A few days ago I discussed the saga of the JEDI cloud computing contract, which engaged tech firms like Amazon, Oracle, Microsoft, IBM, and Google. One has dropped out and two others have filed a protest before the contract was even awarded.
But news stories don’t really give you an idea for what its like working for the DOD. I’ll give some considerations for firms looking to enter to defense market.
(1) First thing you want to consider is being a subcontractor. This allows you to avoid most of the regulatory burden of dealing directly with the Government. Prime contractors are similar to the Big Pharma in this way, they specialize in compliance.
The way the DOD pays profits, it incentivizes the firms to outsource.
The most important step is strategically hiring former employees at big primes or in the DOD. They can get you a foot-in-the-door. But this courtship can take some time, especially if it’s for a new platform or concept.
How about dealing with the Government itself? Strategic hiring is again the first step, let them guide you. But what else?
(2) Avoid the large platforms. Much of the budget goes to Cold War era platforms like carriers or aircraft. Bureaucrats and military men are risk-averse. They want demonstrable proof that your firm has the capabilities to participate before you get a contract. This isn’t just as a lead-systems integrator, but for subsystems and critical components as well.
SpaceX is an interesting story where a billionaire wanted to break into the space launch industry characterized by monopoly. A 2006 merger of launch capabilities from Boeing and Lockheed Martin created ULA, the single remaining U.S. launch supplier. Though ULA had high launch costs, never once has it lost a payload.
SpaceX has had two fatal accidents, mostly recently losing a classified payload likely worth billions. SpaceX may be weathering the storm because of public faith in Elon Musk.
Remember, bureaucrats do not stand to gain much from any value gained through new technologies or lower costs. But they will lose much if they let a contract without checking all the boxes, or if they accept a deficient delivery. This makes bureaucrats risk-averse by nature, even though they really want to do the right thing.
(3) You want to start in emerging technologies or low-end products that defense contractors haven’t captured. Cloud computing is one. Artificial intelligence, machine learning, robotics, and cyber are others. Many types of sensors as well.
General Atomics made UAVs work in the early 90s riding along with DARPA. Establishing a reputation with DARPA or service research labs is perhaps the best way to start out. Transitioning that work into the project offices will be hard.
Small-scale projects can fly under the bureaucratic radar, and use Other Transactions Authority to bypass burdensome regulations in the FAR/DFARS.
Even if you find a customer willing to take a risk on you, they will need to line up funds from Congress. Getting a budget line-item in the President’s Budget basically assures you that a customer will have big dollars for decades to come. But this is unlikely for you, plus it will force you into scaling problems discussed later.
Just because OTAs are the flavor of the week in the DOD doesn’t mean that they have money to draw from. Most unprogrammed dollars still goes to promised technologies, like hypersonic vehicles. But if you get a wedge, it can grow fast. For example, Project Maven‘s AI work for UAVs (which Google exited due to moral concerns), received $16 million in FY 2018. That amount went to $93.1 million in FY 2019.
(4) Help your customer help you. Moral of the story is that finding a customer isn’t enough, he or she is going to have to find funding, most of which is being lined up for traditional contractors. The pool of prototype funding is relatively small and ad hoc.
Use third-party tools to discover where the budget is going. Or, just go through public budget documents yourself (especially the service justification docs).
Give them some “marketing” briefs that’ll help them frame requirements documents. Or, point them to streamlining authorities to bypass requirements process all-together. Shape the requirement without getting bureaucracy involved. Think about your customer who must justify life-cycle cost estimates, Test and Evaluation plans, program management plans, human integration plans, and so forth.
Again, this is the courtship. It takes “patient capital” to receive the DOD’s “patient capital”.
You may have to help the government through its own contracting process (see DIUx’s contracting guide). Get it moving fast if they want you. Help them understand OTAs or other vehicles.
Two problems here:
- Usually marketing in defense needs long, very long, lead times. So you’ll have to do R&D and marketing for years before the government can secure funds for that purpose. Hope you can carry high overhead for a while.
- Your customer will be pressured to compete the work in an open advertisement. The decision will go to a source-selection board. If your proposal was good, they might re-issue the RFP and advertise parts of your solution to the other bidders to see what will happen to the price. The rule here seems to be, if anything goes wrong, just protest the contract.
Once you get a wedge, it can grow and give you credentials for expanding to new markets.
(5) Barriers to scaling will hurt but power through. OK, now you’ve broken in somewhere. Hopefully, it is dual-purpose technology that has civilian uses like sensors. But we start to hit the scaling problem that vastly increases oversight.
Two obvious barriers are:
- When you hit $200 million in sales to the Government, you have to go through Forward Pricing Rate negotiations. All your accounting ducks need to be in a row. These will be the rates you propose on all contract bids, and be the categories (but not rates) that allowable expenses will be reimbursed according to .
- Contract value, often in conjunction with Acquisition Category (ACAT) levels, is a major trigger. Certified cost and pricing data must be presented for all contracts over $2 million (up from $750K). When your contract is R&D or early production, it will often require Earned Value Management reporting, and a certified system. When the contract is greater than $50 million, regardless of contract type, you’ll get a Contractor Cost Data Report, and if there’s $20 million or more in software, another Software Resources Data Report. Some of these requirements flow down to subcontractors. Some dictate your business management processes. You can’t avoid them forever.
These business regulations are my bread and butter. In later posts, I’ll help you execute these regulations with minimum cost.
Once you break through these matters, you are established. After this point, you’ll never go out of business. The reason is that you will have mountains of documented processes and reports that will envelop any outsider trying to provide oversight, like the GAO. They want to know whether you met the processes, not whether you are delivering value.
Still, delivering value will make you in high demand. Our purpose here is to deliver value for national security and the taxpayer as reflected in earned profits.
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That’s a quick intro to considerations for breaking into the defense market. Start small. Grow your wedge. Help your customer. Make sure your business systems are clean and reporting because this will save you when oversight comes. The reports won’t help you do your work. Their benefit to the Government is a “warm fuzzy feeling” rather than helping in real decision.
After all, with progressing technology, how useful is historical accounting data? But this is what is meant by accountability today.
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