The Defense Department realizes that its procurement system cannot supply it with the best technology in the future. Its Better Buying Power 3.0 initiative, Defense Innovation Initiative, and its Advanced Capability and Deterrent Panel are all attempts to correct this situation. This post, and its companion post attempts to bridge the cultural gap.
The Difference Between Silicon Valley and the Defense Industry
Here is a real estate analogy to contrast a typical Northern Virginia defense firm with a Northern California technology startup. One is like a “slum lord”, and the other is like a “house flipper.” The owner of an old apartment building in an impoverished neighborhood is looking for renters with governmental “Section 8” housing vouchers, and barely keeps the building up to code. In other words this land lord’s business model focused on government revenue streams and performing upkeep for government inspectors. The investor-rehabber has a completely different type of business. In a hot market like San Francisco, not having a tenant raises your property value significantly. The investor-rehabber would gladly forgo rental income and spend ten times that amount on rehabbing the house to get a big return on investment. Furthermore, the market is global, to include Chinese, Russian, and Middle Eastern millionaires looking to park their money. In short, this businessperson wants equity, and is less concerned with property management.
The DoD is used to firms whose business model revolves around its acquisition and appropriation process. Thus, Program Managers and Contracting Officers are used to having tremendous leverage in negotiating with these companies. Some companies use the government to fund their research and products; others have developed smaller products, processes, and services to help the government or prime contractors to the government. Over time, the focus of these companies tends to become the chase for the next contract option, or to service the newest version of a weapons system. The focus is less on innovation, and while intellectual property is important, ultimately, survival is about inking contracts with the government.
Silicon Valley (a metonym for the Bay Area’s tech industry) is a completely different animal. For many entrepreneurs, and almost all investors, the “exit” is the North Star. The focus of the company is one piece of technology, and the aim is to raise the value of the company so it will be acquired. The investor-rehabber paradigm compared to the Northern Virginia’s low-income landlord paradigm in the example above.
Here are six others differences:
- Defense programs move more slowly than Valley product development.
- The DC-NoVa area has law firms, consulting firms, and a workforce with a lot of knowledge about governmental regulations and funding processes. That represents cultural and professional anathema in California. (What the accompanying blog post hopes to elucidate)
- As difficult as it is for an innovative technology firm to convert part of its company to servicing the government, it is nearly impossible for a government contractor to internally convert its culture, and change its processes to market new technology products commercially.
- In Silicon Valley, a failed company is just part of R&D in a large economic ecosystem. In the Washington area, a failed Program is a political disaster. If the federal government wants to be a proverbial lion in the tech food chain with Googles and Apples (no food pun intended), the Department and its 535 overseers on the Hill will need a transformational change in outlook.
- Silicon Valley firms are vigilant about protecting intellectual property and assets, so they are more likely to be vertically integrated. Or simply buy smaller firms that add capabilities. This makes subcontracting a problem given the government’s socio-economic policy goals.
- Nationality is a big issue with defense contractors. The large immigrant population of Silicon Valley is a large problem to be navigated for national security work.
Major Issues to be Worked Through
The Defense Department needs Silicon Valley’s genius to maintain it’s global dominance. In the Nov-Dec 2014 Issue of Foreign Affairs, former Deputy Defense Secretary William Lynn describes the history of the defense industry and the need to tap into America’s technology industry. The Valley is the world’s bleeding edge of technological research, we are lucky to have this ecosystem within our borders. However, here is a summary of issues, many more complicated than the DoD is used to, in dealing with the Valley:
Big Picture Innovation
Does it mean supporting and incentivizing companies to have the very best conception of something? Or spurring a business environment that has a dozen companies with a solution nearly as good as the very best one? Departmental policy decisions, as well as negotiating tactics of individual contracting officers will determine the quality of products coming from American companies.
Small Picture Innovation
Realize that the trend in high technology is the “Lean” approach to doing business. This means a very iterative product development process guided by consumer feedback along the way. Once the product is developed, then a young company can model its business. Furthermore, program managers, acquisition officials, and their legislative overseers will have to design a system where the culture of failure is politically acceptable.
Bid Competition
Traditionally, competition meant better products at lower prices. However, market research in technology is very difficult. There are numerous software and hardware projects being developed in secret in garages all over the United States. By contrast, we know every airplane factory, and those of our adversaries. Furthermore, the collective imagination of technology innovators far outstrips the ability of a Program Manager generating requirements for a solicitation. The DoD would do well to ingratiate itself with incubators, venture capital firms, and law firms that are most connected to the newest products in development.
Small Business
The U.S. Government has a strong bi-partisan agenda to support small businesses through contracting regulations. The Small Business Administration usually classifies businesses as “small” based on revenues. This does not include venture capital. So a company like Facebook or Instagram (which Facebook bought) can go for years without making any money, still get pumped full of venture capital, have a large valuation and still be a small business. In fact, with such little revenues, the SBA might not have even considered them viable businesses, even though they made revolutionary products with potential governmental value.
As already mentioned, most technology firms are not set up to farm out subcontracting business, like Lockheed or Boeing. Ironically, some of that problem is obsolesced by the reality that many “small” businesses have created great products, and are capable of servicing the military in ways that could enhance our forces.
Pushing Public R&D into the marketplace
It is well documented that almost all of the technology in the iPhone is based on research commissioned by the American Defense Department. Much of that research was through the government’s own labs and research organizations. Thus, there wasn’t the issue of private entities not wanting to share technology for the benefit of the economy. In fact, a negative side effect of the decades long trend of privatizing historically governmental functions is that modern companies see the government less and less as a public trust, and thus do not feel safe lending them their intellectual property.
The Way Forward
Solutions will have to be found. The key for the government is to understand that the company cares most about it’s valuation, and that valuation is based on its technology remaining proprietary. The onus is thus for skilled contracting officers to use clauses in the FAR that give innovative companies the peace of mind that their core intellectual property will remain viable in the future. The government will have a lot less leverage in the Valley.
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