Because commercial companies with no ties to the federal market increasingly drive advancements in areas crucial to national defense, creating opportunities for these companies to build meaningful revenue streams in the public sector is also essential in curbing the flow of critical technologies overseas.
The Department of Defense (DOD) urgently needs to assimilate innovation from outside the existing defense industrial/innovation base (DIB). Because commercial companies with no ties to the federal market increasingly drive advancements in areas crucial to national defense, creating opportunities for these companies to build meaningful revenue streams in the public sector is also essential in curbing the flow of critical technologies overseas—particularly to China.
DOD contends that it is committed to making it faster, easier, and more appealing for innovative companies outside the traditional DIB to enter the defense market. Further, DOD invests billions of dollars annually in programs focused on innovation, small-business outreach, and rapid acquisition, along with other initiatives—all with the stated or implied goal of attracting and easing the way for new suppliers.
Understanding the effectiveness of these programs and the policies enabling them is essential for shaping future strategies and ensuring DOD is positioned to fight and win. Thus, we undertook to examine key questions:
- Has DOD attracted new suppliers into the DIB?
- To what extent have DOD innovation initiatives served as a gateway for new vendors into the defense market?
Shrinking Base, Few New Entrants
We began by analyzing publicly available data to calculate the number of unique companies that worked with DOD in each of the last 10 years. As shown in FIGURE 1, not only has the overall number of vendors within the DOD supplier base contracted substantially over the last decade, but filtering the data to show how many companies had existing defense business (“existing vendors”) versus those companies new to the defense market (“new vendors”) shows that only a small fraction of each year’s suppliers was new to the market. Further, as total DOD suppliers declined year to year, the proportion of new vendors experienced even sharper declines. In 2010, approximately 19% of DOD vendors had no prior defense business; by 2019, just 8% were first-timers.
A close look at the contracts of new vendors revealed that a substantial portion of them were not innovative commercial technology companies. Product service codes (PSCs) revealed that more than 50% of new vendors received contracts for goods or services unrelated to commercial innovation:
- 5.5% of contracts were for Utilities and Housekeeping;
- 4.9% fell under Maintenance, Repair, Rebuild – Equip; and
- 4.9% had Transport, Travel, Relocation.
Others had codes such as Medical Services, Social Services, Construction of Structures/Facilities, and even Musical Instruments.
These findings suggest that DOD must reevaluate its supplier outreach and engagement efforts to more effectively capture innovative, nontraditional vendors.
Weak Innovation Magnets
Concerning the effectiveness of programs aimed to attract and capture innovation, we focused our analysis on the Small Business Innovation Research/Small Business Technology Transfer (SBIR/STTR) program and the use of other transaction agreements (OTs). This is because both account for billions in annual defense spending and share essentially the same fundamental objectives.
We examined how many DOD-sponsored Phase I SBIR/STTR and OT recipients had no prior defense business (i.e., “gateway vendors”) versus the number that had existing defense contracts. We also examined the share of funding annually awarded to gateway versus existing vendors. As shown in FIGURE 2, the vast majority of SBIR/STTR and OT recipients had existing defense business, and most of the funding went to existing DOD vendors. Both initiatives have overwhelmingly benefited existing suppliers, and neither introduced a substantial number of new vendors into the defense market.
The number of gateway SBIR/STTR vendors and their share of funding increased noticeably in 2019, and approximately 85% of this increase can be attributed to the U.S. Air Force—specifically to two initiatives launched by its AFWERX innovation hub:
- The SBIR/STTR “Open Topic” model, and
- “Pitch Days.”
Both modify certain aspects of traditional SBIR/STTRs with the goal of making it easier, faster, and more appealing for innovative technology companies to engage with the Air Force. Verifying whether a company’s 2019 Air Force SBIR/STTR award corresponded to either the Open Topic or Pitch Day initiatives was challenging due to limitations in the data; however, we validated that more than half of the 2019 Air Force SBIR/STTR awards were related to these AFWERX initiatives.
For other DOD stakeholders, adopting the AFWERX approach may seem appealing. However, we recommend that all SBIR/STTR programs, including Open Topic and Pitch Days, reserve a minimum number of Phase I awards annually for companies with no prior defense business. Further research is required to determine the appropriate number and allocation of Phase I awards among fields of interest to DOD.
Who Wins OTs?
Recently, DOD’s use of its congressionally authorized other transaction authority has been on the rise to attract new companies to the defense market to prototype innovative products and services. While OTs can be awarded directly to nontraditional defense suppliers or small businesses, they can also go to traditional defense contractors (only if a nontraditional vendor participates to a significant extent or the traditional vendor provides a financial or in-kind cost-share). However, despite requiring nontraditional participation, as shown in FIGURE 3, large legacy contractors still benefit from OTs.
We recommend that the government modify the definition of “nontraditional participation” for OTs to mean companies that have derived no revenue from the defense market in the previous three years. Doing so would put the onus on DOD to enhance outreach beyond the traditional DIB.
