Dear DOD: It’s time to become a better customer

Michael Hochberg, Leonard Hochberg, Isaiah (Ike) Wilson

THE CHALLENGE

The DOD has ended up in a high-cost, ‘we pay for all the R&D, so we get to control the program,’ trap.  Attempts at reform have generated very limited success to date.  This high-cost, low-volume, sole-sourced trap is an attractor state, and the DOD needs to expend energy to break out of it in order to fight and ‘win’ the wars of the 21st century.  

A great deal of thought has gone into the problem of reforming the DOD purchasing system in order to acquire weapons and platforms at lower cost and to get them into the field faster. 

Consider:

Today, advanced munitions are reliant on a highly bureaucratic, antiquated manufacturing and contracting system. As a result, a Tomahawk missile costs $1.5-2M today, the United States only has about 4,000 of them, and the supply is likely to shrink to less than 1000 units as part of an ongoing modernization program.  Similarly, a modern torpedo costs as much as several million dollars. Lightweight Mark 54 systems are cheaper but still in the million dollar per unit range, a Harpoon anti-ship missile costs $1.5M, and Patriot anti-aircraft missile unit costs are in the $4m range.  Even systems that are intended for much wider deployment are quite expensive:  Javelin missiles go for about $80,000, with a $100,000 launcher.  A shoulder launched Stinger anti-aircraft missile is now priced at about $400,000. 

These munitions are being hand-built like Ferraris, not churned out in volume like iPhones. In short, the industry is in a low-volume, high-price, sole-sourced trap.

This system sufficed in a world where the main goal of the defense industrial base was the generation of technical differentiation and overmatch of non-peer adversaries, and where cost was not a decisive source of differentiated advantage.  A defense acquisitions culture that gave a very small number of primes the room to develop very high-performance systems, in small volumes, made sense in this context.  And scaling the production of munitions on the assumption that the US would be fighting small wars against non-peer adversaries meant that even modest capacity for production would be adequate for replenishing reserves between wars.

This is not the world in which we live today.  We are fighting, once again – for now through proxies and allies – peer and near-peer adversaries.  And we are failing to provide our proxies with the means to achieve swift and decisive victories.  This is, in no small part, because we are hesitating to deplete our own stockpiles of key munitions.  Our capacity to replenish these munitions is simply not up to the task of supporting long wars against Russia, China, Iran, and their various allies and proxies, particularly as these wars involve Large-Scale Combat Operations (LSCO). 

Russia’s economy, in GDP terms, is comparable to that of Mexico.  It is unreasonable that they should be able to go toe to toe with NATO in terms of output of drones and munitions.  But yet they (with help from their allies) are outstripping the West in the production of munitions and consumables.  How is this possible?  Today, we behave like autocrats in our DOD purchasing, implementing many of the worst aspects of a top-down, centrally planned, limited sourced, monopolistic acquisitions system.   Instead, we should be leveraging the power of capitalism and free markets to drive down costs and increase capacity.  That means more than just signing new contracts with the same old DOD primes:  It means a fundamentally different attitude toward building military systems and consumables.  

History may be illustrative here.  The French Army developed methodical battle from the lessons they gathered from World War I; lessons gathered, but only learned in partial, parochial ways. France then paid for its rigidity during World War II, when the swift, focused German campaign through the Ardennes overran French forces before they could react. Today, the U.S. DOD is sole-source trapped in its own similar form of methodical battle syndrome (also here), and as such, has set itself, and its allies, up for future defeat at the hands of a dramatically changed operational environment, and a savvy and equally uncooperative set of adversaries. 

The DOD, seemingly, does not understand how to effectively leverage commercial manufacturers, instead defaulting to a position of both monopolist and monopsonist.  Typical DOD programs for building munitions seem to start with the idea that the DOD will already own the relevant facilities, or will pay a prime to build them – any capital expenses or improvements appear to be largely borne by the government.  And any commercial investments are subject to extreme risk – between the DOD bureaucracy and congressional action it is very difficult to build a business making these munitions unless the DOD does in fact pay all the expenses up front, and then pays cost plus. 

