Carter’s Courtship of Silicon Valley Could Reshape Military-Industrial Complex

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4/22/2015

By Sandra I. Erwin

Defense Secretary Ashton Carter is making a big play for Silicon Valley startups and tech innovators that so far have shown little to no interest in working with the Pentagon. Carter is seeking to repair those ties by creating a permanent Pentagon presence in the Valley and committing to help fund promising ventures.

Carter’s trip to the Valley April 23 marks the first official visit to the area by a secretary of defense since William Perry went there nearly 20 years ago. After delivering a lecture at Stanford University, Carter is meeting with Facebook Chief Operating Officer Sheryl Sandberg and joining an executive roundtable hosted by the Andreessen Horowitz venture capital firm in Menlo Park, California.

The message to the Valley is that Defense will be pivoting toward the commercial sector as it seeks to equip the U.S. military with the most advanced technology. Whereas the Pentagon led the way in decades past, today privately funded industries are lobbing micro-satellites into space, building autonomous robotics, pushing the biotech revolution and breaking ground in big data — all technologies that the Pentagon now needs.

To show its seriousness about engaging Silicon Valley, the Defense Department will stand up a permanent office there called “defense innovation unit experimental” — the first time the Pentagon will have a full-time outreach presence in the Valley. It will be staffed by civilian and military officials, including reservists with private-sector experience.

Carter also is proposing a pilot program to invest in startup ventures under the CIA’s existing In-Q-Tel technology incubator. According to a senior defense official, the Pentagon will make “small investments” in promising technologies in areas like electronics, software and automation.

The Pentagon will work with Silicon Valley-based White House advisor Todd Park to create a defense-focused arm of the U.S. Digital Service. The service was created last year after a team of technologists led by Park salvaged the healthcare.gov website from virtual collapse. The defense branch of USDS will focus on daunting information-technology problems like integrating the electronic health records of the Defense Department and of the Department of Veterans Affairs. “This is a novel away to attack some of our core problems,” the senior official said.

Back in Washington, Carter’s outreach is being received with a mix of hopefulness and skepticism.

A central question is how the Pentagon plans to go about recruiting tech companies and whether it will be willing to ease rigid procurement rules that commercial firms find unacceptable.

Nobody expects Carter’s initiative to cause any seismic shift in the defense industrial base. He clearly is not looking for Google or Apple to jump into the weapons-making business. But Carter has been emphatic that the Pentagon needs a massive injection of commercial innovation.

Carter is calling for “rewiring” the Pentagon for an era when technology moves at blinding speed and global tech firms vastly outspend the Pentagon in R&D.

Efforts to bridge defense and commercial technology have been pursued for years, with mixed results. The problem, according to analysts and executives, are the enormous bureaucratic and administrative barriers that keep commercial suppliers away.

Although Carter has vowed to address this issue, the Pentagon continues to be viewed as an undesirable customer by most commercial tech firms, except perhaps by small businesses in dire need of cash.

“Ultimately, DoD will have to bargain a lot to induce the Valley to do business,” said Teka Thomas, a business attorney who works with Bay Area entrepreneurs. “But I think there are bargains to be had,” he told National Defense. There are companies that have good software with no commercial market and need cash, and many small businesses are looking for opportunities, Thomas said. “All solutions will take a lot of legwork from the government.”

A likely outcome of Carter’s initiative will be a more aggressive push to integrate commercial innovation into old-fashioned weapons programs. Commercial vendors will never replace the dominant heavyweights like Lockheed Martin, Boeing and Raytheon, but they will become essential partners to the defense giants.

“The traditional separation of military industrial complex and private sector goods is fading rapidly,” said Jason Tama, a federal executive fellow at The Brookings Institution.

Tama has spent time in Silicon Valley brainstorming with venture capitalists. His take: Defense will have to work really hard to lure these innovators. “DoD is a decidedly bad customer,” he said. “It’s a good market for startups interested in cash, but the barriers are formidable.” Companies see “no viable way to win. … It takes too much effort to get a sale.”