Opaque OT Consortia
Most DOD OT obligations flow through consortia: organized groups of companies, academic organizations, or nonprofits that specialize in a particular technology area. Members of a consortium pay fees to join. Each consortium is typically managed by a not-for-profit consortium management firm (CMF) that serves as the intermediary between members and the government. Although our data treats each CMF as a unique vendor, the CMF itself does not conduct the research or prototyping; it administers subcontracts to its members. Further, CMFs are not required to report which members receive the subcontract awards, so while they claim to serve as a “single entry point to hundreds of innovative organizations, many that traditionally do not do business with the government,” the claim cannot be verified due to the lack of transparency in the data.
Fourteen of the vendors in our OT data set were CMFs. As shown in FIGURE 4, collectively they received 67% of all DOD OT allocations. Because there is no public record showing how CMFs distributed OTs among their members, there is no comprehensive way to determine which companies won the majority of OT funds.
It is also worthy to note that many CMFs share many of the same technology priority areas. FIGURE 5 provides a snapshot of eight consortia that listed Artificial Intelligence/Machine Learning, Sensors, and/or Analytics as technological priorities as of February 20, 2020. This redundancy raises questions. How does an innovative commercial technology company decide which consortia to join? Is it expected to join many?
Companies outside the DIB are largely unfamiliar with how the government conducts market research, and the nuances of the consortium process likely add confusion. Further, membership in a consortium does not guarantee a company will be awarded government funding; it still must bid on opportunities administered by the CMF. Is this proposition appealing, particularly for companies with robust private sector revenue streams?
We recommend that DOD revise the consortium model. CMFs should be required to report how funds are awarded, ideally in a manner that mirrors the federal government’s own procurement reporting requirements. The intended purpose of OTs is to make it faster, easier, and less cumbersome for companies to do business with the government, yet most OTs are funneled through CMFs, whose membership fees essentially tax the innovators. Until the awardees of OTs through CMFs—and the value of their awards—can be verified, we recommend that DOD require the majority of OTs be awarded to non-CMF entities.
Expanding the Welcome Mat
Despite DOD’s urgent need to engage innovative companies outside the traditional DIB, the number of new vendors continues to decline every year and traditional defense suppliers increasingly expand their market share. To more effectively attract new vendors, we suggest that DOD adopt the following measures.
1. Add a “First-Time Vendor” Field to Company Profiles in the System for Award Management
This information will allow DOD to hold its contracting entities accountable for allocating a share of program dollars to new vendors.
2. Establish a Gateway for New Vendors
Efforts to streamline legal and regulatory requirements and accelerate award timelines fail to mitigate many underlying factors thwarting diversification of the DIB. We strongly recommend that DOD establish a single gateway for innovative companies with no prior defense business. Such a gateway would allow DOD programs with similar requirements to direct potential vendors to a single initial access point. Given that many innovation requirements and programs appear similar, the new vendor portal could enable defense stakeholders to apply more specific criteria to direct companies to the most appropriate opportunities and could also allow new vendors to receive support and clarity as they navigate the government market.
3. Impose Minimum New Vendor Allocations for Innovation Programs
Identifying a relevant opportunity and successfully submitting a proposal are complicated. Thus, a company’s understanding of the process has become more valuable than the innovativeness of its solution. DOD should therefore consider setting required minimum new vendor numbers to forcefully expand outreach and to favor companies’ capabilities over their skill at navigating the federal market.
Access to state-of-the art and leading-edge technologies and services is critical for U.S. economic and national security. A well-conceived restructuring of innovation resources can make DOD a customer of choice among the nation’s leading commercial innovators. CM
- Chief Strategy Officer, PW Communications.
- Manages a strategic initiative focused on democratizing the U.S. federal marketplace for innovative solution providers.
- In 2019, she was awarded Phase I and Phase II SBIR contracts for Project SHELDON to enable military stakeholders to understand and leverage defense innovation initiatives using large-scale, publicly available data sets.
- Chief Data Officer, PW Communications.
- Data-driven technologist, investor, and advisor to world-class high-tech companies.
- Specializes in delivering mission-critical data analytics and visualizations to clients in finance, law, real estate, and professional sports.
 Specifically, they both stimulate innovation and R&D, engage innovative nontraditional or small businesses, accelerate the identification and adoption of leading commercial technologies, and appeal to nontraditional vendors. (See “Other transaction authority,” AcqNotes (August 15, 2019), available at http://acqnotes.com/acqnote/careerfields/other-transaction-authority-ota; “About SBIR,” available at https://www.sbir.gov/about/about-sbir; and Federal Acquisition Regulation 52.230-1, “Cost accounting standards notices and certification.”)
 “What is AFWERX?” available at https://www.afwerx.af.mil/faq.html.
 See AFWERX SBIR Open Topics, available at https://www.afwerx.af.mil/sbir.html.
 See Air Force Pitch Day, available at https://www.afsbirsttr.af.mil/Events/Pitch-Days/.
 See “Other transaction authority,” note 1.
 M. Dolan, “Consortia-based OTAs” (presentation slides, January 1, 2019), available at https://abrl.psu.edu/wp-content/uploads/2019/01/ATI-Consortia-Based-OTAs.pdf.
 MITRE AiDA, “Existing Other Transaction (OT) Consortia,” available at https://aida.mitre.org/ota/existing-ota-consortia/.
 See https://beta.sam.gov/.