The National Security Marketplace Must Become Stronger

March 4, 2015

Ever since General George Washington wrote IOUs to sutlers and merchants for supplies during the American Revolution, the private sector has helped enable U.S. national security. But over the last two decades America’s ability to respond to, and get ahead of, changes in threats and technology has slowed. Today, global technology advancements occur faster and in greater numbers than what the defense industry and government combined can produce, and they are available to a much larger market – including unfriendly non-state actors and near peer competitors.

The need to maintain technological dominance in national security is real, and both the U.S. government and the national security industrial base will have to make sweeping changes to meet current and future challenges.

To start, the government requirements, acquisition, and budgeting processes are frustratingly misaligned and cumbersome. They favor compliance and reporting over outcomes. At over 4,000 pages, the Federal Acquisition Regulations are complex and stifle competition in the marketplace. There are an insufficient number of acquisition professionals, separate accounting system and audit requirements, indefensibly long sales cycles, and confusing government intellectual property rules. These all create more barriers to entry. Mixed demand signals from government buyers and budget uncertainty from Congress adds to the noise produced by a rigid acquisition system originally designed to buy large items like tanks, planes, and ships, not technology and services.

The defense industry has nearly 160,000 companies registered to do business with the U.S. government. Most know how to navigate the labyrinth of regulations and unique language in government contracting – foreign to most commercial companies. Contract protests, which do not exist in the commercial world, have increased 83 percent since 2006 – some are legitimate, but far too many are meant to either extend current revenue streams or buy time to find any technicality that might force the government to rethink its decision and include the protestor in the contract award. The industrial base also has diversity challenges. Over the last 15 years, the national security industry has ingested a tremendous amount of military DNA, and much like the U.S. Congress, it’s mostly white, middle-aged men – I know, because I am one of them. Too much of one type of DNA stifles innovation in any organization. When an industry mirrors its customer too closely, it simply mimics them instead of bringing new thinking and ideas to them. Notwithstanding Lockheed Martin’s CEO Marillyn Hewson and General Dynamics’ CEO Phebe Novakovic, the defense industry has a long way to go to be seen as inclusive to women and people of color and attracting a diverse pool of younger talent.

All of this conspires to unintentionally foster mediocrity over excellence and affirm the idiom, “good enough for government work.”

Many believe that the wars in Iraq and Afghanistan led to a boon for the defense industry, and that’s probably true for the largest contractors, but the reality is that over time, these wars have weakened the industrial base. Competition is declining. Industry consolidation and necessary expediency during war contributed to this reality, but it does not serve U.S. national security interests in the long run.

As former Deputy Secretary of Defense William Lynn noted in his recent Foreign Affairs essay, the five largest defense firms combined spend about $4 billion per year in independent research and development, but a single commercial firm like Microsoft or Toyota alone spends that much. Perhaps an unfair comparison because the industries are different sizes and commercial tech companies, to keep competitive, must innovate every day. But, as a percentage of sales, the defense industry spends only about 2.3% on innovation. According to a recent report from the Center for a New American Security, the top ten defense contractors do business in both the defense and commercial sectors, which demands they spend some money to remain competitive, but it’s nowhere near enough. Other defense companies rely almost solely on a strong demand signal from government to move them to spend any money on innovation. That fact is alarming because the changing threats America faces move and morph swiftly and far outpace the U.S. national security ecosystem’s ability to catch up, let alone dominate. The Pentagon traditionally exported more technology to the commercial sector than it imported, but the inverse is true today. That change in polarity is troubling, and Congress and the relevant federal agencies should work quickly to revise complicated and archaic export regulations. That would empower U.S. businesses to penetrate foreign defense markets and partner with talented global firms to offer the very best solutions for America’s national security and that of our allies and partners. Certainly we should protect our most advanced technologies, but as former Secretary of Defense Robert Gates said in a 2010 speech, we should “place higher walls around fewer, more critical items.” Congress and U.S. policymakers must accept that globalization plays a significant role in 21st century weapons and technology development and that not aggressively playing in the global market hurts America’s national security and economic interests. A good first step is President Obama’s recent decision to sell armed drones to some of its allies.

To reinvigorate competition, government must reduce (read: decimate) barriers to entry to entice more commercial companies to offer fresh perspectives on national security challenges and offer solutions. Some have argued that the defense industry should create better relationships with Silicon Valley and bring their technologies to government. But new solutions filtered through the same delivery mechanisms will not move the needle – or at least not enough. New commercial technology players should compete directly with the established industrial base, which will strengthen both, bringing better solutions to government. Many West Coast tech firms see the defense industry as a lethargic, hierarchical collection of uncollaborative “frenemies,” and think government is an immovable, disjointed enterprise that can’t innovate, is too risk averse, and fears any type of failure. Most of that is true, but there are smart defense firms who are collaborative, and the government can innovate when it wants to; none of us would be using GPS, the Internet, or Siri if not for government innovation – but there aren’t enough of either, and there is still an inherent slowness that infects transactions between government and business.

If the Pentagon can change the competitive paradigm and let innovative companies focus on problem sets and desired outcomes instead of responding to a broken requirements process that elicits too many mediocre responses with nominal value, it would also create a stronger, sustainable, and cost-effective national security marketplace. Working with commercial companies will see some culture challenges, but DoD’s Defense Innovation Initiative is a good start. DARPA’s series of “Grand Challenges” and “XPrize” offer more examples of how more federal agencies can redesign how they procure goods and services to tap commercial players to offer solutions to difficult problems.

There are some glimmers of hope. Our national security challenges have attracted the likes of Elon Musk and Jeff Bezos, whose products and services are already meeting the challenges of the day. Elon Musk’s SpacEx created its reusable Falcon rockets that promise to reduce the cost of space launches by a considerable amount and draw America away from buying Russian rockets to propel us to the International Space Station and beyond. That work also pressures the incumbent, United Launch Alliance, a joint venture between Boeing and Lockheed Martin, which does use Russian rockets, to innovate or die. Likewise, Jeff Bezos’ Amazon Web Services beat out IBM and Microsoft, both of whom have established national security divisions, to provide cloud service to the intelligence community.

The Pentagon will never be Google, and it shouldn’t try to be, but it can foster an entrepreneurial spirit and inject proven commercial technology expertise into strategic leadership and acquisition positions to better understand and evaluate new solutions. Industry CEOs will have to look across their organizations and determine if they have the right talent to compete in this new environment, and boards of directors and shareholders will have to evaluate their CEOs as well.

In the midst of all of this chaos and process, the new Secretary of Defense, Ash Carter, may need to hold his own version of the “Last Supper”, as his mentor, William Perry did in 1993, to boldly lay out to both the defense and commercial technology industries how he intends to reimagine a diverse, healthy national security marketplace. Progress will come slowly, but the futures of the Pentagon and the industrial base are inextricably intertwined and hard decisions will have to be made to regain and retain technology dominance, and keep America safe in the 21st-century.


Chris Taylor (@cttaylor) is a two-time defense industry CEO and an adjunct professor of national security studies at Georgetown University’s School of Foreign Service Security Studies Program where he teaches the graduate seminar, “The Business of National Security”. Chris is a member of the Council on Foreign Relations and a member of the board at the American University of Afghanistan. He holds an MBA from the College of William & Mary, and an MPA in International Security and Political Economy from the Harvard Kennedy School.


Photo credit: David B. Gleason