When the Cold War ended, there were 107 major defense firms. By the end of the 1990s, there were five. And since then, the middle tier of our defense sector has been systematically hollowed out, bought up by larger companies, or driven out of business altogether.
At the same time, the defense sector has not been attracting and retaining new companies. Between 2001 and 2016, companies that sought to work for the US government, 40 percent were gone after three years, more than half after five years, and nearly 80 percent were gone after 10 years. Indeed, since the end of the Cold War, every technology sector in America, there have been literally more than 100 startups that have grown to be valued at more than $1 billion. In the national security sector there have only been two.
This didn’t just happen. This was the result of incentives created in Washington, some conscious and some unconscious. Most detrimentally, we carved up what little money we’ve spent on research and development into lots of small contracts for lots of small companies that rarely make it across the valley of death, rarely become large scale military programs and enable new companies to grow. This is why many of America’s best technologists and investors have turned away from defense. It’s not because they are not patriotic. It’s because they do not believe they can fully realize their talents, build successful companies, and make large returns on investment by working with defense. Three decades of empirical evidence prove they were not wrong. Defense will never be a free market, but it is still governed by incentives…
The US government must recognize its proper role in this innovation ecosystem. Innovative companies do not need the US government to try to play venture capitalist. America has plenty of money. Indeed, the amount of private capital dwarfs the defense budget many times over. This money is not ideological. It flows to what it perceives to be good investments. America has plenty of good innovators and engineers willing to work with our military. More of them will want to do that if they perceive it to be a path to fulfillment, success, and wealth.
They do not need the US defense agencies to turn themselves into tech startups or software development factories. Innovative companies need one thing more than any other from the US government: revenue. They need contracts for the best things they are building. Not tiny one-time science projects that never get fielded, tested, and transitioned into programs of record. But the kind of recurring revenue that comes from shipping more and more products to customers.
That was Chris Brose speaking to a Congressional Future of Defense Task Force. I agree with everything Brose said, except for one thing.
I don’t agree that government should stay out of doing in-house R&D. We’ve seen value being generated out of the Air Force’s software factories, such as Kessel Run. A similar phenomenon going on in advanced manufacturing as well. For example, the F-16 program is using advanced manufacturing to start eliminating costly depot field teams from repairing landing gear bushings.
This harkens back to the Navy bureau and Army arsenal days of old. They rarely did full systems development, but rather components and subsystems — enabling technology.
In-house technical skill allows government officials to rely on their knowledge to fairly negotiate more contracts, quicker, and with less reliance on the crutch of bureaucratic processes. Paradoxically, for government to become a more attractive buyer and increase market mechanisms, it should probably internalize some functions as producer. After all, what business outsources its entire production-process through contracts? Wouldn’t it go out of business pretty quickly?
Here’s another good part:
We’ve got to be open to surprise by the things… Injecting competition into programs is critical. It’s harder for large capital-intensive programs. But there are plenty of other types of systems – battle management, command and control – where winning a program of record can’t be like getting tenure at a university where you have it and forever it’s yours.
Thanks for the mention and for sharing what sounds like some insightful remarks.
Thanks Eric. Good conversation here. I like to think the defense acquisition needs to be (or have) a swiss army knife–many tools, including some internal capability, to deliver what’s needed. The breadth of requirements is too wide. But that also means it needs agility to move between possible solutions. Chris is right though the lack of contractors “across the valley” doesn’t give many options.
Agree. DoD is more like an economy unto itself than a singular business. There should always be another way of doing something. Competition here and there for a low-level prototype isn’t enough insurance. As EA Fitzgerald defined competition: “competition, which, incidentally, I would define as the ability to take your business elsewhere without unacceptable penalty.” Sometimes that means doing it yourself. SpaceX, for example, received ridiculous price quotes for certain parts when they started out bc that’s how business was done in aerospace. So they internalized it and drove prices down like crazy. Now, gov’t doesn’t have to internalize it in all cases. It can simply support into operations a couple alternatives. But I like gov’t solving enabling technology problems, on improving tools and components, rather than competing on whole systems.
Agree. Thanks for the reply and your commitment to this site. It’s a treasure trove of thought-provoking analysis and discussion!