These same issues even play out in similar ways in the basic research end of the defense enterprise.  The Defense Advanced Research Projects Agency (DARPA) generally reserves the right to cancel contracts with little or no notice; as a result, university faculty are forced to under-staff their DARPA-sponsored projects.  A graduate student is typically a ~7 year commitment.  But a DARPA project is rarely funded beyond the first  three years, often with a renewal option after just 12 or 18 months.  And even before the renewal, the contract can be canceled more or less by administrative fiat or as a result of electoral outcomes, often through no fault of the Principal Investigator (PI) or the lab.

As a result, the money has to be spent in such a way as to protect the labs doing the work from functional bankruptcy should the program end unexpectedly.  One might imagine that universities would buffer this risk for their faculty, but they do not; as a result, the projects cannot be run as aggressively as they would if the funding were guaranteed for a fixed period and treated as non-cancellable.  DARPA and the other DOD funding agencies would get dramatically more bang for their buck on research – enhancing the possibility of fostering innovative spin offs – if DARPA forced themselves to always follow through on their basic research programs for the full program term, except in cases of serious malfeasance by the PI’s. 

These same dynamics play themselves out all the way from the basic 6.1 research to TRL 9 deployment programs.

CHANGING THE BUSINESS MODEL

Coming back to munitions and commodity consumables:  There’s a different business model for building these parts that the DOD should explore, where the DOD seeks to act as a good customer.  By being a good customer, DOD will be able to leverage innovation, capital, expertise, and competence from industry in order to dramatically improve availability of both commodity and advanced munitions to the warfighter. 

But, one might ask, why bother?  Does cost matter?   History suggests that it does.  When fighting near-peer or peer adversaries in conventional conflicts, all things being equal, the side that can arm more men with more and better weapons, and faster, is more likely to win.  That means that the side that’s able to generate to-scale quantities of quality armaments at a low price has a decisive advantage, especially in any war of attrition.  If the goal is to spend the adversary into oblivion, and the two economies are roughly the same size, the side that generates munitions and military systems at a lower cost and higher quality has a decisive advantage. 

We have a tool at our disposal for doing this that our adversaries do not:  The free market.  It’s time we started to use it.  What are some key characteristics of a free market?

1) Transparent pricing

2) Enforceable contracts

3) Open competition

4)  Prices determined by supply and demand

For existing, incumbent military systems and components, it should be relatively easy to generate all of these conditions.  Note that while aspects of this reasoning also apply to cutting-edge programs aimed at generating technical differentiation and capability overmatch, what we are talking about below is primarily focused on ways to improve the cost and availability of commodity, legacy consumables and components.  In particular, we are focussed on military systems that have already been introduced, and for which any upgrades have been exclusive to subsystems that can be easily swapped out, such as  new software or new chips in a guidance module.  Typically, these systems or munitions will have been expended in the field for many years, and their detailed capabilities and specifications will have been extensively reverse-engineered already by our main adversaries, so the need for sole-sourcing and very tight information security will be greatly mitigated.

OPPORTUNITIES FOR IMPROVEMENT

Let’s start with what the DOD gets right:  The US builds systems that provide technical overmatch better than pretty much anyone else.  These are most often long-term programs, which involve very large investments in basic research and engineering innovations.  When they start, the basic technologies required to complete the program often don’t exist outside of a whiteboard sketch.  These are ‘science projects,’ in many cases.

Such programs are incredibly effective for: 

(a) fighting limited, localized wars, with limited aims, while minimizing US casualties 

(b) creating fear and uncertainty in the minds of adversaries, with regard to unknown capabilities

(c) forcing peer adversaries to spend outsized amounts of money in a race to match the capabilities that do get shown

However, there are several things that this purchasing strategy is incredibly bad at doing:  

1. Because these systems are so expensive to develop, the aggregate cost per platform deployed tends to become monumental, because the R/D cost swamps the cost of acquiring the actual systems.

