Firms Think Twice Before Investing in DoD

The United States has the most technologically advanced military force. But Pentagon officials worry that the innovation gap is rapidly narrowing.

Adversaries learn quickly. Just like they managed to defeat U.S. armored vehicles in recent wars with relatively unsophisticated buried bombs, they will find other means to counter American technology. Pentagon strategists predict enemies will use nontraditional weapons such as satellite jamming and computer viruses to disable U.S. military hardware.

The Pentagon needs to get creative as it plans the weapons of the future, officials have said, and it needs private-sector help.

Such calls for public-private collaboration to build the nation’s technology future should be music to corporate executives’ ears. But these are unusual times. Companies were happy to benefit from the military budget largesse of the past decade, but they know the gravy train is grinding to a halt. Those companies that are committed to the defense business are now expected to “put their skin in the game,” as was suggested by Air Force Lt. Gen. Christopher C. Bogdan, program executive officer of the F-35 Joint Strike Fighter.

Corporations in the defense sector are a rare breed. Unlike mainstream businesses, they are not truly operating in a free market and depend on the government for most of their revenues. But they are just as bottom-line driven as any other sector of the economy, and they must weigh national security concerns against shareholders’ pressure to deliver profits.

Whether companies are ready to take on more risks in defense projects as research budgets decline is still unclear. The Pentagon has made specific pleas to companies to target their corporate independent research-and-development investments, known as IR&D, at areas where the military needs the most help. The problem, executives contend, is that the Pentagon doesn’t provide detailed enough forecasts of what technologies it will need, nor does it allow for open lines of communication between government and industry representatives to discuss specifics, one on one.

When the Defense Department does provide seed money for new technologies, it often does not plan to transition from the lab to the marketplace. That puts companies in the position of having to spend their own money to commercialize a product. When contractors do not have the cash to do that, technologies are left to wither.

During a recent industry meeting in Arlington, Va., Deputy Assistant Secretary of Defense for Research Reginald Brothers asked executives to tell him “how we can do a better job telling you what we need.” There is concern in the Pentagon about a lack of innovation in military technology programs, he said. “How do we maintain awareness of what the rest of the world is doing? How do we track emerging trends? How do we leverage technology from small businesses?” he asked the audience.

Executives politely told Brothers they welcome opportunities to score Pentagon contracts. But then they proceeded to list a litany of reasons why companies are becoming increasingly frustrated in their dealings with the Defense Department. Whether to invest corporate IR&D funds, they insisted, is a business decision. “I don’t expect war fighters to be concerned about industry being profitable,” one executive said.

But the Pentagon has to worry that as the defense sector shrinks, which will create more monopolies, prices will soar. If the Pentagon gave contractors more flexibility to commercialize military-funded technology in the open market, he said, costs could be lowered and more vendors would jump into the defense business.

The Pentagon wants industry to spend IR&D on relevant technologies, but it does not give companies enough insight into what the military specifically needs, another executive argued. Brothers pointed out that the Defense Department publishes “technology roadmaps” and recently set up a “defense innovation marketplace” website, all of which are intended to give vendors that insight.

Companies need more information than what can be provided in an open website, however. Roadmaps and online portals are great, executives agreed, but cannot be substitutes for face-to-face communication.

A small business that may only spend a couple million dollars a year on IR&D needs to know that the investment will have legs, another executive said. “There is no way to determine that just by reading the roadmaps or reading PowerPoint briefings that are on the web, or even by talking to a broad network of Defense Department officials. … You really need to get to have a conversation about very specific details.” Such dialogue could never occur online or in a group setting that is populated by competitors.

Even companies that are privately owned and under less pressure from Wall Street to generate profits fear that doing business with the Pentagon is driving away top talent. “We hire scientists and engineers, with PhDs from elite universities,” another industry official said. “We compete with Silicon Valley. It’s tough to hold on to that talent.” Corporate leaders try to convince them that there is stability in the defense market. But then came the sequester, and his company in recent weeks had to lay off 10 percent of that skilled workforce after it lost Pentagon contracts. This is one reason to reconsider betting on defense work, he said. “We make decisions based on whether an IR&D investment will give us long-term programs with sponsors that will allow us to hire and retain talent.”

Non-defense companies that the Pentagon would like to lure to the military market have their own qualms about doing business with the military. A former Ford Motor Co. executive who worked on a bid for the Army-Marine Corps joint light tactical vehicle said the company opted to pull out of the competition because it believed the selection criteria would not favor the best truck. “The metrics for evaluating the program weren’t very good,” he said. The way the Pentagon set up the program allowed prime contractors to control every subcomponent and leave out some of the most advanced armor materials that were available in the open market. Instead of allowing a prime contractor to tell the government what the best composite materials are to arm JLTV, the Pentagon should have an opportunity to test armor samples from more vendors, he said. “None of the best work we saw in materials was included in JLTV variants.”

Brothers listened and promised to take these concerns up with his bosses at the Pentagon. The discussion is to be resumed at an upcoming industry meeting.

Topics: Business Trends, Doing Business with the Government, Defense Contracting