The Army recognizes the need for intellectual property [IP]… I’m going to highlight four principles for you that underpin it.
The first principle is developing a custom IP strategy. As I said, no two acquisitions are the same. No two programs are the same. We need the acquisition community to think early about what the lifecycle of this program will look like. We want them to plan ahead to the sustainment phase and think about how they might support this program. Then plan early. Develop a tailored IP strategy going into the acquistion.
The second principle is negotiating for custom licenses. So you take that tailored IP strategy, and you negotiate for the appropriate — not all — the technical data…
That brings us to the third principle. When you have these custom licenses, you need a process to get the best most competitive process. So this is you’re basic economic principle [of competition between vendors]… We’re encouraging out program managers and contract officers to set prices early in the process to get the best prices.
Now the fourth principle really underpins them all. We’re fostering open communication with industry and safeguarding IP. We need to do a better job of communicating with industry early and often, really throughout the entire process. We want to better articulate what are technical and software requirements really are, and our rights intentions, very early on, so both parties are on the same page.
That Alexis Lasselle Ross, the deputy assistant secretary of the Army for strategy and acquisition, on the CSIS podcast, “Implementing Innovation: The Army’s IP Strategy.” Here is more on that.
Ms Ross says that the military traditionally demands all the data rights, which can be costly and discouraging to industry, or the military doesn’t think about data rights at all, and suffers in sustainment from the lock-in effect and high prices. She seeks a “middle of the road” approach.
I agree that there cannot be a single rule that all programs have to follow. But it is self-defeating to presume that all matters of sustainment can be adequately predicted before the early development phase begins. In defense acquisition, competition is really only present at the front-end of the cycle in development. There is virtually no competition for production or sustainment.
To fully predict lifecycle implications so early is to say that our developments will not push the boundaries of our capabilities or knowledge. It must rule out any chance of novelty or surprise. Certainly that isn’t the intention.
Incremental updates to the plan based on new information is crucial to any development program. Such management by “real options” would defeat any specified IP strategy devised at the outset. Yet because our foresight is so limited, we must step into the dark without knowing the complete consequences of our actions.
And so, if we devised comprehensive IP strategies before the development contract, then we would inevitably find ourselves (ironically) locked into a strategy riddled with errors. Contractors are aware of this, and that the plan is unlikely to persist unchanged for 5, 10, or 20 years. Our pre-commitment to inventorying the system and making an unchanging lifecycle plan puts the DOD back into the lock-in problem it is trying to relieve itself from.
Moreover, the plan would compound bureaucratic planning and approvals at the start of new efforts, which is already far too long. Rather than agile development and rapid prototyping, the DOD would have to revert back to planning cycles of 3-5 years, and contracting cycles of 2 or more years.
The lock-in effects from intellectual property is really a “wicked” problem, there are no easy solutions. Presuming that defense analysts can predict the course of technology development, and precisely how that will impact sustainment many years down the road, is to presume we live in a world of “tame” problems. It presumes that the tailored, middle of the road, approach can be calculated rationally before empirical evidence has been made available. Frankly, that just isn’t going to work.
I see this as primarily a contracting problem. Primes make their profits on the upgrade and sustainment monopoly, not on design or even production. If you want to break that monopoly, in order to get faster cheaper upgrades in the future, you have to compensate the primes for that lost revenue somehow. That would be cheaper in the long run, and better for defense, than what we do now — but both Service incentives and existing procurement law make it hard to do.
Does providing compensation for lost revenue mean, in other words, raising profitability (well beyond 15 or 20 percent) for successful contracts? As you mentioned in a different comment, it is difficult for the DOD to start new programs. So money saved in production and sustainment will likely not go back into more programs, but rather would fill holes in cost growth of other programs — and perhaps other contractors. And so contractors allow expense control programs because higher costs lead to higher profits. It is a difficult prospect starting and winning new work.
This reminds me that profit is a reward for innovation and entrepreneurship. It is the prospect of super-profits that make people excited and willing to take risks. And profits also signal that a product is satisfying the customer more than alternative products (of course, only with competition for alternatives). One issue of the modern economy is that the rise of intangibles means we have an increasing disconnect between money outlays and product values. There is growing evidence that there is a divergence in profits, with some companies in tech making 60 percent profit or more regularly. Being able to grow a market segment and create higher customer demand is another consideration usually closed to defense contractors except for with cost growth.
We can perhaps speculate that if addative manufacturing progresses to an advanced enough state, then spares and repairs and to some degree production will have much lower marginal costs. The whole of the opportunity cost is with RDT&E. And it looks more like software with low marginal costs and high upfront costs. What that means about when and where you incentivize contractors cannot be overlooked.
As I see it, limiting profit is what a bad regulator does when they don’t know how to tell whether they’re getting value for their money or not. DoD caps contractor profit because they don’t feel they can manage cost any other way. Multi-year procurement is a perfect example — in an ideal world, DoD would verify that the system is effective and suitable, then immediately use MYP to buy a lot of them. The contractor would give a reduced unit price in exchange for certainty, then would work to reduce costs during the MYP in order to maximize profit. After the MYP, DoD could then buy at an even further reduced price going forward. It would be a win-win, but under current law (e.g. TINA) it’s almost impossible.
In this case, I was thinking more of explicitly paying contractors to forego future monopoly. One way to do that would be license fees, where future competitors would pay a fee to the original prime whenever their 3rd-party systems were integrated onto the platform. That would be an incentive for the original prime to make that possible, while still rewarding them for innovation.
In its current state, defense acquisition is effectively a (badly) regulated public utility. We need to either recognize that and act accordingly, or reintroduce genuine risk and reward again.
“… limiting profit is what a bad regulator does when they don’t know how to tell whether they’re getting value for their money or not.”
That is the crux of the problem, and the information asymmetry is a hard problem. That is why some in-house development perhaps makes sense, even if it is superficially redundant or wasteful.
I like the licensing fee idea. This is perhaps a good use of blockchain, keeping track of components and specifications to trace technology rights and payments.