Defense Technology At a Crossroads: Can the Pentagon Regain Its Innovation Mojo?

By Sandra I. Erwin

The Defense Department may never become the technological juggernaut it once was, but with the groundbreaking innovation happening in the private sector, the challenge for the Pentagon is to tap emerging technology.

When this topic is discussed by senior defense leaders, there is a palpable sense of urgency that is stoked up by the realities of a dangerous world.

Current and potential enemies of the United States are exploiting technology at breakneck speed. They are launching cyber attacks that one day could cripple military operations or compromise secret weapon designs; they are manufacturing advanced drones at bargain prices; and they are constantly developing novel tactics to hide from U.S. surveillance systems.

“We fully expect to wake up one morning and hear of a terror attack on some important military or civilian asset, like aircraft parked at airfields by drones equipped with explosives,” observed defense industry analyst Byron Callan of Capital Alpha Partners. “These systems are globally available and were used in the Libyan civil war of 2011 for surveillance.”

Although the Pentagon pours nearly $200 billion a year into weapons research, development and procurement, it is not clear whether it has answers to these emerging challenges. And the traditional cluster of contractors that make today’s weapon systems might not have answers either, Callan said. “These threats will spawn new defense demands that may not necessarily be readily met by heritage defense firms.”

Of similar thinking is former Deputy Defense Secretary Bill Lynn, currently the CEO of defense contractor Finmeccanica North America. “Today’s military-industrial complex consists of a small group of conglomerates that are coping with declining Pentagon sales, investing less money in new technology and increasingly depend on the global market for innovation,” he said in a December interview. “A more open market would benefit the Pentagon by spurring competition.”

Defense Secretary Ashton B. Carter is fully aware of the Pentagon’s technological shortcomings, and has signaled that this issue will be a priority of his agenda. He intends to support a “defense innovation initiative” started by his predecessor Chuck Hagel and is asking Congress to fund these efforts.

Carter also is of the belief that the conventional roads to innovation will not take the Pentagon where it needs to go. “We must be open to global, commercial technology as well, and learn from advances in the private sector,” Carter told the House defense appropriations subcommittee.

The defense chief is familiar with the sources of groundbreaking technology, as Carter worked in Silicon Valley before taking the Pentagon’s top job. In his previous stint as undersecretary of defense for acquisitions, Carter was the architect of “Better Buying Power,” a policy guide for how to spend defense dollars more wisely. The theme of the latest iteration, Better Buying Power 3.0, is to “achieve dominant capabilities through technical excellence and innovation.”

The innovation initiative officially kicked off Oct. 29 when Pentagon acquisitions chief Frank Kendall signed a memo directing the launch of a “long range research-and-development plan” with specific instructions to reach out for help to the private sector, and with emphasis on nontraditional players. Kendall said the Defense Department should “identify high-payoff enabling technology investments” and focus on technology that can be adopted into military programs within the next five years. “This effort is of the highest priority and requires full and immediate support from across the department,” Kendall wrote.

The follow-up action was a Jan. 28 “request for information” that sought ideas from the outside world. The hope was to attract innovative small businesses and Silicon Valley startups.

The solicitation was set to expire in March. Overseeing the RFI responses is Stephen P. Welby, deputy assistant secretary of defense for systems engineering. The Pentagon received more than 300 responses, Defense Department spokesman Maj. Eric D. Badger told National Defense. But Welby would not discuss the substance of the responses. “He is keeping the proposals close to the vest at this point,” Badger said. “In fact, it’s likely that the LRRDP report will be classified.” He said many responses came from “small businesses, official actors and some from non-traditional folks that don’t normally deal with the department, which we’ve been very pleased by and continue to encourage.”

Outside the Pentagon, however, there are growing doubts about the Pentagon’s innovation strategy. In the view of many tech industry executives and analysts, the Defense Department is culturally out of touch with the business world and is unlikely to attract the innovators it really needs.

Critics allege that a central flaw in the strategy is that it assumes that Pentagon buyers will be able to ferret out emerging technology and know how to work with commercial companies. “We hear a lot about DoD reaching out to Silicon Valley. I really see it as lip service, and I don’t expect to see much real change,” said Sean Varah, CEO of MotionDSP, a Silicon Valley-based company that develops advanced image processing, computer vision and video analytics software.

