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Department of Defense Commercial Technology Acquisition: A Survey

The United States’ national security and military capabilities are dependent on the development, acquisition, and utilization of innovative technologies. The Department of Defense (DoD) has robust processes for developing its own high-tech solutions and it has developed strong partnerships with major suppliers of military technologies. However, the commercial technology arena, which is full of start-up companies and small businesses, generates a gigantic market for science and technology research and development that cannot be ignored. Centers of innovation like Silicon Valley develop technologies across a wide swath of categories, from advanced materials, displays, cybersecurity software, and wearable electronics to neurotechnology, communications devices, and artificial intelligence. The current DoD and federal government acquisition process cannot keep pace with the commercial market, and as a result, many opportunities for integration of innovative technologies are lost.


Government initiatives like Better Buying Power 3.0 are developing new efforts within the defense acquisition system to utilize technology innovation from the commercial sector. New initiatives from the Defense Innovation Unit experimental (DIUx) to the Air Force’s Office of Transformational Innovation (OTI) are tasked with improving acquisition processes and improving interactions with commercial industry. These efforts aim to maintain technological superiority through effective science and technology programs, spanning development, prototyping, and technology insertion. This article seeks to outline some of the roadblocks to the successful acquisition of commercial technologies and to provide recommendations on how to address them.

 

A growing number of Commercial Technology Experts (CTEs) are interacting with the government to provide insights to the commercial marketplace. These experts span a variety of commercial technology areas that are of interest to government technology needs, including alternative energies, communications, data analytics, imagery, sensors, biometrics, and social networking. The Potomac Institute for Policy Studies has established relationships with CTEs to be called upon for in-person meetings, conference calls, and introductions. Each person we’ve consulted identifies similar struggles in working with the government. Through interviews with government officials, CTEs, and many of these subject matter experts, several recommendations recurred for changes that the federal government and the DoD can make to successfully partner with leaders and developers of commercial technology and innovation. Based on advice from senior advisors and senior subject matter experts who have deep background in innovative approaches, acquisition insights, and direct experience in the exploitation and leveraging of commercial and dual-use technologies, we have assembled specific common findings and recommendations. These are presented below.

IMPROVE THE CONTRACTING PROCESS

From top to bottom, government contracts diametrically oppose the kinds of business opportunities that are sought by startup companies, technology innovators, and commercial solution developers of all business sizes. These contracts do not just deter startup companies, but also provide difficult hurdles for larger, more established companies. Prior year requirements, long lead times for funding, and other regulatory factors discourage companies from working with the government. The government market is not lucrative for startups that need to be agile to survive. In addition, there are cases and business areas where prime contractors have the unintended ability to monopolize the marketplace.

The government needs to create and improve upon credit and incentive programs that will encourage companies to want to operate in the government market. Also, the government needs to engage in more risk and attract companies with contracting options that fit their business plans. Lastly, there is a need to create opportunities for diverse company types to enter contracting spaces that are typically monopolized by large defense contractors and companies. The rules that require businesses to have a five-year track record need to be reduced to a maximum of one year.

Theme I: Understanding the Commercial Technology Market to Make the Department of Defense More Successful

The DoD’s efforts in acquiring innovative technologies can be more successful by drawing from what works for commercial industries. There is a mismatch between the federal government’s perception of Silicon Valley and the trends that are driving commercial technology. The federal government needs more integration of commercial technology experts’ insights into acquisition processes. The federal government should interact with company founders, venture capitalists, and commercial technology experts to better understand the experiences in the commercial marketplace, what trends they are tracking and how to best target opportunities for partnership. They should develop opportunities for engagement with the commercial technology experts that can guide federal government organizations through all phases of commercial innovative technology investment.

Theme II: Encouraging Public-Private Partnership Through Legislative and Regulatory Reform

Many federal government regulations dissuade small businesses, start-up companies, and even established corporations from partnering with the federal government. There is a definite need for legislative reform that can address these federal regulatory issues in ways that remove costly burdens while retaining the intended business benefits and protections. The federal government needs to make changes and improvements to the laws that impact all phases of technology investment, from the regulatory issues that place undue burden on small businesses to the abilities of government programs and organizations to rapidly fund, prototype, and test new capabilities.

