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How The Defense Dept. Can Be A Better Customer

Soldiers maneuver an all-terrain vehicle into a CH-47 Chinook helicopter during Network Integration Evaluation 14.2 at Fort Bliss, Texas. Credit: Sgt. Vincent Byrd/U.S. Army #aerobdnews
Soldiers maneuver an all-terrain vehicle into a CH-47 Chinook helicopter during Network Integration Evaluation 14.2 at Fort Bliss, Texas. Credit: Sgt. Vincent Byrd/U.S. Army #aerobdnews

AeroBD | The AERO news Company…LONDON, December 11, 2015 : A central tenet of Defense Department acquisition reform is that the Pentagon has to become a better buyer of goods and services. This focus is welcome and is now in its third iteration under the Better Buying Power initiatives of the department’s Acquisition, Technology and Logistics office.

However, these initiatives may only address part of the broader issue of acquisition reform. There are two sides to any transaction, and so one element to also consider is how the Defense Department could be a better customer.  First, the Pentagon should recognize that for industry, time is money. Granted, personnel and asset expenses can be folded back into overhead rates for larger contractors, but smaller companies may not be able to bear this. The time it takes to see a program from need to requirement to funding to initial order and fielding can incur unbearable costs on smaller contractors. Product development time cycles would kill most commercial companies. Another money element of time is that commercial technology is moving faster than Defense Department acquisition time frames. This may add another cost to industry—to sustain capabilities and talent that do not have commercial applications.
Second, Defense Department’s concepts of time need to be reset. The mine-resistant ambush-protected (MRAP) vehicle program is usually highlighted as an example of how fast the Pentagon can move in the face of urgent operational needs. However, that is arguably a poor example. Jim Hasik at the Atlantic Council has observed that MRAP acquisition proceeded at a very tepid pace in 2001-05 before the problem of improvised explosive devices (IED) became strategically serious enough that senior Defense Department leadership spurred faster acquisition. There have to be other instances in which the Defense Department more quickly recognized it had a new need and then worked with industry to fulfill it. A customer that can articulate what it needs in weeks or months and get an acquisition rolling is going to be preferable to one that takes years to do so.
Third, the Defense Department can create false expectations about the potential for change or its pace. A case in point is the Defense Innovation Unit, Experimental—DIUx—office that has been opened in Mountain View, California. Staffing of this office has not been proceeding at the pace of a commercial startup—certainly not one with the resources of the Pentagon. This is an experiment in engagement with the commercial sector, but to be a better customer, the Defense Department should put the resources and people in place first, before launching such initiatives. Similarly, events such as the Army’s Network Integration Evaluation at Fort Bliss, Texas, have been a terrific way for companies to showcase new products and concepts. However, if there is no funding with which to reward good ideas, such events may only lead to disappointment.
Fourth, the Pentagon has to be able to offer appropriate returns for appropriate risk. Commercial item pricing remains an issue for the Defense Department, but being a good customer entails being able to identify good value for warfighters and taxpayers. A higher profit margin is evidenced on some commercial items, but the trade-off is that the Pentagon should be able to recognize instances where it has avoided research and development costs and a contractor is providing a unique product or service through its own talent and assets.
Cybersecurity, for instance, is an area in which there are clear disparities between returns and investment of commercial and defense companies. A look at the income statements of two independent public cybersecurity companies—FireEye and Palo Alto Networks—show that they have gross profit margins of more than 70%. But they spend 18-20% of sales on research and development. If the Defense Department is going to be a better customer, it has to recognize these differences between margins defense contractors typically earn and their R&D expenditures compared to commercial companies that could meet some Pentagon needs.
And fifth, if the Pentagon is going to become a better customer for nontraditional defense companies, it may need to better explain its problems and needs in plain English, not just through the Federal Business Opportunities program. Clearly, it has to protect national security interests and classified information in this outreach. But part of being a good customer is to try to explain what needs exist.
There are two parts of being a better customer to which the Defense Department does not necessarily have to adhere. The first is that it cannot be expected to be any more stable or predictable a buyer than a commercial enterprise. Multiyear production runs are terrific for industry, but technologies, adversaries and competitors will challenge the stable and predictable part of any market segment. The Pentagon cannot be capricious, but neither can it set buys in concrete and ignore change. The second is that the Defense Department does not have to be a fair buyer, although statutes suggest otherwise. If a company brings a great product or idea that meets a new or unrecognized need, then it may make sense to award that company a contract rather than open up the requirement for competition.
by Contributing columnist Byron Callan is a director at Capital Alpha Partners in Washington.
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Rajowan Syed

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