The concept of relying on a request for information for long-term R&D is entirely antiquated and reflects a lack of understanding of how commercial industry works, he said in an interview. “It shows that they are living in a world where they are mostly working with a handful of defense primes.”

Most startups or commercial businesses are not going to sign up for R&D contracts that have slow timelines and no verifiable commercial benefits, he said. “Investors would never allow that, ever.”

The government has to change its thinking, Varah said. One way to stimulate innovators is to fund “fast track” procurements where companies can offer products and the government agrees to buy them with minimum red tape. Such initiatives have been used before but recently have not been funded. Examples are the DeVenCI (Defense Venture Catalyst Initiative), the Rapid Innovation Fund and the Defense Acquisition Challenge.

Innovative companies, especially in the software industry, are motivated to sell products, not to be paid hourly rates doing research for the government, Varah said. Tech investors often are surprised to hear that even though the Pentagon has the biggest budget of any government agency, it has very little discretionary money to buy products, he noted. “They have money to hire support engineers and pay them to work by the hour but no money to buy a piece of software.”

One of the Pentagon’s most glaring technology gaps is in big data analysis to process overwhelming amounts of video and other intelligence. Computer vision is now a booming technology that automates data analysis. Tech giants like Google and Facebook are investing hundreds of millions of R&D dollars into computer vision, and yet “DoD is going to lose out,” Varah said. The Pentagon continues to pay traditional defense contractors to develop software that cannot compete with the technology that is exploding commercially.

In the cyber security arena, the Pentagon also is behind the curve. “The kind of technology I see in cyber in the commercial market is devastatingly good,” Varah said. “And I don’t think I’ve seen any software created under a government contract that can compete at all.”

Defense contractors do their best, but they simply can’t recruit the talent, he added. “Kids in Silicon Valley get stock options. When their companies are bought they can make a few million dollars. That’s a totally different value proposition than going to work for a defense contractor with a decent salary and benefits. And guess what? When the company loses a government contract, you’ll probably be let go.”

If the government is serious about innovation, he said, it has to understand that the market is motivated by profit. It should let the market pick the winning products and then buy what’s best, when needed.

One of the rare defense bureaucracies that has quickly updated its buying skills is the U.S. Special Operations Command. “I’m seeing some innovative procurement in special operations,” Varah said. In one project, for instance, SOCOM sought to replace customized software with a commercial alternative.

The issue was about the “color of money,” Varah said. The military spends “operations and maintenance” dollars to maintain customized software that might no longer meet its needs, but it needs “procurement” dollars to buy commercial products. “Our special operations customer was able to change the color of their money and assemble a system with the ‘best of breed’ commercial products. They got a brand new system, vastly superior, for less than their annual maintenance budget for their legacy system,” said Varah. “They were creative. That’s very difficult for the big military agencies. They’re locked into the color of their money.”

These issues illustrate the underlying reason why the Pentagon will struggle to attract cutting-edge innovators, which is a massive cultural divide, said Teka Thomas, a federal contracting attorney at the Paxton Law Group in Washington, D.C.

In a briefing titled, “Silicon Valley’s Guide to the Pentagon,” Thomas warns companies that might venture into the defense market to be aware of the potential pitfalls. Of utmost importance, Thomas advised, it that companies protect their intellectual property. “As a tech entrepreneur, IP is probably your most valuable asset. With the government you will be dealing with patents and copyrights. It is essential that you have experienced counsel in intellectual property with government procurement.”

Simply put, only in work-for-hire agreements where the government entirely funds a project is the government free to use the technology for its own programs, and give it away to others in industry. “As a subcontractor to a prime contractor in a work-for-hire situation, you need to stay on guard at the time of contract review to protect your IP,” he added.

Thomas also offered suggestions to Defense Department buyers in his briefing, “The Pentagon’s Guide to Silicon Valley.”

An Air Force veteran, Thomas sees this as a matter of national security. “The Defense Department needs Silicon Valley’s genius to maintain its global dominance.”

