much more flexible framework to network multiple M&S systems and link simulated environments to live players and operational systems. This compatibility will facilitate joint efforts among U.S. military services as well as allies.

Robert D. Kipps and Jean A Stack are senior executives at Houlihan Lokey Howard & Zukin's Government Services & Aerospace/Defense Investment Banking Group, in McLean, Va.

M&A ACTIVITY OF MODELING & SIMULATION FIRMS


          Total Aerospace/Defense  M&A Announcements
YEAR         M&A Announcements       Of M&S Firms     % of Total

2001 [*]            114                    7              6%


2000                150                   13              9%



1999                143                    6              4%



1998                133                    7              5%






YEAR       Notable Target Companies

2001 [*]      Vector Research,
                 EER Systems

2000      Sterling Software Federal
              Tech Sym, Comptek
                  Research

1999           MRJ, Analysis &
             Technology, Amherst
                   Systems

1998           EMCOR, Mystech,
                  Questech



(*)Year to date annualized

Source: Houliban Lokey Howard & Zukin