Enthusiasm Growing at Pentagon for OTAs
This is part four of a five-part special report on the health of the U.S. defense industrial base.
The National Defense Industrial Association’s second annual Vital Signs report on the health of the U.S. defense industrial base was released Feb. 2. To download a copy, please click HERE.
The Pentagon is using special contracting mechanisms to try to promote innovation and bring nontraditional partners into the acquisition fold.
The use of one of them — other transaction authority agreements — has skyrocketed in recent years. Meanwhile, spending on the more established Small Business Innovation Research program has remained flat, according to data presented in the National Defense Industrial Association’s “Vital Signs 2021” report.
Other transaction authority agreements, or OTAs, are intended to cut through bureaucratic red tape and speed prototyping and delivery of new capabilities to the military. They have become an increasingly popular tool for acquisition officials since the 2016 National Defense Authorization Act encouraged their use.
OTA obligations rose from $4.4 billion in 2018 to $7.7 billion in 2019, the last year for which final numbers are available, according to a recent study by the Center for Strategic and International Studies tilted, “Defense Acquisition Trends 2020.” That represents a 75 percent bump.
Between 2015 and 2019, the average annual amount of Pentagon innovation investment that used other transaction authorities rose by nearly 300 percent, according to the Vital Signs report on the health of the defense industrial base, which incorporated data provided by big data analytics firm Govini.
Analysts at Bloomberg Government said OTA growth continued to ramp up in fiscal year 2020, even though final numbers are not yet available.
“Our data is showing $14.8 billion for DoD and $16.3 billion [for the U.S. government] overall for FY 2020, so the total has gone up over 100 percent over FY 2019 and we’re still waiting on the last month or so of data for DoD,” Robert Levinson, senior defense analyst at Bloomberg Government, said in an email in December. “The enthusiasm for OTAs continues.”
Most of the Pentagon’s OTAs go to firms operating through consortia such as the National Armaments Consortium. More than 80 percent of the NAC’s members are nontraditional companies. The consortium recently had to revamp its operations because the growing caseload was taxing its system.
“That just became a bow wave and it really wasn’t tenable,” NAC Executive Director Charlie Zisette told National Defense. “We knew we had to work closely with the Department of Defense and do … a process reset and take a look at how can we streamline this” to meet the growing demand.
The Army remains the leader in OTA usage among the Defense Department, but the other components saw “significant upticks” in recent years, according to the CSIS study.
Army OTA obligations increased from $3.07 billion in fiscal year 2018 to $4.95 billion in 2019, a 61 percent bump. Air Force obligations grew by 190 percent, going from $540 million to $1.56 billion. The Navy, which had “marginal” OTA obligations in previous years, saw a surge in 2019, from $30 million the previous year to $170 million, a 431 percent increase, according to the report.
In 2019, the Army accounted for 67 percent, the Air Force 21 percent, the Defense Advanced Research Projects Agency 6 percent, and the Navy 2 percent of defense OTA obligations, respectively, the study said.
“The Army is ahead of the other services because it had a head start,” CSIS analyst Rhys McCormick, the author of the report, said in an interview. Army Contracting Command out of Picatinny Arsenal in New Jersey has been the Army’s OTA “center of excellence” since well before the 2016 NDAA was passed, he noted. “When they started ramping up, the Army already had that institutional knowledge.”
“The Army will continue to maintain its lead, but I think the other services are going to catch up,” he added.
But will OTA spending continue to ramp up as fast as it has been recently?
“I definitely don’t think the [current] growth rate is sustainable … but I think we’re going to continue to see growth in OTAs in the coming years,” McCormick said. “It just won’t be at that crazy rate that we saw” after the 2016 NDAA was passed.
Usage of other transaction authority agreements could come under more intense scrutiny as they become more popular.
“There are definitely some concerns about transparency when it comes to OTAs” in terms of who they are going to, the level of competition and other data, McCormick said. “You could see some small pushes from Congress there where they are requiring greater transparency.”
There is also the possibility of a high-profile program going off the rails, he noted.
“There is definitely a big risk that you have a major system fail during those OTAs,” McCormick said. "There are some programs in the works that, if they fail, could lead to some serious curtailment of OTA authorities.”
The Army’s future vertical lift programs are an example, he noted. The service is leveraging other transaction authority agreements for its future armed reconnaissance aircraft, or FARA, and future long-range assault aircraft, or FLRAA, projects.
“The Army is in a good place, but developing any major weapons system is a major challenge,” McCormick said. “The Army is full-steam-ahead on OTAs on those two efforts. So there is a significant risk there.”