The current procurement system cannot supply the military with the best technology, he said. “The DoD is used to firms whose business model revolves around its acquisition and appropriation process. Some companies use the government to fund their research and products.” In the traditional defense market, he explained, the focus is less on innovation than on inking contracts with the government.

Silicon Valley is a “completely different animal,” noted Thomas. “The focus of a company is one piece of technology, and the aim is to raise the value of the company so it will be acquired. If the federal government wants to be a proverbial lion in the tech food chain with the Googles and Apples, the department and its 535 overseers on the Hill will need a transformational change in outlook.”

Google headquarters in Mountain View, California

Tech firms that are considering taking the plunge into the government market need to be smart in how they negotiate contracts, said federal contracting attorney Hilary S. Cairnie, a partner at the Washington law firm BakerHostetler. The large defense contractors have internal machinery in place to handle the creation of IP and the allocation of rights. But small businesses, which are the engines of innovation, bear disproportionate risk because they don’t understand the IP implication of contracts they might sign, Cairnie said. Software is especially tough because a vendor might inadvertently give the government unlimited rights to the IP when it develops a customized application for a government customer, he said. “Contractors sometimes waive the IP rights because they don’t understand the law.”

Most companies in Silicon Valley specifically avoid any innovative work with the government because of the IP clauses, said Varah, the software executive. “When we work with defense primes, we write a piece of connecting code that connects our commercial software to a government system. Then we give them the rights to the connector. That’s how we work with the government.”

IP clauses make it impossibly complicated to commercialize technology, Varah said. Further, the Defense Department might “put our intellectual property into the hands of the prime contractors who, because they control all the big contracts, monopolize any further work with the government, and we’d never see a penny after the initial work.”

Pentagon red tape also is a major gripe. And experts don’t expect that reality to change any time soon. “The oversight has increased over the years. There are new rules that come up on a yearly basis that add oversight,” said Eric Sobota, a partner at the consulting firm BDO. “This is counterintuitive to the way most small technology firms operate.”

The cost and length of the bidding process to compete for government deals also annoys companies. Startups, in general, don’t want to spend capital upfront and wait for a payoff months or years later if they win a contract, Sobota said.

But in some sectors of the tech world, companies do see a silver lining to government contracting, he said. In the biotech and biodefense industry, it is not unusual for companies to seek government contracts as a lifeline to fund their business. Some of Sobota’s clients have R&D contracts with the departments of Defense or Health and Human Services so they can avoid having to go to Wall Street and ask for money.

“They do research and have the government pay for most of their administrative costs. It’s a great opportunity if you need ways to fund your company,” he said. By the same token, the prospects for making money are limited. For newcomers, the risks can be significant. “Why should a company spend millions of dollars of its capital to win a contract that has only a 5 percent profit?”

One reason the government gets a bad rap as a technology buyer is that it has been complacent for a long time, and does not effectively market itself as a desirable customer, Sobota said. “The Defense Department has to get out in the community and make it known they want new partners,” he said.

As the Pentagon tries to regain its technology magic, it will have to come to terms with the widening disconnect between the insular world of defense contracting and the global industries that are creating leading-edge innovation. It is a dramatic departure from the way things used to be, noted Yale School of Management Professor Paul Bracken. The Pentagon in fact was the engine that first fueled the growth of Silicon Valley in the 1950s and ‘60s with Cold War defense spending.

“It was the need for electronic intelligence that drove much of the R&D work,” he said in a recent lecture that was reported by Yale Insights. “That led to a range of technologies including the integrated circuit, which opened the way for computers, satellites and effectively every piece of electronics in use, whether military or civilian.”

The new focus on startups and smaller firms, Bracken said, coincided with a realization that neither the large defense firms nor the Department of Defense had the needed in-house skills to develop critical new technology. “The locus of innovation in the United States, in a relative sense, has shifted to small and medium-size enterprises,” Bracken said. For the Pentagon, “Choosing winners and losers among smaller technology firms is difficult. … But from a national defense perspective, we can’t simply not play the game.”

Photo Credit: Thinkstock

Topics: Business Trends, Doing Business with the Government, Infotech, Procurement, Defense Department

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