Methodology

The information contained within this article was derived through a variety of means. Many interviews were conducted with government officials, technology investors, lawyers, commercial integrators, and other relevant subject matter experts (SMEs). During these informal engagements with SMEs, various questions were asked in order to gain more specific insight into ways the federal government and DoD could successfully sustain acquisition and usage of commercial technologies. Examples of the types of questions asked are below:

  • Do you (or your portfolio companies) collaborate or conduct business with the federal government? If so, what do you like most about this partnership and what are some of the challenges that you face? If you are not conducting business with the federal government, are there any specific reasons why?
  • If you are involved with or are interested in government collaboration, how do you find out about government contracting opportunities? What do you think about the communication process for these opportunities?
  • What are the technology trends that you pay attention to?
  • What are your company’s priorities for cybersecurity and intellectual property?
  • What are the metrics of success that you apply to your company?

Through these discussions, many of the problems identified in this article were discovered. These problems were further researched to substantiate their existence through examination of relevant industry, academic and government reports. Additionally, the Potomac Institute for Policy Studies reviewed previous study efforts carried out through their academic centers that focused on issues relevant to both defense acquisition reform and the International Traffic in Arms Regulations.* The culmination of this thorough research effort led to the recommendations presented in this article, which are supported by the SMEs interviewed and literature analyzed. Lastly, the findings in this article are not unique and many of them have been identified elsewhere, as our research revealed. Instead of presenting new problems, this article aims to reexamine these old issues and offer up fresh solutions in hopes of creating a new dialogue focused how best to move forward.


* See: http://potomacinstitute.org/featured-news/1816-the-decline-and-fall-of-the-itar-empire-written-by-robert-hummel-phd-richard-pera-charles-mueller-phd.

SET EFFECTIVE METRICS OF SUCCESS FOR GOVERNMENT ACQUISITION PROGRAMS

The current metrics of non-traditional technology insertion are poorly matched to actual acquisition situations and outcomes. There are several factors that play into this disparity, which include a lack of acquisition authority for these acquisition programs and a gap between DoD project timescales and the timeframes of commercial industry.

The government should modify and improve the metrics that are employed to evaluate commercial technology insertion and fielding, increase the pathways by which government acquisition programs can develop contracts, and prepare more on-the-shelf capabilities. The metrics that are used to evaluate government acquisition programs must effectively describe the utility of these programs. Program evaluation should include measuring the rate of technology insertion and fielding, keeping track of readily available, on-the-shelf, prototyped technologies, and maintaining a significant level of situation awareness for both internal and external technology capability opportunities. Using prototypes of weapons and conducting more experimentation is key to acquisition reform. Conducting prototyping and experimentation allows the government to speed up the development process and inform critical decisions on operational utility, technical feasibility, producibility, cost and risk.1 There are key elements that make rapid prototyping and experimentation successful. These include a skilled acquisition workforce and the insertion of technology through open systems and standards. There is a definite need to improve the budget process timeframe. It is imperative to reduce the time required to move from the initial identification of a threat or a crucial technology need to the actual process for acquiring the needed technology solution. Prototyping and experimentation will help to inform and better define requirements. We want the ability to take the risk in that phase before we have invested large dollars and committed ourselves to a particular system solution.2 There should be room for risk-taking that allows for expedited experimentation of current commercial and military technology solutions, definition of requirements, and cost evaluations before the final commitment of large resources.

ADDRESS OVERBEARING AUDIT REQUIREMENTS FOR SMALL BUSINESSES AND STARTUPS

Audit requirements and their associated costs are a huge burden to startups and small businesses. These audit requirements represent a major difficulty in coordinating business between companies and the federal government, as it takes significant time and financial resources to complete these audits. Many businesses cannot afford to spend $500,000, allocate the resources to sit with a DCAA auditor for three months while they review costs from a three-year-old contract, and place their day-to-day activities on hold to complete these kinds of audits. Systematic and independent examination of a company’s accounts is a very important task, but when companies are already required to perform audits in the private sector, the addition of further government auditing processes is a large burden.