2. The systems produced tend to be extremely customized and sole-sourced;

3. The only way to fund building these advanced systems is cost-plus, because there is only one customer, and that customer is fickle about ending programs unexpectedly, changing specifications, and otherwise making the engineering of the system incredibly difficult and expensive.  Plus, any overseas customer absorption is subject to significant political risk, thereby rendering expectations of overall volume and profit difficult to calculate.

4. In counterinsurgency warfare against low-tech enemies, advanced hardware often counts less than cultural awareness, realistic ways/means/ends, training, appropriate tactics, information warfare, etc.  

5. In an attritional war of large-scale combat operations (LSCO), and especially one that’s fought by proxies – where furnishing the most advanced weapons systems is politically infeasible – the US is put in a position of not having the right things in sufficient quantities to provide to our allies on an expedient basis.  The systems that the US does build are often cost-prohibitive for allies to purchase, absent direct US subsidies.

6. Because the products are inevitably sole-sourced (ie monopolistic), their costs often rise over time, rather than falling in the manner of typical consumer goods.  In a sole-source, cost-plus world, there is strong negative incentive for vendors to dedicate resources to cost cutting measures.  

BEING A BETTER CUSTOMER

The single most important thing that DOD can do to become more effective at acquiring weapons systems at lower costs is to become a better customer. 

What does it mean to be a good customer?  It means understanding the constraints and pressures on your vendors, and designing your contracts and interactions in such a way that your vendors are likely to be successful, even if doing so requires that you change political and financial incentives within your own organization.  In the business world, when depending on highly specialized suppliers, the customer has to be very careful: It’s not enough for the customer to seek the most expedient supplier; in many cases, the customer has to negotiate the viability of an ecosystem of vendors to make sure that multiple vendors remain viable, and a monopoly trap does not emerge.  The DOD has repeatedly fallen into this trap.  And of course, once the DOD is stuck behind a monopoly, prices rise almost without limit, and lobbying generates regulatory capture, making it all the more difficult to break these monopolies.

What does this mean in practical terms? At the risk of a modest amount of repetition, let me describe some typical interaction problems with the DOD, from a vendor perspective: 

1. Most DOD contracts take what appears to be an eternity, relative to the needs of business and national security, to negotiate and award.  Many companies die just waiting for their first SBIR to arrive; waiting many months for a decision and a first check isn’t practical without ongoing funding from another source.

2. DOD is incredibly fickle as a customer, tending to preserve the right to cancel contracts for any or no reason, with little or no warning.  This feature of the system drives down trust while driving up costs.

3. DOD contract terms, which generally include FAR flow-down clauses carrying criminal penalties, are toxic to raising venture capital.  The set of regulations and requirements is so extensive and so complex that compliance, even for businesses that are pursuing very conventional business models, becomes a significant source of risk.  This in turn narrows the field of executives who are both qualified and willing to lead these businesses. 

4. The risk of ending up with a program being re-categorized as ITAR or classified is nontrivial; when hiring and building an organization, foreign nationals are often brought on for research programs, especially given their prevalence among the STEM graduates from top US schools.  If the program succeeds and is then made more restrictive, it is easy to end up in a situation where none of the relevant personnel can actually work on the program.

5. DOD takes a long time to pay invoices, the pay schedule is unpredictable, and the process of getting paid is so byzantine as to be a full-time job.  This has an outsized effect on small programs that usually cannot afford the staffing overhead already available to the larger, more well established defense contractors.

6. When there is congressional budget chaos, DOD is forced to cancel programs and put other programs on hold.  This kills innovative startups and small businesses, who cannot obtain bridge financing and don’t have multiple months of cash on hand.  This kills trust, and an entrepreneur whose business is destroyed by such actions will rarely choose to do business with the government again.

7. The requirements and specifications for the program or product often change over time.  In a world where building a piece of hardware can take a couple of years from design to fabrication to test to production ramp, changing significant requirements at any faster frequency creates devastating delays and essentially resets the program clock to the design phase.

To state the obvious:  A customer that insists on behaving in these ways necessarily ends up, in any commercial relationship, being forced into paying for the full development cost of their programs.  Asking commercial vendors to find financing from commercial sources given these criteria is nearly always impossible. 

