The Under Secretary of Defense for Acquisition, Technology and Logistics (AT&L), Frank Kendall, has spent enormous time and effort trying to improve the way the Department of Defense acquires goods and services. AT&L has published three versions of its Better Buying Power initiative, trying with each successive iteration to make improvements in the way it managed programs, conducted oversight, promoted innovation, controlled costs, interacted with the private sector and trained its workforce. Recently, AT&L announced it would make the rather dramatic step of using a performance-based contracting model to organize and manage the sustainment of its single largest acquisition program, the F-35 Joint Strike Fighter.
Some of AT&L’s reform attempts have had serious unintended consequences. One example is the use of the metric for awarding contracts known as Lowest Price, Technically Acceptable (LPTA). This standard was driven by the Pentagon’s concern that it was paying too much on many support contracts because it was contracting for more than the basic services it needed. It was alleged that bidders offered more than what was absolutely essential and charged accordingly. There are some instances where the LPTA standard was reasonable, essentially involving low-tech, commodity products and services. But program managers went over the top, applying this standard to all sorts of activities and contracts where factors such as past performance, staff experience, proprietary processes and intellectual property and special facilities mattered. This often resulted in poor performance and sub-par results for the government. Even worse, companies had to reduce costs in order to meet the LPTA standard and often did so by releasing their most qualified and expensive workers, closing facilities and mothballing capabilities. LPTA produced a race to the bottom. AT&L has spent a lot of time and effort trying to ratchet back the use of this standard.
AT&L has been trying to reform its policies for the $4 billion it spends annually on Independent Research and Development (IR&D). IR&D is defense contractors’ investment in basic and applied research and development for which DoD will provide reimbursement. Companies accumulate IR&D funds based on the work they do for DoD; it is built into the cost structure of Pentagon contracts. Often the company will supplement the IR&D funds with its own corporate R&D resources. Until recently, companies had extremely broad latitude regarding how it used IR&D funds. This allowed them to work on high risk ideas, creating the possibility for a significant improvement in the performance of an existing system or even a revolutionary breakthrough leading to the creation of a new and dominant military capability. Obviously, the company conducting the IR&D hopes that such success will lead to an advantage in competing for future contracts.
AT&L is trying to establish greater insight and even influence control over the topics on which companies spend IR&D dollars. This is a reflection of the concern that the U.S. military is losing its technological edge and that it takes too long and costs too much to bring new capabilities into being.
The IR&D policy reforms carry with them a major risk of provoking negative unintended consequences. Companies must now find a sponsoring organization for their IR&D efforts and justify their ideas before initiating work. This is wrong for many reasons. What about the absolutely brilliant, transformative idea that no DoD entity wants to sponsor? Conversely, the new requirement is likely to encourage “sponsor shopping” by companies. Because most potential sponsors are focused on acquiring current systems or supporting current operations, this will inevitably drag IR&D even more into the near-term, exactly the opposite result from what AT&L wants. Finally requiring “pre-reviews” of proposed projects will act like a tax on scarce IR&D resources.
Another really bad change in IR&D policy is a new rule that requires companies spending $11 million or more to submit data on their IR&D projects to the government where it will be reviewed by the Defense Contract Audit Agency (DCAA) and posted on a secure website. The intent of this new rule is to allow DoD better insight into what companies are doing, the opportunity to coordinate IR&D efforts and improve communications between government and industry. Companies are rightly concerned that this is another step in removing the “I” from IR&D. In addition, what sense does it make to have the auditors and lawyers at DCAA review high-risk, high-tech IR&D projects about which they will know virtually nothing? This rule also raises a concern about DoD’s ability to keep this information secure from a company’s competitors, much less America’s adversaries. If companies feel constrained in their IR&D activities or that they will lose a potential business advantage, perhaps even their private intellectual property, they may stop doing IR&D-funded research.
In essence, this new policy could easily result in DoD offices substituting their own judgment about what is worth researching for that of the companies actually doing the work. When DoD uses the word coordinate, what it really means, what the inevitable result will be, is more control. Frankly, DoD is not always the best judge of what kind of R&D to pursue.
AT&L should move very cautiously in this area lest it kill the golden goose that is U.S. private sector innovation. A step-by-step approach that starts with expanded technical interchanges while rethinking the rest of the IR&D policy is in order.
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