Every company wants to make money, but tech investors don’t like their chances in the defense market, Tama said. “The defense workforce is a huge issue,” he said. The cultural divide is wide. “The demographics are out of step with the rest of the economy and the tech sector.”

In the near term, the Pentagon should borrow a page from the DARPA playbook, he suggests. The Defense Advanced Research Projects Agency has been successful at luring tech firms with fast-track contracting vehicles and other incentives. Simpler contracting mechanisms, known as “other transaction authority” are legally allowed but many contracting officers are reluctant to use them.

How the defense business might change as a result of Carter’s initiative remains to be seen. At a minimum, the Pentagon will need to find ways to expand DARPA-like contracting practices, Byron Callan, industry analyst at Capital Alpha Partners, said in a recent report to investors. “We just don’t know how feasible it is to graft on commercial practices to the current acquisition ecosystem.” More commercial contracting might change the minds of companies like Google that have elected not to do business with the Defense Department.

The U.S. defense budget has been on a downward slope, but the Pentagon still gets about $180 billion a year to spend on products and services, so it is not a small market. Winning a slice of that pie comes with added costs, however, Callan points out. “There are costs to set up the unique oversight, compliance and accounting systems to do business with DoD.” Intellectual property rights and cost disclosure also are key impediments to commercial vendors, he noted. Other barriers are requirements for security clearances and employment of only U.S. citizens.

Within the defense industry, Carter’s determination to capture commercial innovation already has stirred concern about how it might impact incumbent contractors. Executives privately have grumbled that the Pentagon’s rhetoric implies that established defense and aerospace contractors are stale, and the only innovation comes from Silicon Valley.

They wonder how the Pentagon might woo companies that are accustomed to 30-40 percent profit margins to work in an industry where margins are less than half that, and whose customer takes years to make decisions.

Stan Soloway, president and CEO of the Professional Services Council, said Carter deserves praise for trying to broaden the market and motivate the defense industry to draw innovation from the commercial world. But the reality is that the Pentagon’s own actions are undermining that goal, said Soloway, whose association represents federal contractors.

“This is a fundamental problem. Even as Carter is trying to do this, actions being taken within DoD are making it harder for commercial capabilities to enter the market,” Soloway said. “They’re increasing the barriers to entry. Until defense leaders can get their arms around that part of the problem, he said, the outreach to the Valley might be fruitless. “As appealing as this might be to companies there that want to support the defense mission, they simply are not going to be able to do it.”

Soloway cited policy directives from the Pentagon that restrict buyers’ ability to acquire commercial products and services under a streamlined contracting process. Congress in 1994 passed key legislation that compelled the Pentagon to buy commercial products when at all possible. But the Defense Department in recent years has moved in the opposite direction, Soloway said, and has made doing business with the Pentagon more cumbersome. “It’s completely counterintuitive that at a time when everybody is looking to new partnerships, that we’re taking these regressive steps back to where we were before the reforms of the 1990s.”

Carter is “absolutely right to be trying to build alliances with Silicon Valley. That’s just one community of many where there’s a lot going on.” But unless these contracting barriers are lowered, he said, “I don’t think you can make a lot of progress.”

The Pentagon can’t have it both ways, said Soloway. Trying to recruit commercial vendors while continuing to insist on government unique requirements and standards are goals squarely in conflict with each other. “We’re relitigating some issues that we thought we’d come to some closure 20 years ago.”

A group of defense executives and former Pentagon officials is now working with the Center for a New American Security on how to bridge the gap between old-line defense contractors and cutting-edge innovators.

“DoD is trying to generate innovation from any source they can,” said Ben Fitzgerald, industry analyst at CNAS. The Pentagon’s intent is not to brand traditional contractors as dinosaurs, but rather to bring everyone together, Fitzgerald said. “The key challenge is the bureaucracy, processes and laws that govern defense acquisition and were set up for the 1970s,” he added. “They made sense then.” There is wide recognition now “that we need new ways to maintain our technological edge.”

