Five New Rules for Defense Innovation
“Silicon Valley folks? Their main focus is on speed to market.” A senior executive at Raytheon recently uttered this quote in response to the innovation push launched by former Secretary of Defense Chuck Hagel and expanded by his successor, Ash Carter. The remark illustrates a frustration shared across the traditional defense industrial base over a series of “innovation initiatives” being rolled out by the Department of Defense (DOD). These initiatives have been spurred by a growing sense that the Pentagon’s historic technological advantage is slipping as a result of numerous shortcomings: DOD’s flagging research and development (R&D) spending, an abysmal technology transition rate, and questionable returns on industry Independent Research & Development (IRAD). There is no doubt that something must be done to ensure U.S. defense-related innovation remains world-leading. Yet despite DOD’s best efforts, it is far from clear that the department has sufficiently considered how it can further leverage the already existing defense industrial base to support this endeavor. Certainly, “non-traditional” companies should be a larger player in the defense innovation marketplace. But as the previously mentioned Raytheon executive noted, “When you’re making technology in the defense market, you also have to address other aspects, including mission assurance, acquisition compliance — these things are important … there’s an overhead to that.”
Fortunately, the innovation imperative is well-understood by many in the traditional industrial base. Recently, Northrop Grumman CEO Wes Bush noted that “Chinese R&D in purchasing power parity will pass the US in the 2020s … national R&D decline is a choice, not a fate.” In repeated comments, Bush has also underscored that innovation outreach sounds great, but the challenge is in the execution. Any successful engagement of non-traditional companies, like those glamorized in Silicon Valley, must include robust defense industry participation to bring concepts like the Defense Innovation Imperative into reality.
Here are five rules that should guide efforts to reinvigorate DOD’s technological edge:
- The Department of Defense Must Become a Desirable Customer
The first challenge is to actually attract interest among non-traditional companies who are well aware of DOD and its legions of contractors, but desire very little to do with them. Let’s not kid ourselves – this is culture clash of the highest order. For all the talk of establishing a DOD satellite office in Silicon Valley, the first time the Defense Contract Audit Agency visits a non-traditional’s office could be the last if DOD isn’t smart about nurturing these companies. Silicon Valley innovators aren’t likely to embrace DOD conducting forensics on their accounting systems or demanding their intellectual property.
As part of this process, DOD must also trim the regulatory burden and the associated costs that have historically deterred non-traditionals from doing business with DOD. Former Deputy Secretary of Defense John Hamre said that the “cumulative burden imposed by all these regulations adds 30% to the cost of a typical acquisition program.” This bureaucratic cost acts as a giant siphon on much-needed R&D dollars. Reduced regulatory burdens also will attract the heralded non-traditional innovators and disruptive thinkers once they realize their ideas have a chance of seeing the light of day in an actual combat system. To paraphrase Army acquisition executive Heidi Shyu, the acquisition decision-making process is a bus filled with overseers and each one has a hand brake to use at his discretion. It’s time to throw some people off the bus. DOD’s acquisition culture must change.
- Bridge the Valley of Death
Getting state-of-the-art products across the “Valley of Death” and into the hands of defense operators will continue to pose a substantial hurdle for non-traditionals. In particular, smaller companies don’t have the time or the money to wait out multiple-year budget cycles trying to get their product into the system, and larger technology companies will simply move onto other commercial products that present lower risk and higher margins. One option to consider is the expansion of DARPA’s $700,000-threshold fast contracting program. Another is combining an Other Transaction Authority (OTA) contract with an accelerator model to reduce barriers to entry.
- Leverage Industrial Partnerships
Established contractors can also help bridge the chasm by partnering with non-traditionals to help them navigate the bureaucratic system. In this manner, these contractors can accept some of the risk associated with DOD business to shield the non-traditional in exchange for access to new technologies and markets. Of course, there are some downsides here: partnering with an established contractor won’t do anything to lower costs or speed the process, but it is step in the right direction as it pairs the traditional defense contractor’s substantial resources and market expertise with the non-traditional’s innovative technology.
- Communicate a Credible Plan
You’ve heard it before, but communication is key. Industry has had a long-term partnership with DOD to develop innovative technologies, and it’s time to reinvigorate that relationship. The Pentagon can start by openly communicating and upholding a credible investment plan. Industry will invest if it believes there is a contract to compete for at the end of the process. Industry will not innovate for innovation’s sake, given repeated acquisition failures in the past. For example, the Army and industry spent approximately 7 years and hundreds of millions of dollars chasing a new scout helicopter only to come away with nothing for the third straight time. This behavior prompts industry to question DOD’s commitment to new investment, leading companies to explore other methods of boosting shareholder value, such as stock buybacks. DOD must adopt and clearly communicate its medium- and long-term investment plans – and stick with them.
- Embrace the Cliché
DOD can also start rewarding smart risk taking through agile product development, more commonly known by the cliché: “fail early, fail often.” Though some in industry have said that we cannot afford to fail, they suffer from a myopic view of Pentagon acquisition history. Consider the First Offset Strategy, in which the U.S. was forced to rapidly innovate to balance Soviet encroachment. How many rockets blew up in the 1950s until we got it right? Change DOD acquisition culture with the effective utilization of the aforementioned OTA’s as well as Partnership Intermediary Agreements (PIAs). Incentives should also be aligned to reward those who take risks on new technology, both in government and in industry. Instead of penalizing short-term technology development setbacks, incentivize speed of progression through Technology Readiness Levels (TRLs). In the global, fast-paced innovation environment, speed is crucial – time is money.
As in any debate, your perspective often depends on where you sit. In this case, DOD ought to be applauded for its outreach to Silicon Valley and non-traditional defense firms. But it should not neglect the role that traditional defense firms can play in driving innovation, either independently or in partnership with non-traditional players. A B-2 bomber, as Wes Bush alluded to, isn’t going to be built by Silicon Valley, but non-traditional companies could help provide enabling technologies. In fusing the best attributes of each with a reformed acquisition system, DOD can truly reap substantial rewards. At the end of the day, non-traditionals such as Nest or Tesla don’t need DOD for their business to succeed. DOD will have to entice them to participate with the defense industrial base as a willing partner.
Stephen Rodriguez is a Venture Partner with New York-based Abundance Partners. He is also a Term Member at the Council on Foreign Relations and President of the Foreign Policy Initiative’s Leadership Council.
Sam Zega is Director of Strategy and Development at Airbus Group, Inc. Previously, he was a defense and security policy advisor to U.S. Senator John Warner. He has an MA from the U.S. Naval War College and an MBA from Georgetown University. The views expressed herein are his own.
Image Credit: U.S. Missile Defense Agency