There are opportunities to mitigate the burden of these audits, one of which is to focus on risk. The federal government needs to think about how much fraud risk that it is willing to take on. If there can be identifiable metrics for risk, then the system for auditing could center around businesses and technology areas where the risk is elevated, rather than a blanket policy that forces all companies to be audited to the fullest extent. Opportunities exist through interactions and policy development with entities like the Auditing Standards Board, which works to provide clarified statements on auditing standards, making them easier to read, understand, and apply.3 The Public Company Accounting Oversight Board, which oversees the audits of public companies, can assist in developing accurate and independent audit reports. The federal government should end the blanket audit requirements, at least for these small companies. Because these companies already pay for commercial audits for their own records, there should be a process established to avoid the need for duplication of effort and to more closely follow the industry’s auditing standards. The federal government should accept commercial industry audits in place of separate government requirements.

CLEARLY DELINEATE WHEN TO ACQUIRE COMMERCIAL TECHNOLOGY SOLUTIONS AND WHEN TO DEVELOP THEM INTERNALLY

The commercial sector develops technology solutions that are profitable for them and shareholders, but these will not always be perfect matches for government needs. The federal government, especially the DoD, has established processes for developing “in-house” technology solutions, but it cannot solve all of its technology needs areas alone. There is a need to categorically identify needs areas for which government research and development is sufficient, areas for which commercial solutions are the most cost-effective option, and areas for which overlap and collaboration between the two is a good idea.

The federal government needs to clearly define decision points on when to use commercial parts and when to develop technology through internal mechanisms. The concept ought to be that the government should buy what it can from commercial options (commercial off the shelf, or COTS) and then only develop internally what it absolutely must. This technology landscape is constantly changing, so it is essential to stay updated on when a technology needs area is sufficiently covered by commercial options so that resources are not spent developing a solution that already exists. This goes back to the requirements problem, as many requirements are made without a full understanding of what is technically feasible, up to date, or, even worse, necessary to complete the mission. To address this issue, requirements should be reduced as much as possible and the program manager should be responsible for the technical capabilities delivered in the system. The investment strategy should focus on acquiring commercial solutions to save on government R&D investment, utilizing internal R&D investment in situations where there are no commercial options, and engaging in public/private partnerships in cases where overlap occurs. A historical example is the US government’s investments in aerospace technologies. For a long time, NASA was the predominant leader of spaceflight R&D. Today, commercial entities like SpaceX and Blue Origin are taking on the brunt of the development and manufacturing, and NASA is engaging in new partnerships with these commercial options.

INCREASE THE PACE OF FUNDING AND ACQUISITION OF NEW TECHNOLOGY

Slow-moving procurement and acquisitions policies for the government cannot keep pace with new technology, and startups. In particular, cybersecurity is an area that the government has not yet leveraged innovation in the private sector. The Navy is using operating systems from four generations ago in part because of outdated GSA procurement rules. The GSA acquisition process and other government regulations mean that it takes months to years before funding for new technologies, software, and solutions can be approved. Small companies and startups cannot afford to take on the current business model used by the federal government. Meanwhile, large, established companies do not want to take on the risk of overhauling their business processes to match the government’s model.

The government must implement major acquisition reform provisions and better procurement rules to allow for faster acquisition of new technology. Project managers need the capability to make time sensitive project decisions as soon as possible, thus shortening the time required to go through the acquisition pipeline. In addition, the government procurement process must utilize analytics to increase efficiency and field the best technologies.