To spur innovation, the Pentagon is going to need help from its own bureaucracy and from its current contractors. “Leaders are trying to communicate to the workforce that we should open our apertures and look more broadly at where we can bring technology,” said Fitzgerald. Defense has to control its proclivity to build things in-house and learn how to tap commercial technology. This is already happening in fields like cyber security, unmanned systems and data mining.

Despite these shifts, the allocation of work between the defense and commercial sectors will not change substantially, he said. “There is a significant role for traditional suppliers. The issue is how we update our business model so we can take advantage of innovation in commercial sector.”

Infusion of commercial technology into the defense sector already is seen in many areas.

Pentagon contractor Textron took a commercial aircraft design from its nondefense business and built a military platform it is now trying to sell to the Defense Department.

Lockheed Martin sought help from Silicon Valley’s Splunk Enterprise to analyze data in the F-35 joint strike fighter’s logistics support system.

The Raytheon Co. has moved aggressively to acquire commercial cyber security firms in an effort to secure access to the latest innovations.

The Pentagon’s top weapons buyer Frank Kendall has warned defense contractors that he will more closely scrutinize their internal R&D spending, or at least the portion that contractors claim as a reimbursable expense. Kendall wants companies to spend their IR&D on “meaningful products for the government,” which in many cases means buying more commercial technology, he said at a Brookings conference.

He suggested that greater competition should compel defense contractors to inject commercial technologies into programs. Analysts like Callan caution that this is easier said than done. “Commercial firms are not going to give up intellectual property rights and probably work at much faster speeds and with more risk than defense acquisition programs,” he observed. “There is a fundamental misalignment between DoD aspirations to sustain military technology dominance and its inability to work with commercial technology.”
This misalignment, he noted, could be fixed with procurement reforms like those already proposed by Kendall and by the House Armed Services Committee.

Intellectual property rights continue to be a major sticking point, especially for software companies, said Jon Etherton, a federal procurement expert who served on the Senate Armed Services Committee. “The rules haven’t changed since 1995,” he noted.

Carter’s courtship of Silicon Valley is part of a larger gameplan that also includes reshaping the military’s R&D spending plan and changing buying practices. The latest policy guidance, “Better Buying Power 3.0,” emphasizes innovation and access to emerging technology.

“The devil will be in the details as this plan gets implemented and put into action by thousands of acquisition professionals spread in organizations throughout the country,” said Andrew Hunter, director of defense industry initiatives at the Center for Strategic and International Studies.

“DoD has big and increasing challenges in gaining awareness of and access to the cutting edge of technology, particularly those originating outside the traditional industrial base,” he wrote in a CSIS report. “Even after military users are fully aware of the potential of new technologies, getting access to outside innovation remains difficult when the innovation they want comes from nontraditional sources,” Hunter said. “The new plan seeks to address these challenges, but success is by no means guaranteed.”

If the Pentagon wants to shore up U.S. technological superiority, it will need to invest in “building a culture of innovation and experimentation and deploy new technologies faster,” Hunter said. “For example, it may need to consider different approaches to intellectual property rights for inventions developed in part with funding from DoD. An intellectual property system that allows companies and individuals to protect and commercialize their inventions is a bedrock for innovation.”

Under current law, any technology or intellectual property developed with DoD funds is owned by the government. And the government has the right to share it with whomever it wants, Hunter said. The United States also has the authority to allow other contractors to manufacture and use the patented invention “for or on behalf” of the government without obtaining a license from or compensating the patent holder, he explained. “Concerns about the intellectual property rights regime for federal contracts discourages truly innovative companies and individuals from working with DoD.”

Photo Credit: Defense Dept., Wiki

Posted at 3:23 PM by Allyson Versprille | Permalink | Email this Post | Comments (0)

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4/22/2015

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