While Congress wants the military to move faster in acquiring next-generation systems, that doesn’t mean they are seeking to jettison the traditional procurement process. If lawmakers decide that the Defense Department is using other transaction authority excessively or inappropriately, they could compel the Pentagon to dial it back, McCormick said.
“OTAs are great, but you have to be careful about using them where they make sense, or you do risk losing this authority or having it severely curtailed,” he said.
To bring nontraditional players and small businesses into the defense innovation ecosystem, the Pentagon is also leveraging the federal government’s Small Business Innovation Research (SBIR) program and Small Business Technology Transfer (STTR) program.
The SBIR program was established by Congress in the 1980s to strengthen the role of innovative small businesses in federally funded R&D.
The most significant difference between SBIR and its sister program STTR is that STTR requires a small business to have a research partner consisting of a university, federally funded research-and-development center, or another qualified nonprofit research institution.
The Defense Department accounts for about half of all U.S. government SBIR funding — $1.8 billion out of a total of approximately $3.7 billion in 2019, according to the Small Business Administration. Spending in this area has remained relatively flat in recent years, according to the Vital Signs 2021 report and other data.
Solicitations are released three times per year for SBIR and contain a number of technical topics that describe areas of interest and needs. Small businesses are invited to submit proposals dealing with one or more of the topics.
“Through the Navy’s SBIR program, small businesses of 500 employees or less have the opportunity to address naval needs in more than 30 science-and-technology areas,” according to a description on the Navy small business office website. “The SBIR program provides the fleet with the innovative advances in technology developed by small firms that have the courage, drive and flexibility to assume risks, develop niches, and generally compete in areas less attractive to larger firms.”
One difference between SBIR and OTAs is that the former are limited to small businesses, whereas even the largest defense primes are eligible to receive OTA funding.
SBIR contracts also have price ceilings that don’t apply to OTAs. SBIR deals involving the Defense Department are generally worth up to $50,000 for phase 1 awards and $750,000 for phase 2 awards, whereas some OTAs have been worth hundreds of millions of dollars for big-ticket projects like hypersonic weapons development.
Helping companies commercialize their products is another key aim of the SBIR program that doesn’t necessarily apply to OTAs.
Defense officials have touted the broader economic benefits of SBIR/STTR investments.
A study conducted by TechLink in collaboration with the business research division of the Leeds School of Business at the University of Colorado in Boulder, tried to quantify the programs’ overall contribution to the nation’s economy and defense mission. It examined the economic outcomes from phase 2 contracts initiated in fiscal years 1995 to 2012, with the impacts measured up to 2018.
During that time period, the department invested $14.4 billion in small business R&D funding provided via 16,959 phase 2 contracts, according to the report titled, “National Economic Impacts from the DoD SBIR/STTR Program, 1995-2018.”
More than half of those contracts — 58 percent — resulted in sales of new products and services based on the innovations developed under those deals, the study said.
Additional findings from the report include: $121 billion in total sales of new products and services; $28 billion in sales of new products to the U.S. military; $347 billion in total economic impact nationwide; and 1.5 million jobs supported with average compensation of about $73,000.
However, because the SBIR program doesn’t fund phase 3 work, many participating companies haven’t been able to cross the so-called “Valley of Death” between technology development and production deals because they weren’t working with a program office.
“It wasn’t connected to the big acquisition system — the market that we represent — and that created a Valley of Death,” Assistant Secretary of the Air Force for Acquisition, Technology and Logistics Will Roper noted in September during a talk promoting AFVentures, the investment arm of the service’s AFWERX initiative that is focused on fostering innovation.
“Unfortunately, the option that was only left to many companies hitting the end of the SBIR pipeline was to be acquired by a prime, and then ultimately that technology would be charged back to us, but probably with a little higher rate than we would have gotten from a small business,” he added.
The Air Force aims to address that problem by providing additional sources of funding to help small businesses involved in innovative research bridge that gap, he noted.
Many analysts expect defense spending to decline in coming years, which could potentially take a bite out of the SBIR program.
“I definitely think that is a possibility,” McCormick said of a downturn in funding. “We’ve seen in the past that SBIR has fallen as defense budgets have fallen.”
However, McCormick said continued growth in OTA spending wouldn’t necessarily divert resources from SBIR accounts.
“I don’t think they should necessarily be competing for dollars,” he said. “They both have similar types of [innovation] missions, but they also have distinct differences.”
Update: A previous version of this story stated that the Army was leveraging OTAs for its Optionally Manned Fighting Vehicle program. The service has decided to move forward using a more traditional contracting approach, and this story has been updated in light of that decision.
Topics: Defense Department