Defense Firms Are Ready To Invest But Pentagon Must Make Good On Acquisition Reforms

    Dan Goure


    Hopefully, the new leadership at the Pentagon can make good on their promise to reform the acquisition process.

    For years, senior Pentagon officials have been hectoring defense companies to put more “skin in the game” by increasing their spending on research and development and investing more of their own money on infrastructure and production technologies. In 2015, former Under Secretary of Defense for Acquisition, Technology and Logistics Frank Kendall publicly called on defense firms to eschew stock buybacks and larger dividends and instead invest more of their capital on technology for future products.

    Mr. Kendall is remembered for his attempt to exert directive authority over how these companies employed their independent research and development funds. Increasingly, the Department of Defense (DoD) has sought to bypass the defense sector entirely and go directly to the commercial world, which it perceives as being agile, innovative and efficient.

    The Pentagon wants these companies to spend more of their own money to develop next-generation products. But without a reasonable prospect of a production program that generates a revenue stream and profits, what incentive is there for a company to risk its own funds? Moreover, if a company were to use its own money to develop a new capability, the government might lay claim to the intellectual property, undercutting any incentives to make such an investment. Or it could just walk away, leaving the company with a budget hole and no prospect for filling it.

    Then there is the practice of structuring contacts based on the standard of the Lowest Price Technically Acceptable (LPTA) proposal. Companies bidding on LPTA-type contracts only have to demonstrate the minimum level of proficiency. Providing a better product and high-quality service or proposing a more innovative solution doesn’t increase a bidder’s chance of success. Instead, any investments in highly qualified personnel or expenditure to develop a new solution reduces the chances of winning.

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