Defense Leaders to Discuss Next Steps in Private Sector Outreach

The Pentagon’s push to attract innovative technology firms is moving into its next phase as a group of government officials, senior defense industry and Washington think tank executives is poised to meet in Silicon Valley next month.

The upcoming discussions will seek to chart a path forward as the Pentagon figures out how to establish new business relationships with the commercial tech sector — including companies in Silicon Valley that are creating cutting-edge technology the Pentagon wants for its weapons and information systems, but are generally reluctant to work with the government and contend with onerous regulations.

These meetings are occurring amid a rising tide of skepticism within the defense sector and the investor community in Silicon Valley, where critics have dismissed the Pentagon’s initiative as high-minded rhetoric that is not backed up by serious efforts to lower regulatory barriers to businesses.

“It’s easy to be negative, but we have to try to make this work,” said Arnold Punaro, CEO of The Punaro Group and chairman of the board of the National Defense Industrial Association. Punaro will be taking part in a series of gatherings in Silicon Valley in early November, along with other industry representatives, Pentagon officials and experts from the Center for a New American Security.

“We’ll have meetings with key people, including the new head of DIU-X [the Pentagon’s new technology hub in Silicon Valley] and business leaders to get a better understanding of what people are doing and thinking, and where the barriers are that need to be overcome,” Punaro said. Attracting innovative suppliers is a key priority of Secretary of Defense Ashton Carter, and Congress has passed legislation to help DoD do business with nontraditional firms, he added. “There are some real opportunities here. We need to look at what we can do to make it work rather than wring our hands and complain that’s it’s never going to work. To me that’s a defeatist attitude that we need to set aside and figure out what we can do.”

After Carter launched a highly publicized campaign to lure Silicon Valley firms soon after he was sworn in as defense secretary, it did not take long for the naysayers to predict this was a doomed effort. Some of them noted that the commercial industry has little incentive to do business with a Pentagon that sets strict limits on corporate profits and demands access to companies’ intellectual property. Other critics in the defense industry questioned why the Pentagon needs new suppliers when there is already a sizeable government contractor community from which it can solicit ideas.

Punaro said everyone should be motivated to improve the current system. “We in industry are as interested in innovation as anyone else. We have the bandwidth to help companies that are very entrepreneurial and innovative but don’t have the patience to deal with a lot of the government requirements.”

The defense innovation experimental unit known as DIU-X should propose different contracting mechanisms to attract nontraditional companies, Punaro said. “The secretary of defense has acknowledged that one of the cultures that has to change is the government culture,” he said. “This is hard. There are probably people who will give up and maybe in the final analysis they’ll be proven correct but I don’t think we should throw in the towel.”

Some of the Pentagon’s own rhetoric gets in the way, however, Punaro noted. A series of comments by Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall is a case in point. Kendall recently voiced concerns about defense industry consolidation and suggested the Pentagon may seek ways to block mergers of prime contractors. Kendall also pointed out in a new study that some Pentagon subcontractors are making higher than acceptable profits. And he introduced a revised policy for the procurement of commercial products that many companies believe will deter nontraditional vendors from selling to the Defense Department.

“That’s why a lot of people are skeptics,” Punaro said. “On the one hand they say defense wants to do x, y and z and then on the other hand they are adding new barriers to be able to do that,” he said. “Policies like those that have been proposed for commercial pricing are inconsistent with the defense secretary’s directive and inconsistent with congressional language.”

Among the doubters is Stephen Rodriguez, a defense policy adviser at Coldon Strategic Advisors, a consulting firm that helps entrepreneurs in the aerospace, defense and government services sector.

“I appreciate what the Department of Defense has done to date with outreach,” he said. But public relations campaigns only go so far, he said. Tech companies outside the Beltway know about the Defense Department and the amount of contracting work it generates, he said. They know “exactly who DoD is” but still do not see it as a desirable customer. “This is not a communications issue,” Rodriguez said.

