Concern over the Defense Department's inability to scale emerging technology has permeated the Pentagon and Capitol Hill in recent years, with criticism coming from Washington insiders and outsiders on the barriers -- and controversy -- surrounding start-ups in the defense industrial base.
Many lawmakers have signaled the Pentagon needs to be a more agile innovator -- most recently, House Armed Services cyber, information technologies and innovation subcommittee Chairman Mike Gallagher (R-WI), who said the problem stems not from a lack of mechanisms to innovate, but from the department’s culture and the “slow, bureaucratic status quo.”
“Maybe we don't have a structural problem or an authorities problem -- we have a sort of cultural problem in the DOD, in the acquisition workforce,” he said in a hearing last week.
Since former Defense Secretary Ash Carter was in office, numerous innovation outfits have been launched to pair disruptive or emerging technology companies with the Pentagon -- such as the Defense Innovation Unit, Defense Innovation Board and last year’s stand up of the Office of Strategic Capital, which aims to connect defense-related start-ups with private capital investors.
Anduril Industries’ Chief Strategy Officer Chris Brose said while DOD’s innovation organizations are valuable, there is no process to identify which start-up companies need to transition into large-scale production.
“The most important thing that the Department of Defense can do is actually buy these capabilities that are being developed and buy them at scale and send the market signal, the demand signal that what company X is doing is fundamentally an important solution to a problem that we have, and then private capital will flow into those companies,” Brose told Inside Defense during an interview.
This will create companies that have real staying power to make more investments, hire more people and build new technology for national defense, he said.
In the absence of that, Brose said, the Pentagon will continue to have what it largely has now: small companies doing small projects over short periods that often don't lead to large production contracts and recurring revenue.
Bill Greenwalt, a non-resident senior fellow at the American Enterprise Institute who previously served as DOD’s head of industrial policy and as a Senate staffer, argued the Pentagon is extremely successful at bringing in new sources of innovation -- if it’s capped at $1 million.
While it’s easy to give new ideas $250,000 here and $750,000 there, he said, the Pentagon has not been willing to fund nontraditional, potential disruptors at a level to create something at scale.
However, the blame cannot solely be cast on the Pentagon, Greenwalt said, pointing to congressional appropriations committees that have “not been willing to put the money up to allow the department to innovate at scale.”
Allocating a several-billion-dollar pot of money to provide flexibility for innovation is difficult when there are multiple companies, states, districts -- and the Pentagon itself -- all clamoring for funds, Greenwalt told Inside Defense.
But with annual defense budgets nearing 13 figures, lawmakers on both sides of the aisle have criticized DOD for overspending. This includes new House Armed Services Committee Chairman Mike Rogers (R-AL), who pledged earlier this month to find savings at the Pentagon.
Brose argued, however, that the funding required to scale emerging technologies would be “budget dust” for DOD. He said Congress and DOD could pick the “low-hanging fruit” that costs relatively little money -- organizational changes and process reforms.
“I worry that there's a paralysis waiting for some brand-new fund, some brand-new authority, some new person, when in reality, the tools, the authorities, much of the money is right there,” Brose said. “It's just a question of doing the work, doing the oversight, doing the organizing differently and understanding what is the problem that we actually need to solve.”
Worries over ‘boutique’ experience
Anduril, which nabbed an almost $1 billion contract to do counter-unmanned systems work for U.S. Special Operations Command last year, seems to be one of the few start-ups that have crossed the finish line and won big-dollar programs.
When asked about the company’s achievements, Brose said its success has been “more despite the system than because of it.”
“I would say everything that Anduril has done that is successful and getting to scale, I could go back and point to one or two human beings by name who were instrumental in navigating that byzantine process to get things brought to scale or setting up processes where they didn't exist or building programs where they didn't exist,” Brose said.
Unfortunately, Brose said Anduril’s success is a “boutique” experience, as opposed to a common occurrence for the Pentagon.
“We will continue to work incredibly hard to run up this hill,” he said. “But for other companies that are coming in behind us or for the next things that we're seeking to do, it would be nice to have more established processes for how you get this kind of conveyor belt approach to bringing new entrants in and adjudicating how to separate the performers from the nonperformers and getting the performers to real scale.”
New 'incentives' sought
Some point to AFWERX, the innovation arm of the Air Force which engages with nontraditional businesses, as a key example of how the Pentagon can deliver results with new companies. Other service-level efforts include NavalX and the Army Applications Laboratory.
Nate Diller, the previous head of AFWERX, told Inside Defense that the organization deployed over $1 billion per year using other transaction authorities and small business tools to scale R&D contracts for individual innovative companies.
“Used properly, these tools allowed access to capital and talent for accelerated [research and development], but to move to production, fielding and recurring revenue, other incentives and tools might be needed,” Diller said.
Getting emerging technology to scale has proved challenging as start-ups don’t have the resources to wait multiple years for revenue, which historically, has led prime contractors, offering scalability and cash flow, to acquire smaller companies.
However, the motive behind this move and the practice of ingesting a start-up under the premise of fostering innovation was recently brought into question by Air Force Deputy Chief of Staff for Strategy, Integration and Requirements Lt. Gen. S. Clinton Hinote.
While briefing the Defense Innovation Board on Feb. 1, Hinote alleged that primes can hamper innovation by acquiring smaller, innovative companies because their technologies are disruptive and pose a threat to the normal order -- stable, long-term profits.
“Cultural and structural barriers preventing the ingestion of commercially driven innovation into the Department of Defense must be addressed now. It takes leaders willing to prioritize risk in the future vs risk now,” Hinote said in a follow-up statement to Inside Defense.
Hinote declined to provide a specific example to support his previous remarks.
When asked about the general’s comments, Aerospace Industries Association President and CEO Eric Fanning, himself a former Army secretary, said he’s never personally seen evidence for what Hinote alleges. Defense companies already have relatively small profit margins, Fanning said, especially when compared with commercial technology industries.
“The biggest barrier to scaling innovation is time -- the amount of time it takes to become a program of record. The problem for smaller businesses is that they can’t get the investment needed to carry them through this waiting period,” Fanning told Inside Defense.
Lawmakers have previously voiced concern over the Pentagon's process for considering defense industry mergers and acquisitions and have attempted to crack down on M&A in the name of increasing competition.
ML Mackey, chair of the National Defense Industrial Association’s small business division, said the current M&A process allows for innovation to be sublimated, rather than lead the way.
Often, when a large prime contractor acquires a high-tech small business, it provides the resources necessary to scale innovation and deliver a more distributed impact of the technology, Mackey told Inside Defense during an interview.
However, the problem Hinote pointed out is that “these acquisitions are not always made in order to scale disruptive innovation but to bury it,” Mackey said. “To affect positive change, the business models, as defined by current legislation and policy, need to evolve to incent the adoption of disruptive innovation.”
Lawmakers will again have a chance to debate the merits of the Pentagon’s innovation strategy when the White House submits its fiscal year 2024 budget on March 9.
Brose, a former staff director at the Senate Armed Services Committee, said he believes Congress needs to use upcoming debates to start “digging in” and asking which DOD development programs should begin receiving procurement dollars.