The sibling team that is Amanda Bresler and Alex Bresler joined me on the Acquisition Talk podcast to discuss their recent analysis on defense contracts, the industrial base, and innovation programs. They found that between 2010 and 2019, the number of unique defense vendors had fallen from nearly 80,000 to just over 50,000 despite a 286 percent increase the the number of transactions. Even more precipitous was the decline of new entrants, falling from over 15,000 to nearly 4,000. During the episode we dive into the data and discuss:
- Whether DoD innovation programs are stovepiped
- How new entrants receive a small fraction of SBIR/STTR Phase I awards
- The opacity of Other Transactions data
- How companies market themselves to the agencies
- Strategies for improving new entrant transitions
- (Bonus) Overtime discussion at the end on China and great power competition
One of the recommendations Amanda and Alex float is to incentivize the government and prime contractors to allocate a percentage of their funding to “proven innovators.” This sounds a lot like what Steve Blank recommended to me last month. The title “proven innovator” wouldn’t be given to just any firm, but new entrants that have done business with defense in the past and have tested solutions to meet military requirements. In effect, it could be managed much like the set-aside programs for women-owned, HUBzone, and so forth.
The Breslers have worked to close the information gap through their own work on a SBIR Phase II contract. Called Sheldon, the information system will bring together disparate sources to aid in market research. The need is great. They found nearly 50 percent of companies received zero or one follow-on contracts after SBIR/STTR, and just 3.5 percent of companies won a startling 80 percent of all follow-on contracts by value.
Podcast annotations
Here’s Amanda breaking down the problem of new entry:
The question should be answered in two buckets. What should the Department of Defense do to attract new vendors into the system, and what should the Department of Defense do to market the capabilities of companies that have made it into the system, that have gotten through the first door.
In general, there’s a lot of activity and progress on attracting new companies to do defense business. However, the follow-on phase that markets solutions and gets them adopted into programs for recurring revenue seems to remain the biggest barrier.
They manage to get through the door. They’re an innovative non-traditional company and they won their first SBIR, or they won an OTA. At that point in time, it becomes incumbent upon the government to really invest in marketing that company’s capabilities to the government community. They’ve undertaken some degree of mission testing to determine that those capabilities are relevant. Sharing that information is the right thing to do from a taxpayer perspective so we can avoid redundant market research. It’s a way for the government to behave as a better customer.
Amanda says that many times, knowledge of a new entrant’s capabilities isn’t known far past the defense office it does business with — and often doesn’t go beyond the individuals involved in the first deals. Of companies that have only done 2-12 follow-on contracts after a SBIT/STTR entry, 76 percent only received awards from their initial branch.
The consumer industry seems a bit different because of the social networks. Don’t we show off our new iPhone or draw our friends into new apps? The ability for products to go viral in the consumer world doesn’t seem to exist within the government (except perhaps by getting on a GSA contract). Even for commercial enterprises like Wal-Mart, if you do well in a test of perhaps 12 stores a startup has the chance to get in every store. That’s a big prize.
The Breslers will be the first to admit that these statistics can be hard to interpret. We don’t know how many entrants are joint ventures from traditional companies, or end up engaging through the primes rather than the government.
In fact, it may be the wrong way to think about transition by looking at government transactions. Many startups aren’t developing full weapon systems platforms, but rather component services or subsystems. Rather than new entrants receiving large programs of record, they more likely will plug into infrequent programs managed by prime contractors because they last 3, 5, 10 years or more.
I see two models: (1) SBIR/STTR new entrants transition into subcontractors of the major primes; (2) the government disaggregates major programs and deals directly with a larger subset of contractors. I think a lot of the public discussion speaks about transition as if we lived in the second world, when in fact we live in the first. There are some exceptions. Advanced Battle Management System is a rather disaggregated program engaging dozens of firms directly. But that is the exception, not the rule, and is already coming under fire. Here’s Amanda on the issue:
There’s the question of whether the government can handle these small companies as primes, and there’s also the question of whether these companies are interested in becoming primes themselves. Many innovative technology companies have no interest, let alone ability, in selling a service in addition to their software, for instance. We’ve had conversations where many want to stay focused on their technology, not to be burdened with the administrative and service aspects of a contract.
… The scenario you described where the government can be the master of ceremonies and manage a series of subcontractors would be fantastic because that’s the ultimate transparency — that’s the government having a hand in what it gets access to and not being limited to technologies because of its administrative requirements. If we can go back to that kind of model that would be ideal.
It’s somewhat ironic that the military service which is doing the most to bring in new innovative firms through SBIR/STTR — the Air Force — has historically been the service which has outsourced the programs the most to single large prime contractors. Indeed, the Alex and Amanda found that the Air Force brought in 5 times more new entrants through SBIR/STTR than the rest of the DoD combined! But a 2015 study found that the Air Force lost much of its in-house talent and as a result, can no longer own the technical baseline.
By contrast, the Army and Navy have more history with their arsenal and bureau systems leading program developments and managing a series of subcontractors. However, with the rise of software factories, ABMS, B-21, NGAD, and other programs, the Air Force looks like it’s moving ahead to rebuild its ability to own the technical baseline.
I’ll leave you with a good observation from Alex that I’ve never thought about:
It seems to me [that OTAs] are a round-about way to make — what in other parts of the government would be an assistance program to achieve X, Y, or Z — a contracting vehicle. The money gets funneled into these consortium firms as a contract, and then from there we don’t really know what happens because that’s where government data ends. It seems a bit like an outsourced assistance program.
I’d like to thanks Amanda Bresler and Alex Bresler for joining me on the Acquisition Talk podcast. Be sure to read their two Naval Postgraduate School symposium papers: “The Effect of Defense-Sponsored Innovation Programs on the Military’s Industrial Base” and “Bridging the Gap: Improving DoD-Backed Innovation Programs to Enhance the Adoption of Innovative Technology Throughout the Armed Services.” Here is Amanda speaking with Rick Dunn about her findings. You can find out more about their company, PW Communications, and their SBIR project Sheldon.
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