A number of organizations inside of the DOD have attempted to improve on these challenges for decades.  These include the Defense Innovation Unit (DIU), the ‘Joint Requirements Oversight Council’ (JROC) process and ‘Rapid Fielding Initiative’ (RFI), early 21st century major  acquisition reforms (e.gs., JIEDDO/JIDA; MRAP accelerated acquisition programs) led by the late former Secretary of Defense Ash Carter; and of the “SOF-peculiar” Acquisition, Technology, and Logistics (AT&L) statutory Title 10, sections 164 and 167 legislative authorities coming with the Cohen-Nunn Amendment to the 1986 Goldwater-Nichols Defense Reorganization Act reforms).  Progress has been spotty at best.

There is, however, an entirely different model, which the DOD should consider for many of their programs.  In this model, the DOD would focus on being a good customer, in order to entrain commercial economic benefits of competition, rather than being stuck in a sole-sourced trap.  Key components of this category of strategy would be the following:

• Time-definite programs

  • In corporate America, time is the most expensive commodity.  The lack of  certainty as to when a program will be awarded, how long it will take to get under contract, what the size of the program will be, and so forth, are all very effective deterrents to commercial organizations engaging with the DOD.  Even SBIR funding, which is supposed to be startup-oriented, can take many months to years to be awarded and to get a check cut.  Most startups and small businesses, unless they are specifically designed as an organization to serve only government programs, cannot weather this kind of long-term uncertainty.  It would be better for the DOD to make a habit, when opening bidding for new programs, to always indicate (a) how much funding has been allocated, (b) how long it will take to select awardees, and (c) how many awards they anticipate.   Committing to making very fast decisions, in days or weeks, and then sticking to that commitment, would vastly improve the aggregate performance of DOD-sponsored programs.  

• Act as a market-maker

  • For commodity components – say, generic 155mm shells and their components, built to a common, well-defined specification – the DOD could establish an international market among allies, where pricing and forecasts are transparent to both vendors and customers.  Transparent pricing would encourage new entrants to the market.  Furthermore, allowing transparent, public bidding on price, at least within the community, would create a commercial-style dynamic that drives vendors to reduce pricing.  The DOD could act as a market-maker, by forecasting demand and auctioning off the deliverable contracts with appropriate lead time.  There could even be options markets, where the DOD and other customers pay for the right to take up extra capacity, or where they can sell parts that they discover that they don’t need.  Consumables like ammunition should be liquid markets, with all the features of any other commodities market – but with some basic guard rails to protect the national interest and promote appropriate levels of confidentiality.

• Leverage prestige more effectively

  • An under-appreciated super-power of the DOD and NATO is the ability to confer prestige and credibility for free, or very inexpensively, on people who might want to work in the defense sector.  Very small awards for graduate (and even undergraduate) students or young entrepreneurs, sponsorship of hackathons with prizes for the best results, and coding competitions can be organized with extremely low overhead.  There are a lot of talented people who just need a bit of direction, and these kinds of vehicles are an excellent way to get people who might not otherwise be interested in DOD activities into the defense tech space.  If there is a pipeline where these people and projects can win very small awards from the DOD (say at the $20k level), with less than a month turnaround for a decision, no fixed deadlines, and with almost no strings attached to seed new commercial efforts, they are suddenly in an excellent position to go out and raise 10-100x that amount of money from commercial venture investors.  This is especially true if there is a next stage to that award where DOD will contract to purchase prototypes at a fixed price (either through a PO or through a grant vehicle).

• Matching programs for investment

  • If the DOD wants more venture and commercial investment in projects intended to serve the DOD, one of the best ways to do that would be to create a mechanism where any VC-backed startup can get their funding matched pro rata.  For instance, if a company working on a new drone raises $2m from commercial VC, they would automatically be able to get another $2m in non-dilutive funding from the DOD for the project, assuming that they met certain eligibility criteria.  These eligibility criteria need to be very simple and very transparent -- the goal is to make them easy to meet and to understand.  Such a matching program would create a frenzy of venture investment in DOD-relevant activities, assuming that the go/no-go decisions could be made on commercial timelines, i.e., within only a couple of weeks.  The decisions about who is qualified would need to be made in advance of the company raising their VC funding, so that they could use it as leverage with investors.  

