Pentagon Leaders Seek New Ways to Spur Innovation

By Sandra I. Erwin

The next installment of the Pentagon's "better buying power" procurement guidelines will take aim at a problem that keeps Undersecretary of Defense Frank Kendall up at night: The U.S. military is on a path to lose its technological edge.

Kendall, who is the Defense Department's chief acquisition executive, will unveil later this year an updated version of the Pentagon's procurement playbook, known as better buying power. BBP 3.0 will be about "incentivizing productivity and innovation," he said Aug. 5 at an industry conference organized by AFCEA International.

The first two versions of BBP focused on how to make the military acquisition process more efficient and minimize wasteful spending. Kendall now wants to tackle a more intractable problem, which will require a major education effort across the entire Defense Department's procurement workforce. Program managers and contracting officials will be asked to apply "critical thinking" as they make decisions on what technologies should be bought and how they should be acquired. This is a drastic departure from traditional and cumbersome ways of doing business that emphasize process and oversight but not necessarily innovation.

"Our technological superiority is very much at risk," Kendall said. "There are people who are designing systems intentionally to defeat us, in a very thoughtful and strategic way. ... We've been complacent. We'd better wake up and start paying attention," he added. "This keeps me up at night far more than anything else."

Deputy Secretary of Defense Robert Work has been studying this problem, Kendall said. He acknowledged that it is a tough issue because innovation is not always quantifiable or easy to define. "We will continue to work with the workforce to make sure they understand what this means," Kendall said. His staff has been trying to figure out how to increase incentives for contractors to innovate.

Companies' bids typically are rewarded for meeting price targets and "threshold" requirements set by the government. "Source selection doesn't give you credit for extra capability," said Kendall. "We want industry to be incentivized to give us better performance."

Defense officials have to be able to "define best value, so industry knows what we are willing to pay for the increased performance. ... [We need to] give industry a reason to be innovative, to bid above the threshold."

BBP 3.0 also will look at how the Pentagon can attract high-tech vendors that currently shun the military market for its red tape and low profits.

These so-called "barriers to entry" are real, said Kendall. In discussions with small business and startup executives, Kendall realized that it is "incredibly difficult" for newcomers to break into the defense market. "We want to open up opportunities for innovation," said Kendall, particularly when companies are willing to invest in technology that could benefit the Defense Department.

Despite steep budget cuts projected for the coming years, the Pentagon's problem is not a lack of money, but how it spends it. The Defense Department obligated about $310 billion in fiscal year 2013 to acquire products and services.  

A Pentagon advisory panel blasted the Defense Department in a July 24 report for "inadvertently erecting barriers against innovation." The Defense Business Board, made up of senior industry leaders and retired military officers, cited common complaints such as onerous regulations and a risk-averse culture as some of the reasons why tech industries eschew the Pentagon. A more significant barrier is the Defense Department's bias toward "contracts by negotiation," instead of buying products at market prices.

Acquisition rules already exist for the acquisition of commercial items, the panel said. "The Defense Department can act now, no new authorities are required."

The Defense Business Board noted that top Pentagon contractors benefit from the current closed system because it keeps commercial competitors out, and locks in high-priced customer buying behavior. "The Defense Department lacks sufficient understanding of business operating models and drivers of innovation," the report said. The panel suggests the government has to acknowledge that companies' intellectual property is a "source of value" and profit should not be seen as something to be "minimized."

Commercial companies and tech-skilled workers are exiting the defense market," the report warned. "Without talent and investment there will be little innovation."

If technological superiority is the goal, the panel said, the Defense Department must "elevate mission above process."

Kendall pushed back on some of this criticism. He noted that the military builds extraordinarily complex weapon systems that require skills and products not always found in the open market. Kendall insisted that the Pentagon already is adopting a "commercial model" for many procurements, including tactical radios and space launches.

"We have to work our way through all this. But we want to have the benefits of what is happening in the commercial world," he said. Kendall cautioned that the commercial model does not work all the time. The Defense Department could buy its weapon systems from the open market, like other countries do. That would save money, but it would mean giving up the U.S. military's position as the world's most advanced military, said Kendall. "We wouldn't be the number-one military in the world, but if were willing to be number two, three or four, we could do that, buy what somebody else developed," he said. "For the things that matter for winning in the battlefield, we are probably not going to do that. ... The commercial model does have some utility for us, but it's not a panacea."

Kendall agreed with the Defense Business Board that the Pentagon has to find a more reasonable approach to negotiate intellectual property rights with vendors. "We have to manage intellectual property better," he said. Companies have complained that the government demands technical data rights to equipment that was funded by the private sector. The government should fairly compensate companies for their intellectual property, he said. How much IP the government really needs would vary from program to program, he said. “Industry cannot be forced to sell us their property.”

Topics: Procurement, Acquisition Reform, Defense Department

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