MITIGATE THE “VALLEY OF DEATH”

Currently, there is a gap in middle stage funding, investment, and support in manufacturing innovation. These gaps are commonly referred to as the “Valley of Death”, and describe the difficulty of covering negative cash flow. The Valley of Death is characterized as the middle stage in development and is common when doing research and development on new technologies. These gaps are commonly seen in technologies awaiting different stages of development and production. Energy technology development is a prime example of a technology area that is hampered by the Valley of Death: Energy technologies are slow to move because of various difficulties in obtaining capital, managing risks efficiently, complying with existing energy infrastructure requirements (let alone create entirely new energy infrastructure systems), and developing systems that can integrate hardware, software, and services cohesively.

The government needs to commit to becoming a major lead customer and develop procurement and contracting strategies to push real orders that will result in real cash flow into startups for specific and essential technologies. This will increase their valuation, and will help persuade investors to buy their shares and back the startups. As a result, startups can accumulate more resources to overcome the Valley of Death.

REDUCE THE RESTRICTIONS THAT ITAR PLACE ONTO THE COMPETITIVENESS OF STARTUP COMPANIES AND SMALL BUSINESSES

International Traffic in Arms Regulations, or ITAR, hamper all companies and small businesses in today’s globalized economic and technology environment. ITAR was originally designed to secure vitally important science and technology to help the US to sustain its dominance as an economic power and to improve national security by ensuring that defense articles did not show up in the hands of the US’ adversaries.4 Today, the restrictions that ITAR puts in place have a negative economic impact on business, especially small business.

ITAR should be rescinded and the security of US science and technology should be ensured through updates to the security classification system. The ITAR restrictions have made it difficult for startup companies and businesses that focus on technologies that are key to the DoD’s technological success to stay competitive. These companies have to dedicate resources to meeting requirements and performing due diligence, and they have to worry about strict liability standards and possible violations.

PROMOTE A STRONGER MESSAGE REGARDING FEDERAL GOVERNMENT HANDLING OF COMPANIES’ INTELLECTUAL PROPERTY

There is a perception among small business owners and startup founders that the federal government and DoD are not properly managing the intellectual property of companies and small businesses with which they initiate contracts. There have been cases of complaints that proprietary technical data is mishandled, that patented technology has been used on government programs without compensating the patent holder, and that SBIR programs have not been enforcing protection policies that should have been afforded to small businesses. The point is not to place blame or dispute these claims, as the federal government has policies in place that do provide contracting businesses with intellectual property protections.

There is an opportunity to address some aspects of the intellectual property rights issue. In order to better engage with small businesses, the federal government should initiate dialogue with companies to identify their concerns with these intellectual property claims. CTEs provide insight into the mindset that startups in innovative places like Silicon Valley have in regards to intellectual property. A large motivator for many of these companies is to be acquired, and thus eventually transfer their IP to a large company. It would certainly serve to placate these companies if they knew that they would not jeopardize their chances of meeting their development and growth goals with their IP intact, by working with the federal government.

The federal government should negotiate intellectual property protection, and it should structure Federal Acquisition Regulations (FAR) and Defense Federal Acquisition Regulations (DFARS) clauses to protect startups and their intellectual property. The government needs to have consistent openness and transparency about its intent to use intellectual property and small businesses need to respect the deliverables and rights that are absolutely necessary for the government to accomplish the acquisition strategy.

LEARN MORE ABOUT WHAT MAKES SILICON VALLEY SO SUCCESSFUL AND TRANSLATE THIS INTO SUCCESSFUL DEPARTMENT OF DEFENSE ACQUISITION

The federal government wants to leverage the successes of commercial technology companies from centers of innovation like Silicon Valley, but this goal cannot be achieved without an understanding of the drivers and factors involved in this success. Silicon Valley is still leading the country in big technology winners. There are other cities like Boston and San Diego that are well known for specific technologies, but many of the companies and talent are fused together in the Bay Area. Part of the reason for their success is the ability of companies to get the right people working in cohesive teams. Information about new product ideas and startups also flows very rapidly in these communities. The commercial world sticks out from the government in the way they balance their strategy and resources for risk mitigation. Specifically, they manage risk instead of avoiding it in a common sense way that spends the right amount on detection versus response. Small startups are fantastic at solving small problems or projects in innovative ways (e.g. how do I make this sensor cheaper?) whereas large companies are better at solving whole system problems (e.g. the F-35 JSF). The right size company has to fit the correct size of the problem space.

