SecDef, Industry CEOs Exchange Views on Innovation, Acquisition Reforms (UPDATED)

By Sandra I. Erwin
Defense Secretary Ash Carter and Undersecretary Frank Kendall speak with executives at the Aerospace Industries Association

Defense Secretary Ashton Carter participated in a closed-door meeting with a group of industry executives March 29 to discuss wide-ranging concerns such as Pentagon technology initiatives, procurement regulations and foreign military sales.

“We had a constructive dialogue,” Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall told National Defense after the meeting held at the Aerospace Industries Association, in Arlington, Va. “It had been a while since we did something like this,” Kendall said.

The hour-long off-the-record forum included 40 corporate CEOs and senior executives from the Aerospace Industries Association, the National Defense Industrial Association and the Professional Services Council. The executives had requested to meet with Carter to air out differences over Pentagon policies and to seek his advice on “how we can best position the aerospace and defense industrial base at this critical time in our nation’s history,” according to a joint letter sent to Carter by the associations. Pentagon Press Secretary Peter Cook said Carter "appreciated the invitation to to talk to these groups and hear directly from industry leaders."

Efforts to engage Carter reflect the industry’s continuing unease about his enthusiastic outreach to high-tech companies in Silicon Valley and the implication that he is dissatisfied with traditional defense suppliers.

Kendall pushed back on the idea that the Pentagon has been dismissive of the technological achievements of the defense sector. “The secretary has made it clear he values the innovation that comes out of the defense industry,” he said. “What we're trying to do is accelerate the flow of commercial technologies into defense, and we're trying to tap into human capital that might not be working on defense problems. That does not disparage in any way the companies that made us the best in the world.”

Many executives contend that DoD has been sending “mixed messages” to the industry since Carter took office and made technological innovation a top priority. Pentagon officials have insisted that private sector innovation is a linchpin in efforts to keep the U.S. military on the cutting edge of technology. But at the same time, defense CEOs counter, procurement red tape has grown. Industry officials said they would like to see action from the Pentagon to speed up procurements and motivate companies to spend more of their profits on defense technology. Top CEOs have said they were perplexed by the newly proposed IR&D (independent research and development) rules that would add more controls, bureaucracy and regulations.

Kendall has criticized defense companies for curtailing R&D spending and directing their profits to shareholders. “I worry about our technological superiority,” Kendall said. “I am always looking for industry to be more aggressive in research and development.”

Carter has been persistent about seeking fresh ideas on how to design and develop advanced technology, as well as how to employ existing systems in new ways. To attract private sector input from traditional and nontraditional industries, he declassified the previously “secret strategic capabilities office” and requested nearly a billion dollars in fiscal year 2017 for SCO projects.

At the same time, defense companies over the past year have been especially alarmed by the time and attention Carter has given to Silicon Valley, where he opened a DoD outreach office and recruited Eric Schmidt, executive chairman of Google parent company Alphabet, to chair a Defense Innovation Advisory Board. Defense industry groups took notice and have asked Carter to be allowed to participate.

The defense sector also is asking the Pentagon to help expedite foreign military sales as companies see U.S. procurements slowing down and foreign competitors making deeper inroads into U.S. market share. U.S. defense and aerospace companies fear their advantage in the global market is eroding because of aggressive foreign competition.

Where this debate goes next remains to be seen. Industry insiders say both DoD leaders and industry CEOs have legitimate gripes but they doubt much will change during the final months of the Obama administration.

“We overreact on both sides,” said retired Air Force Lt. Gen. CR Davis, a military procurement expert who is president and CEO of Seabury Global Aerospace & Defense Consulting.

Davis was not a participant in the forum with Carter. In an interview, he said the fact that a meeting took place with DoD and industry chiefs is a positive sign. “Unfortunately that dialogue is very rare.

Any time CEOs are wiling to sit down with the DoD and be honest, open and direct, tell them what they can work with, I think it’s a good idea.”

The tension between the industry and DoD has been brewing for a long time, he said. In the face of declining procurements, CEOs have directed corporate profits to paying investors and bolstering their stock values, “to make Wall Street happy until they see the next big thing.” That in turn has caused DoD to react by putting more controls on how IR&D is spent.

“The industry rightfully should be criticized for the lack of investment in IR&D,” said Davis. “But DoD also should be criticized for IR&D policies. There is a lot of blame to go around on that issue.” It is a reality that companies are judged by the value of their next production contract. In the current environment where few programs are ramping up, DoD should consider funding prototype projects.

“They need some type of cash flow,” Davis says. “You can’t expect companies to build three versions of an X-plane that may never be used with their own funds. There has to be a joint approach to this.”

Davis agreed with CEOs’ concerns that the Pentagon and other agencies should do more to help secure foreign military sales for American companies. He said he has only seen marginal improvements to the process in recent years. A case in point is the sale of Boeing-made F/A-18 fighter jets to Kuwait, which has been held up in the regulatory process. This is an example of a deal that should move far more quickly because it’s to a friendly country and would help Boeing keep its assembly line in business. “Why would we hamstring ourselves at that level?” Davis asked. “If we walked away today, five European countries would be ready to start building fighters there. We definitely make it difficult for our companies to compete at the same level as other countries.”

On the practicality of DoD seeking innovators in Silicon Valley, Davis said he doubts that companies that have never been interested in working with he government will change their business models.

“I do understand why defense companies are upset,” he said. The commercial tech industry could dominate in areas like cybersecurity or special operations-unique widgets, Davis said. “For the major weapon systems we need, DoD is going to have to work with the mainstream defense firms.”

Bringing in the CEO of Google as a top adviser is not going to fix much, said Davis. “Any of these advisory boards are a waste of time. I’ve never seen any of them produce useful outcomes to improve the acquisition process.”

To buy products from Silicon Valley, the Pentagon has to commit to commercial off-the-shelf procurement, he said. “DoD has never fixed the commerciality issue. That is the only type of approach that will ever work with anything they bring from Silicon Valley.”

The ultimate goal for both government and contractors should be to provide cutting-edge equipment to the military faster and more cost effectively, but that objective often takes a back seat to beltway politics, Davis noted. “Congress is not helping.” Newly proposed legislation by the House Armed Services Committee is “going to provide hundreds of pages of new acquisition statute on things like prototyping that require reporting and constant updates on status, which is going to make the process more cumbersome.”

Kendall said he recently conversed with House Armed Services Committee Chairman Mac Thornberry, R-Texas, on his latest acquisition reform bill. “Chairman Thornberry is very receptive to comments,” said Kendall. “I'm working with HASC, and also talking to the SASC. I would just hope that both committees work with us on any proposed language.”

Photo: AIA/Leonardo Bodmer

Topics: Defense Department, DOD Leadership, DOD Policy, International

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