Sick Defense: How to Foster an Affordable, Innovative Defense Industrial Base

The U.S. defense industrial base provides America and its allies with the capabilities to deter, engage, and defeat adversaries decisively. This “arsenal for democracy” must be a source of technological advantage at a price tag the taxpayers can afford. A healthy U.S. defense enterprise has proven a decisive lever in America’s success in past conflicts and a critical tool to maintaining the peace. Yet the relative strength and vitality of our industrial base is at risk. The Department of Defense (DoD) has reacted with alarm at flagging research and development (R&D) across industry. This has motivated U.S. defense officials to increasingly reach out to commercial technology providers for solutions. However, as their recent visit to Silicon Valley demonstrated, not everyone is chomping at the bit to work with the Pentagon.

Historically, the defense industry evolves in response to the nation’s military strategy, force structure needs, political environment, and fiscal realities. In past defense downturns, industry changes were characterized by the removal of capacity through consolidation and the exit of a large number of companies. While some of this is to be expected during this downturn, many critical areas within the industrial base are already at minimum scale or are served by a small number of companies (in some cases, a single supplier). If not managed properly, the United States could foreclose on sources of future technological advantage for the warfighter as companies exit the defense market. Further, if we are not able to optimize our industrial base, the nation will end up paying for unneeded capabilities and overhead or, worse, having to make hard choices about giving up capabilities we need to achieve our national security goals.

What can defense leaders do?

First, DoD should cultivate a global supply network capable of fielding “best in breed” future capabilities derived from both government and commercial sector innovations. The U.S. Marine Corps’ interest in aquatic “war balls” on the commercial market is a step in the right direction, but more is needed. Government-funded R&D in military technologies like standoff precision munitions, advanced communications and stealth, enabled America’s armed forces to dominate the Cold War era. But now, with autonomous and unmanned systems, nanotechnology and robotic capabilities, the sources of technological advantage are changing. Leading innovations in these “dual-use” technologies increasingly come from commercial entities outside of DoD’s traditional supplier base. Not only do these suppliers invest more in R&D and benefit from greater economies of scale and scope, but also commercial innovation cycles are faster than those of the defense industrial base.

Simply put, DoD is not fully capitalizing on the advances in Silicon Valley because of antiquated, costly acquisition policies and a risk averse, compliance-driven acquisition culture. In order to preserve our technological advantage, DoD must cultivate a larger, more commercial and global, industrial base. A good first step would be to reform the Federal Acquisition Regulation (FAR) and Defense Acquisition Regulations (DFAR) to enable a strategic sourcing approach to defense procurements. This would involve the ability to tailor acquisition rules based on the expected level of funding for a new program as well as the source of technological innovation. DoD contracting agencies can also work in tandem to develop recommendations on how the costs of compliance with DoD acquisitions can be lowered. This review should evaluate how the Pentagon can lower the barriers of entry for commercial suppliers by streamlining audit and accounting requirements and instituting more flexible rules on commercial retention of intellectual property.

DoD research institutions should also expand commercial technology access through proximity, openness, and incentives. NATO’s Centers of Excellence and the Allied Command Transformation’s Innovation Hub in Norfolk, Virginia could provide the basis for a network of international “Battle Labs.” These labs would function as focal points for international, defense-focused innovation. In addition, the Technology Domain Awareness initiative is one effort that underwrites improved information sharing between defense stakeholders and commercial industry while the U.S. Army’s Open Campus initiative can be leveraged to provide greater opportunities for university-based researchers to work alongside their Army counterparts. Such efforts greatly promise to expand opportunities for DoD to transform a legacy defense industrial base into a 21st century Defense Innovation Base.

The second area focuses on optimizing the industrial base to free up funding for future capability investment. There is excess capacity across the entire industrial base, both in the private and public sectors. In some cases, capabilities do not reside with the organization that can create the most value for the warfighter. The warfighter may suffer, for example, when agility is needed from the industrial base, and the “owner” is a government-run lab or depot. On the other hand, however, when the balance tips too much toward the private sector, the military finds itself without enough uniformed personnel to forward deploy. This situation reaches its logical conclusion when enterprising citizens such as Erik Prince offer their services to fill the purported gap. While current rules require a business case to examine the trade-offs between public and private infrastructure, too often it is impossible to get an “apples-to-apples” comparison. For the defense industrial base to capitalize on the best practices in both the government and the private sector, the two sectors need to be able to compare standardized, transparent performance metrics.