GAIN INSIGHT INTO THE ECONOMIC AND TECHNOLOGY TRENDS IN THE STARTUP COMMUNITY

The federal government is not deeply ingrained in the business realities of the commercial technology ecosystem. There are many pressures on the ecosystem that the government is not tracking. A majority of startup company founders are seeing that it is becoming more difficult to raise capital. Reaching an initial public offering is an overarching goal for many startups, but the longer that a company is in existence, the perception of being able to achieve this goal diminishes. Company founders are seeing the power shifting from entrepreneurs to investors. Founders fear long-term failure but are not worried about short-term mistakes.

In emerging technologies, the biggest trends and disruptive new ideas have been in the fields of data, sensors, and artificial intelligence. These include: wearable health monitoring, digital health, ubiquitous sensors, new unique apps, big data analytics, predictive algorithms, cyber security, and the Internet of Things. In the health and biology fields, there are some cutting edge products coming out in wearable, health monitoring and overall digital health. Sensors that can be plugged into your phone are becoming more popular and can collect vast amounts of data for low cost (e.g. barometers). Apps and other software programs can be quickly developed in the commercial space. Big data analytics and predictive algorithms used for commercial purposes (including real time in-store monitoring) were pointed out as readily available. Lastly, cyber security and the Internet of Things continue to be important topic areas for investors.

The federal government should engage with CTEs, company founders, and venture capitalists to improve its understanding of the ongoing trends in the commercial technology sector. Of course, the Defense Innovation Unit is a small step in the right direction. All of these trends highlight the opportunity for the federal government to develop and provide attractive options for these companies to contribute to national security.

TAKE ADVANTAGE OF BUSINESS TRENDS TO ENSURE GOVERNMENT TECHNOLOGY SUCCESS

Government contracting opportunities are incompatible with the current commercial technology sector business trends. The government acquisition process reduces the fluidity and ease of procurement. PMs and PEOs are notoriously risk-averse in contracting. Rapid innovation and fielding on the other hand requires more flexibility and empowerment of government managers. The length of time and hurdles in dealing with government (e.g. Fedbizopps.gov) is not tolerable by most innovative companies. Lastly, taking time to implement the correct and most useful acquisition strategy for a particular good or service is critical to procurement.

The government must leverage the commercial market by recognizing market incentives. By acknowledging the market incentives, the government can benefit from cheaper products. Developers, inspired by market incentives, and provided with flexibility, will better serve government needs. Interaction and collaboration with startup companies is a way to access the top-tier talent that might typically be drawn away from public service and federal government jobs. Instead of a zero-sum competition where talented scientists, engineers, administrators, and executives are either going to the private or public sector, a strong collaborative environment can ensure that top talent is always being utilized for government needs areas.

Because of the perceived shift in power from entrepreneurs to investors who back their companies, the federal government needs to engage with the venture capitalists and CTEs just as much as it does with small company founders and entrepreneurs.

Going forward, it may be useful to develop resources that effectively prepare, equip, and convey acquisition tools as necessary to assist the government. It should be possible for government entities with urgent needs to purchase and field a solution immediately. Government customers should be provided with actionable advice from resources that leverage knowledge of all available acquisition methods and authorities. By understanding the different acquisition tools available for rapid procurement (e.g., Other Transaction Authorities), program managers can more successfully follow through on purchases. Government customers will often delay or hold off on opportunities to evaluate commercial technology solutions because they are unsure of their ability to follow through on acquisitions. This could be mediated in the future through coordination of acquisition practices and authorities available to them. When executed in a respectful manner (taking care to avoid any kind of forced commitments), this added capability could produce more acquisitions and successfully fielded technologies.

