Private capital for defense needs, DoD’s requirements system will be most challenging areas to address in the coming years

Recommendations around strengthening the alignment of capital markets to defense needs and modernizing the Defense Department’s requirements system and budget documents will be particularly challenging to adopt in the coming years as the DoD tries to bridge the gap between its evolving operational needs and the limitations posed by outdated acquisition processes, according to the authors of a new report.

The Atlantic Council’s Commission on Defense Innovation Adoption released its final report Tuesday, laying out recommendations and case studies for DoD and Congress to move away from Cold War-era acquisition processes and enable the adoption of innovative technologies.

The final report builds on an interim version released in April 2023 and includes a series of case studies, or vignettes, to showcase how progress can be achieved within the current system.

“We all know the current system makes it too hard,” former Secretary of the Air Force Deborah Lee James, the commission’s co-chair, said at an Atlantic Council event Tuesday.

“The final report emphasizes that we need to not only get the right policy but also the right people and the right mindset to accelerate our adoption of capabilities … We all look forward to the day when the vignettes in this report become the norm and are no longer considered rare as they are today,” she added.

The report urges the vice chairman of the Joint Chiefs of Staff to establish a team by September 2024 to get after modernizing the bureaucratic Joint Capabilities Integration and Development System, which defines acquisition requirements for future defense programs.

Pete Modigliani, a co-author of the report, said that the recommendation will be particularly hard to implement in the near future and will require a wide range of organizations across the military services, the Office of the Secretary of Defense, the Joint Staff and industry to see this effort through.

“These are entrenched processes that have had decades of various organizations with competing priorities going through a long established, entrenched set of processes. So getting them to think differently, operate with greater speed and agility, while still balancing the rigor required for our environment is going to take some time,” Modigliani said.

“It’s getting the right players in the room to not fully clean sheet the environment but to tackle some of the more onerous approaches to get greater speed and agility. We can’t spend two years writing requirements documents given the pace of change with some of the emerging technologies out there,” he added.

To better illustrate how detailed requirements that were approved and validated years ago hinder the process of quickly advancing commercial tech, the report uses the example of the Navy’s Fifth Fleet working to address capability gaps in maritime domain awareness.

Due to shrinking allied defense budgets and growing operational commitments, the Fifth Fleet was facing major capability gaps. NATO’s experience with the Maritime Unmanned Systems Initiative highlighted the role of combining maritime robotics with machine learning and artificial intelligence to improve situational awareness.

The initiative was tested out and ultimately led to the establishment of Task Force 59, the Navy’s first task force driven by artificial intelligence. Beyond just tech adoption, the Navy was focused on the innovation process, and the innovation was driven by two main process changes: capability as a service and the capability sprint model.

“[Fifth Fleet] started first with an operational challenge, not ‘We need drones.’ It’s ‘We have an operational challenge.’ How do we iteratively improve upon it to solve it? What kind of experts do we need in the room? What coalition do we need to build? What adaptations do we need to make mid process to make it work? In their case, this was pivoting to different acquisition and data integration models, and in the end, they were able to achieve an initial operational capability. The new pathways they forged not only saved them money, but allowed them to build relationships across dozens of vendors and leverage that expertise,” Whitney McNamara, co-author of the report said.

The Fifth Fleet’s example doesn’t just show that detailed requirements written years ago don’t add any value when it comes to solving operational needs using innovative solutions, but it also highlights the need to adopt a portfolio approach that allows the services to pursue multiple technical solutions.

There has been some headway in the effort since Congress included a provision in the defense policy bill requiring the Pentagon to modernize its acquisition and requirements processes. DoD has until October 2025 to implement a streamlined requirements development process, which includes revising its Joint Capabilities Integration and Development System. Congress wants DoD to streamline requirements documents and approval processes for programs below the major defense acquisition program threshold. It also calls for a collaborative approach with industry, DoD’s science and technology labs and nontraditional defense contractors.

The report also calls for leveraging private capital and aligning it to defense needs. Some indicators of success would include a significant increase in capital market funding for defense companies, more companies crossing the valley of death and more production contracts from nontraditional vendors. Matt MacGregor, another co-author of the report, said that it will likely take some time to see a systemic shift in how DoD leverages capital market resources for defense innovation.

“When I think about what it would take in the department to do that, it’s a lot of things that have to come together. I think the biggest challenge is going to be the interdependencies between these recommendations and to really get that alignment where the department is sending their demand signal to the private capital markets, they’re responding. And in turn, there is a follow through that rewards those investments through scaling up production,” MacGregor said.

The report used the Air Force Special Operations Command as a success story of finding different pathways to bring in innovative tech and, more importantly, getting them across the valley of death between Phase II and Phase III SBIRs.

The AFSOC identified the need for the integration of AI for small unit maneuvers. In the end, a start-up won a $60-million contract through the Strategic Funding Increase (STRATFI) program to provide AI technologies to AFSOC. This approach, the report says, allows both DoD and vendors to benefit from capital market investments, and investors get a strong demand signal.

Congress took into consideration some of the recommendations around strengthening the alignment of capital markets to defense needs. For example, the defense policy bill directs the services’ small business innovation research program offices to conduct a study on expanding strategic funding increase programs beyond the Air Force to help small businesses seek Phase III awards. It also establishes the Office of Strategic Capital in statute. In addition, the Army, the Navy and the Air Force have allowed the majority of VC-owned companies to participate in SBIR/STTR.

Congress and DoD have implemented some of the recommendations, but the report acknowledges that “broader, strategic matters will take time to reach full implementation.”

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