Kendall: Industry ‘Overreacted’ to Pentagon R&D Reforms

Defense industry CEOs have been up in arms over proposed new rules that would give the Pentagon more control over companies’ internal research spending.

The Defense Department’s top weapons buyer Frank Kendall said the Pentagon should have greater visibility into research and development projects that contractors charge to the government. One way to do that, according to the proposed rule, would be to require companies to enlist a “technical sponsor” from the Defense Department before they start any R&D project. Contractors also would have to provide a written report of the project’s results, annually if the project spans multiple years.

The provision was included in the procurement policy guidebook Better Buying Power 3.0. that Kendall unveiled in April. At the time, he described the policy as “minimalist.” But the blowback from the industry was unexpectedly strong. He reportedly got an earful from CEOs during an Aerospace Industries Association meeting in late April. Executives argued that micromanaging internal company investments would be counterproductive and a drag on innovation.

Kendall insists that the new policy is not going to be as intrusive as some CEOs fear. “People have overreacted to my initiative a little bit,” he told a gaggle of reporters July 28. “I’m not going to make any fundamental changes. … I’m looking for a little bit more of a check on what industry is doing to make sure it’s technically meaningful work.”

The provision in Better Buying Power grew out of concern that the military is losing its technological edge and that the Pentagon has to have a better handle on how companies turn their internal research and development, or IRAD, into militarily useful innovations. The Defense Department reimburses contractors about $4 billion a year for R&D expenses.

Kendall said the concern is justified as other countries like China and Russia are modernizing their armed forces at a rapid pace with the intent to offset U.S. military technologies. He sees this as a crisis that calls for new approaches to R&D investments.

“What I’m looking for is better communications between industry and government, both ways,” Kendall said. “But I want to do that with as light a touch as I can have. I don’t want to create a lot of new bureaucracy and I don’t want industry to have to wait for government approval before they can do something.”

The details of the new policy are still being hashed out. “We’re still doing some internal debating,” Kendall said. “We’ll share our ideas with industry before we do anything.”

The language in Better Buying Power alarmed executives who dread the prospect of having to jump through a bunch of extra hoops in order to get reimbursed for projects. CEOs view recoverable IRAD as one of their main weapons that gives them a competitive advantage in the defense market.

Some military leaders believe the additional oversight is warranted because they cannot always be sure that companies are spending R&D funds wisely.

“I understand the concern by industry,” said Lt. Gen. Michael E. Williamson, military deputy to the assistant secretary of the Army for acquisition, logistics and technology. “But at some level this concern reflects a lack of an institutional memory,” Williamson said July 9 at an industry conference. “People forget that 25 years ago the burden placed on the use of IRAD, the amount of oversight was significant.” Over time, he said, there has been less Defense Department involvement in “providing direction.” Also, Williamson noted, “Reporting procedures associated with IRAD as allowable overhead cost changed significantly.”

The language in BBP 3.0 is an “effort to look at opportunities to become more efficient, cut costs,” he said. “We can have a discussion about the execution.” As potential adversaries catch up with U.S. technology, “It becomes an imperative for us to be able to not only look at promising technologies that industry is looking at, but also create a mechanism for the Department of Defense to interact with our industry partners so we can demonstrate our significant interest in specific areas.”

Four billion dollars is “significant money,” said Williamson. The government should be able to point at “gaps and seams in the context of technology,” he said. The Pentagon’s initiative to increase oversight is “probably the right path in an environment where we have constrained resources.”

Kendall has made a case that IRAD is not well balanced between near-term and long-term projects. But industry executives reject the idea that more red tape is the answer. Some CEOs have called on the Pentagon to better articulate its needs, and to shed more light on its long-term investments so companies can follow in a similar direction.

“The point of IRAD is to have government reimbursed R&D that isn't government directed, in order to see what the best minds in industry can do to solve the government's tough problems,” said a defense industry representative who asked to not be quoted by name. “Having the government dictate exactly what it wants kind of takes the ‘I’ out of IRAD.”

Kendall is purposely not rushing to release a new policy that might fan the flames. “He wants to get this right,” said Ronald J. Youngs, assistant vice president of acquisition policy at the Aerospace Industries Association. “And it’s good that he’s being deliberate about it,” he said. “Our CEOs and others are very interested in this topic. We think a continuing dialogue to achieve the goals in Better

Buying Power is important.” But defense companies strongly disagree with the specific IRAD provision, he added. “We really think the way to achieve the goal of technological superiority is through greater communication from DoD that would give us greater insight into their expectations … but working within existing processes.”

Contractors expect the government to scrutinize expenses but the Pentagon has “never tied the hands of the company from making determinations of where to invest.”

Topics: Logistics, Procurement, Acquisition Reform, Defense Department, Research and Development