Acquisition Process Undermining Silicon Valley Outreach Efforts

Last year, Secretary of Defense Ash Carter established a new U.S. military outpost in Silicon Valley known as the Defense Innovation Unit-Experimental, or DIUx. Its purpose is to connect the Pentagon with commercial innovators to help warfighters maintain their technological edge over potential adversaries.

Although they view the establishment of the new office as a positive step, Silicon Valley executives have nonetheless expressed continued frustration when it comes to doing business with the Pentagon.

“We have no problem with DIUx,” said John De Santis, chairman and CEO of security software firm HyTrust. But “we have a serious, serious problem with the contracting officers and with the purchasing process and the acquisition process.”

While DIUx offers opportunities to pitch products and ideas, funding decisions are still slow in coming, Silicon Valley CEOs said during a recent panel discussion hosted by the Atlantic Council. That frustrates executives who are used to doing business at a much faster pace.

“When you have something sit there … for nine months you start to say, ‘What are we doing here? Why are we even talking about this anymore? It’s a waste of time’” because there are other projects that the company could be working on that would yield profits faster, De Santis said.

Officials from DIUx did not respond to an interview request.

If the Pentagon wants to draw in more commercial tech companies, it needs to speed up decision-making and acquisition timelines, the executives said.

“My fellow CEOs look at me and go, ‘You are so stupid/brave to be doing work with the federal government because what a risk it is from a timing perspective,’” De Santis said.

Venture capitalists that are bankrolling many of the Silicon Valley firms are even more impatient, the executives said.

Investors in the healthcare field consider a nine to 18-month sales cycle to be too long, noted Mylea Charvat, founder and CEO of Savonix, a technology company that focuses on neurocognitive assessment and brain health. They aren’t interested in hearing about efforts to land contracts with the slow-moving Pentagon bureaucracy, she said.

“VCs just go, ‘Oh, forget it’ … when we start talking about something that might happen six to eight to 10 years” down the road, she said. “We don’t even talk about [our government business] when we’re pitching the company to investors.”

Defense officials and lawmakers are trying to reform the acquisition system, but there is pessimism among commercial tech companies that have an interest in doing business with the U.S. military.

“The majority of CEOs I know in Silicon Valley are … very skeptical of whether or not any real change can be made in the process the way it is,” Charvat said. Executives are looking for “other injection points” or mechanisms by which technologies can be sold to the U.S. military more quickly, she said.

De Santis said it is much easier to do business with war-focused components such as Special Operations Command and Central Command, which have more streamlined acquisition processes.

SOCOM, which has a knack for putting equipment through the procurement cycle in months and not years, is often held up as a model for what industry would like to see from the rest of the Defense Department.

“There’s not a lot of … nonsense going on,” De Santis said. “It’s just like, ‘Hey, we’ve got a job to do, we’ve got to get it done and get it done now.’”

Some defense officials want to use a funding mechanism known as “other transaction authority,” or OTA, to get commercial technology into the pipeline faster.

“We have a lot of authorities that we just don’t use, we have a lot of flexibility that we don’t actually take advantage of,” said Camron Gorguinpour, director of transformational innovation in the office of the assistant secretary of the Air Force for acquisition.

For some projects, his office is targeting a three-week timeline between the due date for industry responses to solicitations and the awarding of contracts. That can be accomplished through the use of OTAs, Gorguinpour said at a recent acquisition forum hosted by the National Defense Industrial Association.

“Absolutely it can be done,” he said. “We’re doing it. We’re scaling it up.”

Some in industry see problems with the Pentagon’s contracting workforce, which isn’t as accustomed to dealing with startups and non-traditional firms.

“I don’t think that your [contracting officer] that deals with General Dynamics or Raytheon is the guy who should be dealing with my company …  because it’s a completely different way of thinking,” Charvat told National Defense after her panel remarks. “I think you need to hire completely different people.”

Concerns about intellectual property also deter tech companies from working with the Defense Department, analysts and CEOs said.

Charvat recently walked away from a business opportunity with the military after she was asked to write a detailed white paper.

“There’s no way that I’m going to expose my IP in a process like this,” she told the audience at the panel discussion. Doing so would be irresponsible to her employees and her investors, she said.

The problem is especially acute when it comes to sole sourcing, she noted.

“In order to justify a sole-source contract you have to write down why what you do is so unique and they want you to go into the kind of detail that would make a patent officer blush,” she said. “That’s a huge IP concern because then what they also want to do is ... show this to all these other companies and see if they can do it too.”

Roger Zakheim, a government affairs lawyer at Covington and Burling, said the Defense Department’s intellectual property rules are essentially closing the door on many of the potential entrants that Pentagon leaders want to do business with.

The Pentagon may have an easier time attracting startups and other small companies, rather than firms that are already household names, analysts said. There is less financial incentive for commercial technology behemoths to endure the pains of the Defense Department’s acquisition process, especially when the profit margins are comparatively low, they noted.

