In 2012 Bill Lynn was announced as the new head of Leonardo DRS, fresh off serving as deputy secretary of defense for the first Obama administration.
DRS, both as an independent entity and then since its 2008 purchase by Italian firm Finmeccanica (now Leonardo), has enjoyed a remarkable run of CEO stability. Mark Newman served as CEO from 1994-2012. Then came Lynn, and on Jan. 1, John Baylouny — who has 35 years with DRS and currently serves as COO — will take over the CEO role.
Given his experience both as a defense executive and the No. 2 official at the Pentagon, Lynn has had a unique view of the defense space over the last two decades. He sat down recently with Breaking Defense to look back at his time leading DRS, the decision to take the company public, and his thoughts on the state of the industry.
This interview has been edited lightly for length and clarity.
BREAKING DEFENSE: A lot has changed in the last 14 years, not just in terms of Leonardo DRS itself but in terms of the market. I’m curious at a very high level — looking back, are you surprised where the company has ended up going?
BILL LYNN: A little surprised. I mean, 14 years ago, the company was an Army-heavy company reliant on revenue from the two conflicts in Iraq and Afghanistan, and I came in as those conflicts were winding down, and so the revenue was dropping precipitously. We’d been bought a few years before by Leonardo, and they’d set up a overly elaborate security structure that was particularly onerous as your revenues are dropping. So, over the course of a few years, restructure the company into a streamlined security structure under a proxy which makes us a US company for all classified work, which we have a lot of. So that was important.
We diversified the revenue base. We’re about a third Army, a third Navy, a third everything else — international, Air Force, Coast Guard — and so that’s much more stable. And then sort of in a second phase, we started reshaping the portfolio so that it really focused on being a pure play defense technology company. We bought some more technology businesses focused on the four core areas we still talk about — advanced sensing, network computing, naval power, and propulsion and force protection, all four of those. I mean, those weren’t chosen randomly. In all four markets, DRS was a leader, one, two or three.
They’re clearly the future, and none of them are platform dependent. We’ve made a conscious decision, particularly as a mid-tier company, to not be a platform company. The bigger guys have the scale to do that, but also it gives you much more flexibility in uncertain budget times, which is pretty much all the time [now]. Platforms are where people look to make savings. But if the way it works for us, if you’re buying new platforms, our electronics, our sensors, our communications, our computing, go on them. If you don’t buy new platforms, and you delay the new ones, you have to upgrade the old ones. And if you’re upgrading the old ones, you’re actually upgrading our install base, because we’re literally on every vehicle in the army and every ship in the Navy.
Arguably the biggest change in the company happened a few years ago, when you did a merger with Israeli-firm RADA which took the company public.
The final stage of this transformation of DRS was when we agreed with our parent, Leonardo, to go back into the public market. They sold 30 percent of their shares as part of that triangular merger with RADA, brought us a public listing on the NASDAQ and that that’s allowed us to really flower. The valuations gone up substantially, our strategic and operational independence went up with that public listing. So I really feel like that’s partly why I’m leaving. I feel like, okay, the company is in a good place. I didn’t want to leave before we kind of gotten that public phase launched, but I feel like now we’re on a good glide path. I think there’s much more to come. And I think, you know, John Baylouny will take the reins at the beginning of the year, and I think he’ll be able to drive to even higher heights. But I feel like the stability of the company is strong, and that’s a good time for a transition.
You’ve kind of positioned yourself personally as the champion of the mid-tier defense firms. How do you feel about where the mid-tiers are positioned, and do you feel any pressure or concern about the tech companies, the upstarts, that these guys are kind of coming behind you?
We started championing this in public, [that] to maintain competition, you need to expand beyond that consolidated tier [of primes]. The place to go for that is the mid-tier. In those four markets we’ve talked about, in terms of technology, in terms of performance, we’re the equal or better of any of the major players. We’re not in as many markets as they are, but where we play, we are world class, and that offers the department that competition.
I think what you’re seeing now with [Defense] Secretary [Pete] Hegseth’s recent speech and the moves of the new administration, they want to see competition. They’re embracing the mid-tier, they’re embracing the newer companies. I think it’s great that we have these newer companies. I don’t really feel threatened. We have that same agility and technology and the ability to bring performance and investment to the market. We also have strong financials, like the legacy companies, we actually make money. Newer companies, they have to get on their feet. So I think we have a fairly unique position in the market, having the characteristics of some of the newer mid-tiers, but the strength and stability of some of the longer running companies.
You obviously had a front-row seat to how the sausage gets made at the Pentagon. Do you have any advice for the current team as they pursue yet another round of defense acquisition reforms?
I think it requires sustained senior-level attention. They gave the speech, they put out the memos, if they move on and leave it to lower levels in the Pentagon to implement it, I don’t think it’ll go all that well. You’re trying to change structures, you’re trying to change regulations, you’re trying to change culture, change habits, and that takes a lot of senior-level attention. If the senior leadership moves on to the next big thing, much, much less change will happen. I think the test here is going to be, can they maintain a sustained level of attention to this at a senior level? They’re not going to just walk away from it [but] are they going to be talking with the same level of enthusiasm and prevalence that they are today in, say, a year? If they are, I think it’s auspicious.
We know there’s a big push from both Congress and the Pentagon to support new entrants. Where do you see the overall market going? Do we think we’ll see the death of primes, or will some of these new entrants fall apart over time?
I think you’re going to see the legacy guys continue — I mean, you’re not going to have Silicon Valley build aircraft carriers or nuclear submarines, so there’s still going to be a role. I do think some of the new technology companies will succeed, probably not all of them, but I think you’ll have a more robust mid-tier.
You know, part of this new acquisition reform will be to bring more commercial companies in. I think you’ll get some of that. I think it’s going to be, though, more of a hybrid. I think it’s going to be companies that have some commercial skills, but that are in, you know, in the defense space, and know how to operate in the defense market. You can lower the barriers to entry, but it is still a relatively unique market, and some things aren’t going to change. It’s [always] going to be a single government buyer that frankly, with the government paying some of the development costs, that limits your margins. This isn’t going to be like selling to consumers, where you take far more risk and you get much higher margins. With government paying some of the development costs, you’re frankly taking less risk, but correspondingly you get lower margin. That doesn’t appeal to everybody, and so I think the defense ecosphere is going to expand, but I don’t think it’s going to suddenly become like the commercial space. I think it’s gonna look like a milder version of what we have.
What’s your view of the international market? The Europeans are gearing up to spend a lot more, but they’re also looking at domestic production as a priority.
You’re going to see two phases. I think the first phase, which we’re kind of in now, you’re going to see the Europeans, Japan, Australia, the Asian countries — are going to buy more American equipment, because the need is urgent, and the US has the equipment. So it’s going to lead to more sales from the US overseas.
Europe is very under-invested in development. They have a fraction of what we do in development. I think they will start to invest more in development, which will correspondingly bring their industries up and be more competitive. So I think a second phase, five to 10 years down the road, you’re going to see more competition internationally than we currently see. But I don’t think the European militaries can afford to wait for that given, you know, Vladimir Putin and Ukraine and Xi and Taiwan. So getting your system in 2035 isn’t going to be, probably, the right answer.