Industrial Base Challenges Pose Risks for National Security

By Moshe Schwartz, President, Etherton and Associates

This week’s FAR & Beyond blog features a guest author on national security. The comments herein do not necessarily reflect the views of The Coalition for Government Procurement.

The National Security Innovation and Industrial Base (NSIB) is the bedrock upon which American military strength is built;[1] drawing its strength from the economic power of the U.S. economy. In recent years, however, a strange and disturbing trend has emerged. The NSIB is becoming detached from the greater U.S. economic base as private industry increasingly opts not to work with the federal government in general, and the Department of Defense (DoD) in particular.

 

According to the Government Accountability Office (GAO), from FY2011 to FY2020, the number of small businesses receiving DoD contract awards decreased by 43% even as obligations to small businesses increased by approximately 15%. GAO stated that phenomenon extends to all businesses, finding that the number of larger businesses receiving contract awards fell by 7.3 percent per year on average from 2011–2020. According to Blomberg,

 

The federal industrial base is shrinking even as contractors are asked to respond efficiently to increasingly complex requirements and crises… A decade-long, 23% increase in contract spending since fiscal 2012 means larger and fewer contracts are going to larger and fewer companies

 

The decline in industry participation in the government marketplace stands in sharp contrast to the overall U.S. economy. U.S. GDP grew by 34% from 2011 to 2020 and the total number of businesses increased 7% from 2010 to 2019.

 

This drifting of private industry is occurring precisely at a time that the federal government increasingly relies on commercial technologies. In 2022, DoD’s list of 14 critical technology areas vital to national security identified only three that are defense-specific (hypersonics, directed energy, and integrated sensing and cyber). The other 11 technologies are either the result of “existing vibrant commercial sector activity” or emerging technologies being developed in the private sector or in collaboration with the DoD. The 2018 National Security Strategy noted “technologies that are part of most weapon systems often originate in diverse businesses as well as universities and colleges.”

 

But the situation is perhaps even more dire. At the same time the federal government is losing access to leading commercial solutions, those companies committed to remaining in the NSIB are hamstrung by statutes and government policies that inhibit innovation and adaption. Members of the NSIB (such as traditional defense contractors) are at a severe disadvantage when competing with industry for high-skill talent critical to innovation, dedicating internal resources to R&D, and staying ahead of the technology and innovation curve.

 

In some cases, the U.S. is behind the technology curve and needs innovation and R&D in the NSIB to catch up to potential adversaries, such as in hypersonics, as Gen. David Thompson, Vice Chief of Space Operations, admitted at the Halifax International Security Forum in October 2021 when he stated “We’re not as advanced as the Chinese or the Russians in terms of hypersonic programs.”

 

Despite this reliance on commercial capabilities and the need for NSIB innovation, defense acquisition and business processes continue to become more complex, more heavily regulated, and out of synch with the private sector.  The consequences are that DoD and other national security agencies are not harnessing the most advanced technologies and capabilities the commercial markets and the NSIB can offer – but many of our competitors and potential adversaries are.

 

DoD, to its credit, recognizes the need to expand the base, writing in the recent report, State of Competition within the Defense Industrial Base:

 

To counteract the trend of overall shrinking of the DIB, DoD should endeavor to attract new entrants to the defense marketplace by reducing barriers to entry. This will be accomplished through small business outreach, support, and use of acquisition authorities like other transaction (OT) authority and commercial solutions opening (CSO) that provides DoD the flexibility to adopt and incorporate commercial best practices to reduce barriers and attract new vendors.

 

Unfortunately, “outreach” is not the problem, and other proposed DoD solutions do not address the root causes of what is happening. As the largest buyer on the continent (and perhaps the world), companies of all stripes are well aware of the buying power of DoD. But they are also aware of the challenges in working with Department. Increasing the use of different contracting vehicles like Other Transactions, while a positive step, is not a solution. And as DoD slowly puts more regulation and bureaucracy on OTs, Middle Tier Authorities, and other flexibilities, the value proposition of these contracting vehicles decreases.

 

What can be done to reverse these trends? The most important step to strengthen, expand, and revitalize the NSIB is for DoD (and Congress) to understand that it has the largest impact on the NSIB and marketplace behavior. As Secretary of Defense Lloyd Austin said at the Reagan Forum, “for far too long, it’s been far too hard for innovators and entrepreneurs to work with the department.” Until the federal government looks inward and matches policies to the realization that it cannot dictate to industry the terms of contracts, DoD will often get what it pays for: less innovation, less access to leading commercial companies, fewer commercial capabilities incorporated into national security capabilities, and a loss of ground in the race for technology overmatch.

 

Companies eschew working with DoD for several reasons, but based on our research and experience, some of the primary factors are:

  • Intellectual property (IP) rights,
  • Cash flow and risk return alignment,
  • Bureaucracy that slows down both acquisition timelines and transitions to scaling up contracts,
  • Policies that inhibit good-business decision-making, and
  • Failure to structure meaningful follow-on procurement opportunities.

 

Some of these factors also inhibit traditional defense contractors from being more innovative; delivering capabilities quicker, more efficiently, and at better price points. Additional factors inhibiting current members of the NSIB from being more innovative, include being unable to compete with the private sector for highly skilled workers, and adhering to poorly thought-out and developed requirements.

 

We believe that DoD’s report State of Competition within the Defense Industrial Base got it backwards.  The question is not, to what extent are companies competing to do business with DoD? The question is to what extent is DoD (and Congress) taking steps to compete with the commercial market to induce industry to do business with?

[1] We use the term National Security Innovation and Industrial Base because we believe that innovation and industrial strength both matter, and the term defense industrial base does not capture the full gamut of national security–to include intelligence services and other agencies that support national security.