“If you’re Google, if you’re Apple, if you’re Facebook, then the market at DoD is actually quite small, almost laughably small,” said Andrew Hunter, director of the defense-industrial initiatives group at the Center for Strategic and International Studies. “For the big players, it’s hard to see what would compel them to work real hard at it.”

But even small contracts could be a boon for some companies.

“If there’s a quarter million dollars [or] a half a million dollars, that’s significant to a startup. … That’s enough to get you going,” De Santis said. “It’s not like you need a lot a lot of money [to entice companies], you just need some speed at which you can deploy that.”    

But creating a more streamlined acquisition process for commercial tech firms could lead to contract award disputes, analysts noted. Such legal challenges would undermine efforts to speed up the acquisition system.

The defense industry is worried that “traditional suppliers are going to be stuck in the slow lane of acquisition and the cool kids from Silicon Valley are going to get to go into the fast lane,” Hunter said.

Frank Kendall, the undersecretary of defense for acquisition, technology and logistics, said the Pentagon has no intention of sidelining companies.

“We know that you defense industry firms are aware of those technologies and are trying to bring them in,” he said recently at the 32nd Annual National Logistics Forum, hosted by the National Defense Industrial Association. If “we can buy those products and services [from] non-traditional sources … that adds to competition, which is all good.”

Hunter said the outreach to commercial industry is already pushing defense contractors to up their game, even if the Pentagon hasn’t doled out many big contract awards to Silicon Valley firms since the creation of DIUx.

“I think you’re seeing the traditional suppliers really react quite markedly to stress and advance their own innovation,” he said. “You’re seeing a lot of behavior by the traditional primes to be [and] to look more innovative.”

Going forward, analysts expect to see more partnering between old and new players, including mergers and acquisitions.

“There’s a real business opportunity for the traditional defense company that actually has the ability and the knowledge of having business with DoD, and then they can leverage that innovation” from commercial companies, Zakheim said.

Gary Gysin, president and CEO of Liquid Robotics, participated in a business roundtable with Carter during one of the secretary’s trips to Silicon Valley. His company, which builds unmanned maritime vessels for oil and gas firms as well as the Navy, is already partnering with larger defense industry firms.

“For us, you know the prime contractors are our lifeblood,” he said.

Liquid Robotics builds the unmanned platforms, leaving the job of adding sensors and other military gear to other companies.

“We’re not trying to attack that … large program procurement process directly, because it’s a fool’s errand,” Gysin said.

Loren Thompson, a defense industry consultant and the chief operating officer of the non-profit Lexington Institute, sees teaming as the most effective way of getting new commercial technology into the force quickly. There’s no reason why a company like General Dynamics can’t help Apple adapt its technology to meet Army needs, he said.

As a complement to its Silicon Valley outreach, the Defense Department is also pursuing new relationships with industry and academia in other tech hubs such as Boston, Austin and Seattle. Carter and other high-ranking officials have been making pilgrimages to these innovation hotspots to meet with business leaders and entrepreneurs.

The effort is starting to bear fruit, according to the Pentagon’s acquisition chief.

“There’s a lot of … transactions that are pending out there,” Kendall said during a discussion with reporters after his NDIA speech. “We’re flowing technology money to some of these [companies]. Essentially we’re paying for development, but it’s an investment as far as they are concerned.”

DIUx officials have already met with representatives from more than 500 companies, according to a Defense Department fact sheet.

“We’re really building the relationship, building the dialogue,” Kendall said. “Overall it’s moving in the direction we want it to go.”

But Carter clearly sees that the outreach effort is falling short.

“We need to admit when we need to change,” he told reporters in May during a visit to DIUx headquarters in Mountain View, California, where he announced the launch of “DIUx 2.0.”
The next iteration “will be a test bed for new kinds of contracting with startup firms,” Carter said in his speech. “They’ll work quickly to execute time-sensitive acquisition programs. And they’ll move at the speed of business. We know how fast companies run here and in other tech hubs around the country, and we expect DIUx 2.0 to run alongside of them.”

As part of the organizational restructuring, he is bringing in a new leadership team comprised of individuals who have both U.S. military and Silicon Valley business experience and understand the different cultures. The Defense Department plans to set up a similar unit in Boston and potentially in other tech centers across the country.

For fiscal year 2017, the Defense Department requested $30 million in new funding to direct toward non-traditional companies with emerging commercially-based technologies that meet Pentagon needs. “With co-investment from the military services, this number is really just a starting point,” Carter said.

Although the Obama administration will be out of office next year, industry analysts expect the Pentagon’s outreach to Silicon Valley and other commercial innovation hubs to continue. The need for cutting-edge technology and faster acquisition cycles is not going away anytime soon, they noted.

“A new administration is going to see the same underlying factors,” said Byron Callan, managing director of Capital Alpha Partners. “I’m trying to just tell people, ‘Hey, pay attention to this,’ because I don’t know how it’s going to play out, but I think it’s a shift and it’s an important shift.”

Photos: iStock/Defense Dept.

Topics: Cyber, Cybersecurity, Defense Department, Infotech, Science and Engineering Technology