“Pentagon officials went to the cradle of innovation this week to recruit tech gurus and entrepreneurs who may not be familiar with the opportunities available in the defense contracting market.
The good news for the Pentagon’s innovation champions is that Congress seems to get the message. Both the House and the Senate are proposing a slew of new procurement rules that would encourage the use of commercial contracting practices.
A recent Silicon Valley tour by Deputy Defense Secretary Robert Work and weapons procurement chief Frank Kendall will be followed later this month by a visit from Defense Secretary Ashton Carter. They are sending a loud and clear message that the Pentagon leadership is not just parachuting into the valley for a quick mission but is there to become a permanent resident of the tech community.
One of the Pentagon’s talking points in its outreach to Silicon Valley is that the Defense Department wants to be a “smart customer of commercial technology.” If the rhetoric is matched by action, the Pentagon would have to act more like a commercial buyer, which means casting aside the usual red tape and compressing purchasing cycles that usually takes years down to months or weeks.
The Pentagon recently stood up a Silicon Valley office, called Defense Innovation Unit Experimental, or DIUx, at Moffett Field in Mountain View, California. Work and Kendall during a recent visit there declared that DIUx will serve as a mediator for companies that have not traditionally worked with the Defense Department and need help navigating the defense system. The motivator for this outreach is worry that the Pentagon’s weapons and information systems are not keeping up with a rampant tech boom in the United States and around the world.
In Washington, meanwhile, there is much chatter about the potential ramifications of Carter’s initiative on defense contracting as we know it. Observers wonder how far the Pentagon will go in order to do business with commercial firms that have little tolerance for intrusive bureaucracy, auditing, intellectual property sharing and other requirements that are facts of life for defense contractors.
There are pockets of buyers in the defense world — such as the Pentagon’s research arm DARPA and the Special Operations Command — that have perfected commercial-style procurement and have shown they can insert new technology into their products rather quickly. But innovation for the larger Defense Department will not come easy because it is by nature a big battleship that cannot turn on a dime, analysts and defense officials point out.
“There are structural impediments within the procurement process, within the funding process, that really keep us from the speed and scope of innovation whose potential is there,” said Jim Joyce, manufacturing specialist at Deloitte Consulting.
The Pentagon’s procurement system is made for large capital expenditures, Joyce said at a Brookings Institution panel discussion. “It’s not driven by innovation or adaptability.”
A democratization of ideas that has led to explosive innovation in the commercial economy creates a major concern for the Pentagon and for traditional defense contractors that develop technology with government funding, he noted. “And the revolution will come, I believe, on the defense side when they start to tap into that,” he said. “The best ideas, the innovation, the adaptability, are not coming through traditional hierarchical organizational structures.” The innovation the Pentagon wants will happen “when we start to relook at the fairly hierarchical and rigid way that we innovate and procure. And that needs to change if we’re to really take advantage of the potential of the country’s economy and innovative people.”
Another huge impediment to a commercial buying approach is that the Defense Department fears being fleeced by contractors. That creates a risk-averse culture that emphasizes process and has little tolerance for failure, said James Kenyon, director of advanced programs and technology at engine manufacturer Pratt & Whitney. “This makes it very hard to introduce some of these more complex but much more revolutionary capabilities very rapidly,” he said. “We have a system that is more willing to tolerate a budget increase than a performance shortfall. And we just keep adding this and adding this, and so things take longer, they cost more.”
It is not realistic to expect regulations to go away, Kenyon said. “I think if you deregulate too much, you do run the risk of the taxpayer getting ripped off.” The question is how to find a balance between protecting taxpayer dollars and at the same time giving industry the flexibility to innovate. “I don’t know that there’s a good answer, which is why acquisition reform has been a buzzword for decades, and continues to be something that we continue to strive for and continue to struggle with.”
Tapping into commercial innovations will be an uphill climb for the Pentagon, said Brennan Hogan, program manager at LMI Research Institute. “You’re trying to apply old regulations and old acquisition policies to new solutions. And there is also sometimes a fear of the unknown. If you don’t have all of the answers at the beginning or if the evaluators that are part of the acquisition process don’t understand it, instead of asking questions again and again to better educate the acquisition policy process, there is a fear and just a shutdown of the process,” she said. “The amount of complexity in the actual acquisition process prevents these new solutions from being applied.”
As one industry insider put it, “A tour of Silicon Valley isn’t going to get it done. You have to do business in some way that the Silicon Valley companies can recognize and respect.”
In both the House and Senate versions of the 2016 National Defense Authorization Act, there are provisions that would allow the Defense Department to act more like a commercial customer.
“If we want to get nontraditional suppliers, we have to be willing to change the way we do business in DoD,” said retired Air Force Lt. Gen. Charles R. Davis, who served as the top military acquisition adviser to the secretary of the Air Force. “We also have to be willing to accept commercial products, commercial pricing and treat intellectual property in a totally different way than we do now,” he said. “If DoD doesn’t change its approach to commercial pricing, it will never be able to take advantage of the innovation.”
Another piece of the puzzle that analysts are watching is how the influx of new suppliers might disrupt the small but entrenched industry that currently dominates the defense technology sector.
One of the industry’s most prominent analysts, Byron K. Callan, managing director of Capital Alpha Partners, has warned investors that the erosion of U.S. defense technology superiority is a “disruptive theme” for traditional suppliers. It’s unlikely that commercial firms have all the answers to vexing national security issues, he wrote in a research note. “As one would expect, some heritage defense firms may initially strive to oppose change as they are quite content with the current system, but others can and will adapt.”
There are many defense sectors where demands are unique and where there will be no commercial competitors. Regardless, Callan said, the “institutionalization of efforts aimed at accessing commercial technologies and achieving faster innovation is an under-appreciated theme within the defense sector.”
A greater push for reform by the Pentagon and Congress, he noted, “may result in new challenges to programs of record, and in some defense segments, commercial technology firms could potentially upend traditional defense contractor market positions and strategies.”