“DEFENSE ONE” BY 1st Lt. Luke Chen and Capt. Louis McCullagh
“Being a good customer by hearing private-sector concerns is particularly important today because the Defense Department must attract new sellers of emerging dual-use technology to maintain its technological edge.
Two active duty military officers spent time at tech firms. Here’s what they learned.”
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“We all understand the importance of being a good customer in our daily lives. As customers at restaurants and hotels, we know that being considerate towards service providers such as waiters and bellhops is the baseline for receiving good customer service. The same concept should apply to the Defense Department’s acquisitions system, despite the difference in scale. In military technology acquisitions, to receive the best customer service from defense firms and maintain access to the best service providers, DOD should be a good customer by listening to private sector concerns for speed and profitability.
As a customer, the Defense Department should not become too comfortable acting as a kingmaker of defense firms. Being the principal buyer of military equipment in the United States, the Pentagon has a buyer’s monopoly in granting contracts to build military systems. To have so much power feels good to the department—but it comes with drawbacks for the defense acquisitions system. Being the only buyer, DOD can often use its buyer’s monopoly to dictate market conditions and acquire systems without heeding the struggles of the companies selling to it.
As innovations in military technology shift from traditional defense contractors to small technology startups, DoD is operating with a weaker and weaker buyer’s monopoly. It no longer has absolute power over all potential sellers and instead must convince sellers of dual-use technologies that the military can be a good customer. If perceptions remain that the Pentagon is a bad customer, dual-use technology companies will simply decide not to do business with the government because they have better options in the private sector. Being a bad customer thus leaves the military in an unenviable position where it is less able to acquire the technology necessary for future warfare. To change this, the Defense Department must become a better customer by taking private-sector needs into account.
The view from the private sector
The authors—both active duty military officers—recently got the chance to experience the military acquisitions system from the industry’s perspective. As fellows in the Defense Ventures Program, run by the career-management firm Shift and the Air Force’s AFWERX, we embedded as externs in technology companies. It was eye-opening to look at the Defense Department’s famously complex acquisition process through the eyes of a tech vendor.
The first question that businesses ask themselves is whether they want to do business with the government at all. Usually, this comes down to a question of profit: will expected revenue sufficiently outweigh the expense of acquiring and serving a contract? For many vendors of dual-use technology, the Pentagon’s byzantine acquisition processes and the need to customize their products to suit the military market make that a hard no. This is especially true for startups and smaller companies, who must compete against large prime defense contractors with deep pockets and decades of experience with DOD’s contracting system. And even if a startup beats out a large defense prime contractor, turning an initial contract into long-term revenue requires convincing the government to adopt their technology as a program of record that will be included in future budgets. This is no easy feat; most companies are unable to do so. The stakes are high: a nascent product that falls into this “valley of death” can drag an entire firm to bankruptcy.
Through conversations we had with various early-stage investors and venture capitalists in the Defense Ventures Program, we saw that the valley of death casts a long shadow over private-sector attitudes. News spreads quickly in the tight-knit startup ecosystem, so it is not surprising that many investors are wary of startups that emphasize government customers, nor that many companies think twice about pursuing defense contracts.
Think like a business
Fortunately, the Defense Department is becoming a better customer for sellers of dual-use technology, especially in the U.S. Air Force. In recent years, an upswell of activity from relatively young organizations like AFWERX and the Defense Innovation Unit is adding simpler and more accessible pathways to winning defense contracts.
But more such pathways are needed. The Defense Department must do something it is not accustomed to: put itself in the shoes of a small business. It should ask: If I were a small business with dual-use technology, why should I sell to the Pentagon? How quickly and reliably will money come into my account? How much energy does my business have to exert to earn that money?
This view-from-outside perspective helps form proposals to reform military dual-use technology acquisitions. A few are listed here, but many more can be designed this way.
First, the Defense Department should dole out grant money more quickly. The Small Business Innovation Research, or SBIR, program, sometimes called “America’s seed fund,” offers startups a good deal: non-dilutive capital in exchange for limited intellectual property rights. But the typical SBIR grant pays out in one or two years. While this is acceptable for defense primes, it’s an eon in startup time. A quicker injection of cash will help companies develop products faster and better.
Second, the Department should provide startups more access to military customers. Many tech products work better with scale, so officials should connect firms to potential customers after initial contracting so products can scale and cross the valley of death.
Third, shorten the Planning, Programming, Budgeting, and Execution process, which is how money gets allocated to military acquisition programs. We think the current work by Congress for budget reform in the 2022 National Defense Authorization Act is on the right track. As two writers put it, “the commission should be mindful that making decisions at the speed of relevance requires a resource-allocation process that encourages rapid adjustment to new ideas and is closely synchronized to the acquisition oversight process.”
Above all, the Defense Department should take care not to think it has a buyer’s monopoly when it goes shopping for the latest dual-use technology. Instead, it should envision itself as one of many customers shopping in a popular boutique, where vendors want to deal with their best customers first.”
ABOUT THE AUTHORS
1st Lt. Luke Chen is an intelligence officer who works in acquisitions intelligence at Air Force Materiel Command. Capt. Louis McCullagh is an acquisitions program manager working in the Air Force’s Life Cycle Management Center. Their opinions do not necessarily reflect those of the Air Force, Defense Department, or U.S. government
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