Commentary: For Government and Defense Industry, It's All About Innovation

QUOTE: pressure to engage with commercial firms will further increase in 2016-18. The October budget deal Congress reached entails that DoD will likely make cuts to its FY '17 research, development, test and evaluation budget.​

Innovation emerged as the new defense mantra of 2015. The "Defense Innovation Initiative" was unveiled in late 2014 by then-US Defense Secretary of Defense​ Chuck Hagel, but then embraced and further promoted by Secretary Ash Carter's 2015 visits to Silicon Valley, the opening of the DIU(X) office in Mountain View, California, and his Force of the Future initiative. This has not just been a US trend. Innovation was addressed in the UK's just released sS​trategic dD​efenc​se and sS​ecurity rR​eview. Last July, China held a "First Military and Civilian Industries Integration Expo" in Beijing, whose purpose was in part to open its defense market to more commercial enterprises.

Innovation emerged as a concept for defense establishments to change as a result of the twofold realization that US defense technology dominance is fast eroding and that commercial technology investment has far outstripped research and development budgets of the government and independent research and development conducted by the largest defense contractors.

An example of the later shift is that in 2014, Northrop Grumman spent $569 million in independent R&D on sales of just under $24 billion. In contrast, three public US cybersecurity companies — FireEye, Fortinet and Palo Alto Networks — in their latest fiscal years spent $512 million on research and development. Combined, these three companies reported sales of $2.2 billion — less than 10 percent of Northrop Grumman. Of course, independent R&D is only part of Northrop Grumman's total R&D but the rest is provided by government contracts.

The signature effort of DoD's outreach to commercial technology firms was the opening of the DIU(X) office in Mountain View, Calif​. This effort appears to have gotten off to a very slow start and has been met with a great deal of skepticism. Industry attitudes may well be that innovation and outreach to commercial sectors will be a passing fad that could evaporate with a new presidential administration in 2017.

However, it's far more likely that pressure to engage with commercial firms will further increase in 2016-18. The October budget deal Congress reached entails that DoD will likely make cuts to its FY '17 RDT&E​ research, development, test and evaluation budget. There is no sign that commercial firms are slowing their pace of investment in technologies that have military and security relevance. Global competitors are not evidencing slackened investment in weapons and capabilities that will further challenge US dominance.

For industry and government, multiple changes could emerge in 2016. For DoD, the "​Innovation Initiative"​ needs to become an the "InnovationI​imperative."​ DIU(X) will need to be recrafted and not viewed as an "​embassy"​ in a foreign land. Giving it funding to invest will get more attention. Acquisition and profit policy needs to be agile to attract innovation where it's most needed, and DoD has to fund new programs that​ so that industry has an incentive to invest. Heritage defense firms rightfully are stepping up to highlight they are innovative, too. However, they may need to more carefully assess where they are willing to invest and take risk and where they could face greater competitive pressure from new entrants with very different business models.

Callan is managing director, Capital Alpha Partners, Washington.