If DoD Wants Industry To Innovate It Will Have To Buy Things

Like any long-standing, quasi-socialist enterprise, the Department of Defense (DoD) doesn’t understand how to motivate the private sector to innovate. As has been the case with other centrally planned economies – the former Soviet Union comes to mind – the Pentagon finds itself losing its technological edge not only to prospective adversaries but to the commercial marketplace.

DoD has responded to this situation in true Stalinist fashion: by demanding that industry be more innovative. But it doesn’t want to pay for this innovation. Rather, it wants the defense industrial base to spend more of its own resources. DoD also wants to bypass the defense sector entirely and go directly to the commercial world which it rightly perceives as being agile, innovative and efficient. Or at least it was until it had to deal with the defense acquisition system.

The Pentagon’s leadership apparently hasn’t learned a simple fact taught to every business major at any university on their first day in class: private companies require appropriate incentives for innovating. Investing in R&D is a cost that a company must believe it can, at a minimum, recoup once its invention hits the market. If a company is really lucky, it might even make a profit from its efforts. Every company that innovates, from the “lowly” inventor of an app for a smart phone to biotech and pharmaceutical companies looking for the next breakthrough drug all the way to the makers of vehicles, ships, airplanes and satellites, invests in new products or processes for one reason only: to make money.

It is becoming harder and harder for companies to make money selling to the Pentagon. The profit margins in the defense sector have always been substantially lower than for many other parts of the U.S. economy. But they have gotten worse as the defense budget has shrunk. This reality has been exacerbated by recent DoD efforts at acquisition reform that undermine the business case for companies spending their own money on innovative ideas. The acquisition system’s mania for competition has resulted in increased costs to companies (and to the government) and shorter contract periods over which those costs can be recouped. The overuse of the principle of the lowest cost, technically acceptable bid in awarding contracts is a positive disincentive for companies to bring new and innovative ideas to the table. Then there is the Pentagon’s effort to seize the intellectual property that companies have created for the commercial marketplace but imported into their defense offerings.

DoD has even made it hard for companies to innovate in sustainment. Many companies have found success in innovating to support their products in the aftermarket. This is particularly true for companies such as auto makers and jet engine manufacturers that promise a specified level of reliability or performance for their products. It is worth investing in innovations that improve reliability or on wing time because it reduces the costs to the company of repairs, resulting in increased profit. This is known as Performance-Based Logistics and it is a win-win approach to innovation. Despite proven successes using this methodology, DoD has refused to make it a central part of its maintenance and sustainment strategy. The Pentagon would rather spend more than it needs to than allow its contractors to make additional profits.

The bottom line on innovation is quite simple really. If DoD wants companies to innovate it will have to buy things. Companies, whether selling to DoD or the commercial market, live or die on the basis of sales. No sales, no revenues, no profits and no company. The Pentagon now buys so little that companies cannot see how spending scarce resources on innovation will help their bottom line. In fact, to the extent that introducing innovations adds to cost, schedule and risk, even if only at the beginning of a program, there is a positive disincentive to invest.

A few years ago the Army began a clever effort to test its communications and information systems and jumpstart innovation called the Network Integration Experiment (NIE). Companies were asked to bring their products and technologies to the game at their own expense which they did in the hopes of sparking sufficient interest leading to a procurement contract. After several years with nothing to show for their efforts at innovation, many of these companies told the Army they didn’t want to play any more without some reasonable hope of procurements at the end of the road.

Across almost all the major platform categories there are virtually no new program starts as far as the eye can see. Existing procurement programs are being cut back or delayed. Today, the failure to win just one major procurement contract can spell the exit of a defense company from a part of the sector or even its demise.

DoD’s leadership is fooling only itself if they think that companies will innovate on command. As is the case with any retailer from the smallest mom and pop convenience store to the luxury car showroom or high-end jewelry store, eventually the proprietor will tell the browsing customer either buy something or get out. DoD needs to buy rather than exhort.