GO TO CTEs TO UNDERSTAND HOW THEY IDENTIFY AND FUND SUCCESSFUL TECHNOLOGIES

Venture capitalists are examining what is going to be commercially available within the year, rather than what technologies will be available five or ten years down the road. The technology pipeline of the commercial and entrepreneur investment community is vastly different from the government needs, so the process by which they review technology is dramatically different. Identifying successful technologies is a very dynamic process that involves tracking new technologies and talking to industry and academic experts who are on the cutting edge of technical innovation. Technology can be developed through investment as a four step process: 1) invest in the science, 2) invest to conceptualize a product, 3) invest in development to realize the product, 4) invest to generalize the product to a technology. These steps do not predict how successful a technology will become or how a technology will be used in society, but as the chances of great profitability increases as one progresses through the steps.

Some experts explain that their experience with product development is not well represented when the government sponsors discuss their challenges. The experts’ knowledge of cutting-edge product development is largely disconnected from the government’s focus on research and laboratory work. Commercial technology experts have a wide range of experiences in both research-oriented science and technology areas as well as in helping startups create finished products and solutions.

The federal government needs to engage in this process in order to successfully encounter innovative technologies and operationalize their capabilities. The federal government should reach out to organizations that are funding technology growth in the developing world, since transition is so important in these domains.. They should determine methods to present their technological and classified needs to CTEs, and maintain an information flow free of excessive jargon and bureaucratese.

“Redteaming” could be implemented to federal government-commercial technology workshops to discuss how technology can both be implemented unconventionally for improved government capabilities and be used outside of its intended purpose for the development of offensive capabilities, or to understand threats when the technology proliferates.

INCREASE COMMUNICATION OF CONTRACTING OPPORTUNITIES

Currently, the government marketplace is unfavorable for startups, but recent policy changes such as Better Buying Power 3.0 and the 2016 National Defense Authorization Act (NDAA) have explored new ways for acquiring innovative technologies. These changes have not been met with a concurrent push to reach out to the commercial sector to demonstrate this sea change in acquisition and contracting policy.
There needs to be more communication of improvements to the acquisition and contracting process. In addition, the government needs to increase their marketing strategies to provide information on contracting opportunities for startups, and restructure SAM.gov to attract startups, and not turn them away.

“A significant effort to improve how the federal government and DoD acquire innovative technologies will be crucial for the maintenance of US defense leadership across the globe and the development of new capabilities that will benefit all of society...”

CONCLUSIONS

The problems and recommendations described above only begin to address the numerous challenges facing the federal government in its mission to develop, acquire, and utilize innovative technologies for our national security and military capabilities. While each topic area faces its own unique set of challenges, each of which requires intelligently applied and nuanced solutions, there are certainly overarching themes. These themes constitute a pathway for approaching the policy and legislative solutions. Before confronting substantive policy changes, the DoD should engage in extensive data gathering through partnerships and dialogues with CTEs and representatives from the innovative technology sector. This engagement process will, above all else, help the federal government to better understand the realities of the commercial technology economy and provide key insights into commercial stakeholder concerns, market trends, and opportunities for partnership.

Enacting changes that make federal technology acquisition work more like the private sector will be a boon to the pace of acquisition and the ability to utilize truly innovative solutions for the DoD. Seeking to improve upon and maintain a robust technology acquisition process is a monumental task, but this is a goal that should be met head-on with confidence. A significant effort to improve how the federal government and DoD acquire innovative technologies will be crucial for the maintenance of US defense leadership across the globe and the development of new capabilities that will benefit all of society.

 

 

NOTES

1. Richard R. Burgess, “Stackley: ‘‘Taking Risk up Front’ with Prototyping, Experimentation will Improve Acquisition,” Seapower, Jan. 7, 2016. http://www.seapowermagazine.org/stories/20160107-stackley.html.

2. Ibid.

3. See: Auditing Standards Board (ASB), AICPA, https://www.aicpa.org/research/standards/auditattest/asb/pages/auditingstandardsboard.aspx.

4. See: US Department of State, ITAR, https://www.pmddtc.state.gov/regulations_laws/itar.html.

 

 

 

©, 2016, Potomac Institute for Policy Studies, All rights reserved.

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