“The reason they are not working with DoD is not because they’re not aware of defense funding opportunities,” he said last week at an industry conference. That the Pentagon spends more than $200 billion a year on products and services, in itself, is not a draw for many investors who would rather not see their money tied up in government red tape. The Pentagon funding process is murky and unpredictable, said Rodriguez. “Why in the world would nontraditional companies even want to touch DoD?” he asked. There are too many reasons not to, he added, “Eighteen-month sales cycles, opaque contract language, the promise of money that may or may not be there,” he said. “Commercial businesses have their own warts, but I’ll take that any day over the DoD process where there may or may not be money at the end of the tunnel. That’s very discouraging to business.”

The Pentagon has billed its innovation initiative as an effort to “better identify the ‘art of the possible’ for national security.” Carter and other senior defense officials have championed it as a way to reenergize the military’s plodding technology development cycle. The key pillars of the plan are the opening of the DIU-X technology hub and the launch of a long-range research and development program. The DIU-X will “position the Department of Defense to be more open to the infusion of nontraditional technical ideas and talent,” a Pentagon news release said. The long-range R&D program was created to help DoD “better understand and prioritize new or unconventional application of technology.” The Pentagon has solicited technology pitches that it will consider funding in the 2025-2030 budget cycle.

These initiatives are a “big deal,” said John G. (Jerry) McGinn, the Defense Department’s principal deputy director for manufacturing and industrial base policy. To help contracting officers work with nontraditional suppliers, his office is putting together a handbook of existing procurement authorities and vehicles that can be used to “improve how DoD accesses commercial technology,” McGinn said at a Heritage Foundation forum. “Some authorities are well known, others not.” Fast-track contracting methods exist already but may not be familiar to many procurement officials.

Rodriguez said a deal breaker for small businesses is the exorbitant cost of doing business with the government. It requires specialized staff just to get through the paperwork, he said. “What DoD should do is build an incubator to enable incoming nontraditionals, to help them work through the contracting process, figure out who to partner with.”

The Obama administration has not helped the Pentagon’s cause as it has unleashed a slew of new regulations in recent years via executive orders that make it more expensive for government contractors to do business, said Peter Lichtenbaum, a partner at Covington & Burling. “Even the established industry associations and trade groups sent a letter to the White House saying ‘enough is enough.’ Imagine what it’s like for companies that are not used to that.” Regulatory burdens range from intellectual property rights to export controls, cybersecurity requirements and penalties for use of counterfeit parts, he said. “As regulations accumulate we start to strangle the very programs we want to succeed.”

Another gripe often heard from smaller contractors is that the cards are stacked in favor of established suppliers. It will be hard for DoD to innovate until that changes, said Kevin Kelly, CEO of LGS Innovations, an information and intelligence technology firm.

“DoD has frustrated vendors,” he said in an interview. “The government keeps awarding business to traditional players. That frustrates innovators.” The outreach to Silicon Valley will not achieve much if companies are not given a legitimate shot at winning contracts. “Companies come to the table with solutions and then you see legacy programs continue to get tens and hundreds of millions of dollars for the same old solutions,” he said. “They discourage innovation with their actions.” In his experience working with the Defense Department, Kelly said, “If a product doesn’t have a traditional trusted brand on it, it’s probably never going to see the light of day. That problem has yet to be solved.”

Companies are investing time and money in technologies and expect to make money from them, Kelly said. “They need to show return to their investors. If we don’t see a path to marketability, we don’t fund it. Some new companies may think the government is like an ATM machine that hands out money” until they realize this is a market without easy avenues to sell, he said. “I met with a Silicon Valley company that used to have a strong relationship with the government and no longer does. They don’t trust that the government is actually going to buy.” LGS Innovations usually partners with traditional defense contractors, said Kelly. “That’s how our technology makes it to the mission. If we were a small startup with a really innovative idea, I would have a hard time finding the right avenue to reach a government buyer.”

Topics: Defense Department