Defense industrial base policy leaders should develop a prioritized list of industrial base capabilities critical to executing future contingency plans. Excess capacity in lower capability areas should be rationalized, whether that excess capacity is in private or public sector assets. As part of this effort, the depot “Fifty-Fifty rule” should also be reviewed so that there can be true best value competition between private and government owned assets. By sharing savings, the Services could reinvest funds realized from closing depots/arsenals and allow the private sector to share in the reduced rate structure on cost-plus programs.

Lastly, improving transparency will improve our insight into how risk is managed across a global supply chain. While the Department of Defense is moving towards being fully auditable by 2017, the audit methodology itself should be tied to fully loaded costs for the public sector industrial enterprise – depots, program offices, installation services, etc. – just as contracting agencies audit the disclosure schedules and billing for private sector companies performing on government contracts.

The third major area is the fight for talent. Much of the U.S. advantage in defense rests on our ability to use superior technology in the fight against our enemies. To develop these technologies requires top-notch technical talent in defense companies. Unfortunately, the defense industrial base has been losing the war for talent for over 20 years. Today, the best and brightest graduates desire to work in an exciting field where they will be challenged, given autonomy to experiment, collaborate with like-minded colleagues and be afforded well-paid opportunities to advance based on merit. While defense companies are investing in efforts to increase STEM (Science, Technology, Engineering, and Math) educational programs, when today’s candidates look at the defense industry, they often see an unattractive value proposition: a highly regulated, hierarchical environment that stifles autonomy and innovation, limited opportunities to advance on merit, and unattractive work environments. The retention of quality talent that does come to work with DoD has also suffered due to defense budget drawdowns and intense competition from other industries. Many “millennials” get frustrated with their job and simply leave for other industries. Even federal publications acknowledge that while the younger workforce sees value in their government work, they don’t stick around to enjoy it. On the other hand industries, such as venture-backed technology firms and financial services, invest heavily in recruiting and retention. They dazzle college students with impressive recruiting presentations to get them excited about a job and offer a “campus style” work environment to keep them there once they join.

While this challenge requires a whole of government approach, DoD has a unique role to play in funding R&D because over half of its multi-billion dollar research budget is spent at universities. This makes the Pentagon the major contributor of funds in some areas of science and technology like electrical engineering and material science. DoD laboratories should also consider more outreach activities, both domestic and international, that would allow potential research partners to learn about DoD research and identify potential collaborators on specific mission areas to address technology risk.

Let’s Get it Done

Technology has always played a critical role in war. Should DoD constrain innovation to conventional notions of defense product development where better, cheaper, and faster are mutually exclusive propositions, the U.S. military will be severely challenged to maintain its decisive technological advantage relative to adversaries who more fully internalize commercial markets and innovation practices. Maintaining the U.S. military’s technological edge requires an approach to innovation that internalizes the lessons of the most successful segments of the global high tech economy, where the sustained interactions of diverse, properly incentivized stakeholders drive breakthrough solutions. The good news is that efforts contributing to this goal are already underway inside DoD. To achieve lasting enterprise-wide outcomes, such efforts must be reinforced by a coherent framework where collaborative innovation that reaches beyond traditional defense stakeholders becomes a core competency within DoD.

 

Ryan A. Brukardt advises Aerospace & Defense companies on a broad range of strategy and operations topics.

Eric Chewning is an OIF veteran who has spent the last 15 years working with the institutions who forge and wield the tools of national security.

Lori Hammer is a senior market analyst with Avascent Analytics, where she specializes in analyzing defense markets, forecasting U.S. and international procurement trends, assessing R&D programs and making budgetary assessments.

Dr. John G. McGinn is Chairman of the Defense Reform Committee of the Project for the Common Defense and President of McGinn Defense Consulting LLC. He has previously held senior roles in the defense industry, U.S. Government, think tanks, and the military.

Stephen Rodriguez is Managing Partner of Coldon Strategic Advisors and specializes in running growth-stage, venture-backed investments. He is also a Term Member at the Council on Foreign Relations and President of the Foreign Policy Initiative’s Leadership Council.