At an insightful discussion with business executives as part of a BENS workshop last week, the following scenario was briefly discussed. I wanted to frame the scenario out and open it up for further discussion with our readers.
Imagine an acquisition program was acquiring many small systems, e.g., drones, munitions, or small sats. Assume the following for simplicity:
Budget: $1B over the next decade evenly spread $100M per year.
Annual delivery of 100 systems that each cost $1M.
Five viable vendors competing for this work with some clear leaders and some not ready for prime time.
Yesterday DEPSECDEF Kathleen Hicks discussed the Urgency to Innovate in her keynote address at NDIA’s ETI Conference. She announced a new Replicator initiative to field attritable autonomous systems at scale of multiple thousands, in multiple domains, within the next 18-to-24 months.
There are a variety of potential acquisition and contracting strategies a DoD program office could pursue. Each come with clear benefits and issues from both the DoD and industry’s perspective. It’s important to understand the full range of factors when shaping a strategy and identify novel approaches to manage risks and scale success.
Scenario 1
After a lengthy source selection, the DoD program office awards a single vendor a 5-year, $500M contract. Unless the contractor drastically underperforms, they will likely be awarded a second 5-year, $500M afterwards.
Benefits
The program office and contracting officer select a vendor to run with for the next 5-10 years with easier contract management.
The selected vendor has stable business that they can raise capital and focus investments and resources on producing the systems.
Issues
Those not selected may leave that defense sector given the lack of opportunities which includes a loss of their talent and infrastructure.
The selected vendor has less incentive to perform. Depending on the contract type, their cost, schedule, and performance may slip. They will perform to the contract requirements but are not incentivized to develop or integrate new features.
Traditional prime contractors may have a competitive advantage and win most of these contracts, further discouraging startups and nontraditional defense contractors from entering or staying in the defense sector.
Scenario 2
The DoD program office, based on a source selection or competition, awards a split buy. Depending on the results it may be an 80/20 or 50/50 split between two vendors or a 70/20/10 or 34/33/33 split among three vendors. These are five-year contracts. After five years, they will conduct a similar competition with split buys.
Benefits
Multiple vendors, their talent, and facilities are involved in this defense sector to include more startups and non-traditional defense contractors.
Selected vendors have a stable revenue stream to raise capital and invest in talent, R&D, and production.
With multiple vendors involved there is some competitive pressure to perform, and DoD has visibility into three systems to iterate on best of breed.
Issues
This requires additional work by the program office and contracting officer.
Five-year contracts may reduce some competitive pressure to perform depending on the environment around the time of the recompete.
Depending on the type of system, there may be challenges or inefficiencies with operation, integration, training, or sustainment of 2-3 different systems.
Scenario 3
The DoD program office, based on a source selection or competition, awards a split buy. Depending on the results it may be an 80/20 or 50/50 split between two vendors or a 70/20/10 or 34/33/33 split among three vendors. These are 1-2-year contracts that are recompeted every 1-2 years.
Benefits
Multiple vendors, their talent, and facilities are involved in this defense sector to include more startups and non-traditional defense contractors.
The continuous competition keeps the vendors incentivized to deliver quality systems within cost and on schedule.
The regular competition focuses industry R&D to continually improve system performance and or drive down cost efficiencies.
Those who weren’t selected in a competition have a short timeframe to compete again, so they may invest their R&D to be more competitive in the next round.
Issues
Requires the most work for the program office, contracting officer to administer.
Selected vendors don’t have a stable revenue stream with short term contracts to raise capital and invest in talent, R&D, and production.
Depending on the type of system, there may be challenges or inefficiencies with operation, integration, training, or sustainment of 2-3 different systems.
Other Factors
There are many other factors that can play into a program’s acquisition strategy across these scenarios, so there’s no one right answer. Some of the factors include:
How big the market segment is and if there is a related commercial market. If this program is a small part of a larger market across DoD, Government, and industry, then there is broader stability across the market to compensate for a more volatile program approach. However, if this program is “the market”, then that would drive a different calculus.
R&D vs Production. If these are commoditized systems to produce or there is R&D (by DoD or industry) to continuously improve system performance. Similarly, the unit cost would likely shift from a standard $1M/unit over a decade.
Contract type. Many are realizing the issues with cost plus contracts incentivize inefficiencies and delays to generate greater revenue and profit. It also imposes defense unique cost accounting systems and audits from defense agencies. A major shift to fixed price contracts (or OTAs) shifts the incentives and risks to industry. They will drive efficiencies to control costs to maximize profits yet assume risks such as a rapid increase in inflation, personnel costs, or materials.
Changes. There are many other factors in play, to include budget instability from Congress or the Pentagon, disruptive tech, supply chains, threats, and more. For simplicity of this notional example, we’ve assumed a stable environment.
Public Private Partnership. There are novel strategies to pursue greater collaboration between the DoD and industry to shape and co-invest R&D. This is a bigger idea that warrants its own post - coming soon.
We want to hear from you on other factors to consider from both the DoD and industry’s perspectives. Are there other potential scenarios to offer? Are there public examples (no CUI) of strategies that worked or didn’t to learn from?
Scenario 3 is clearly the best approach because it fosters competition. Until we inject more competition into our defense acquisition system, we will continue to live with programs where there is little incentive to reduce cost or improve performance. Scenario 3 is the way a commercial company would structure its procurement to take advantage of what the market offers in the way of new solutions, incorporates new vendors and avoid lock-in. However, as pointed out, this is a LOT more work for the program office and the overburdened acquisition staff. What incentives would we put in place to make this attractive for them since Scenarios 1 would be easiest to implement and probably raise the fewest questions since this is “the way we’ve always done it”.
All of these presume the challenge is 'commodity' purchasing of mature or nearly mature tech components. The REAL challenge that Defense faces is PROCESS transformation. This is much more intrusive and collaborative than the purchase of HW/SW components. How does the model support enterprise transformation through 'process' optimization and integration?