  • The VC’s that qualify for this program will need to be white-listed in advance.  The DOD will need to verify that the GP’s are trustworthy, and that the LP’s do not include adversary investors who need to be kept far from US defense activities.  VC’s are often in a position of enormous leverage over their portfolio companies, and forcing the entrepreneurs to do this diligence would create a nearly impossible barrier to entry.

• Create radically simplified contractual vehicles

  • Complicated contracts are a disaster for small and medium sized businesses.  Just getting them reviewed is prohibitively complex and expensive, in terms of legal overhead.  Negotiations are even worse.  Developing very simple contracts that do not include FAR flowdowns or special auditing requirements, and that do not require transfer of IP rights, would greatly aid small and medium businesses in interacting with DOD.  

  • One of the most powerful mechanisms that the DOD can employ is a take-or-pay contract structure.  In essence, this is a structure where DOD contracts to buy a fixed number of parts, at a fixed price, by a certain date -- typically on a rolling basis, with an associated increase in volume and decrease in price.  If the parts aren’t delivered or don’t meet specifications, then the DOD does not pay.  If the parts are delivered, but DOD no longer needs them for some reason, DOD is still obligated to either buy them, or pay a significant penalty.  All of the implementation and financial risk in such an arrangement lives with the company – they have to raise the money to stand up production.  For new entrants trying to build either commodity components or devices where a clear and simple specification and test regimen can be articulated, such a contract gives the supplier assurance that if they’re successful, they’ll get paid.  Offering contracts like this to SME’s eliminates the risk associated with product-market fit, and will enable them to raise large amounts of money rapidly to finance R&D or capital investments to drive cost reductions.  The key with such a program is that the requirements cannot change.  If a new requirement emerges, it needs to be a new program, bid separately – if the DOD backs out and insists on changing requirements part-way through the program (i.e., not by mutual consent with the vendor), it will kill commercial willingness to participate in this kind of contract vehicle and will dramatically undermine trust.

  • While it may seem that this kind of program would require a lot of technical talent on the purchasing side, this is not the case:  These specifications by and large already exist, for any existing military system.  Starting from existing requirements and simply making them available to challenger vendors would require little or no new technology development or expertise, and no sharing of existing IP; the IP lives in the solution, not in the specifications.

• Welcome failure

  • One nice feature of take-or-pay contracts is that if the program fails, there’s no direct cost to the taxpayer.  Of course, if multiple programs fail, then the DOD can end up not getting the parts that they need.  But allocating 10 or 20 percent of the spend on a major defense commodity to these kinds of programs, and splitting it among two to five new vendors, will often yield one or two successes.  And if the cost reduction goals are set appropriately, those vendors are then in a position to force incumbent vendors to drive down their own costs.  This kind of program will work especially well for commodities where there is little or no ‘invention’ required.

• Leverage allies

  • These programs should be open to our close allies.  States that are values-aligned and that have cultural capital for manufacturing at low cost, such as Brazil, Taiwan, Mexico, and the Philippines should certainly be included.

• Establish a Cost Abatement and Reduction Projects Administration (C-ARPA)

  • One thing that we’ve seen in the recent wars is that being able to rapidly surge capacity for munitions, drones, and other expendable defense articles is critical to the defense of ourselves and our allies.  Creating an ARPA organization solely responsible for driving cost reduction – no research, no science, just the use of good contracts and good economic incentives in order to make the DOD a better customer – is more than warranted.  This organization should have broad contracting authority, and its success should be measured in terms of driving down prices to the DOD for a wide variety of defense articles and systems.  This could include anything from 155mm shells, to expendable drones, to entire Arleigh Burke class destroyers.

All of this is not to say that DOD should exit the basic research business:  Basic research is critical.  But production cost reduction is a different game than basic research and the generation of highly differentiated, asymmetric technical capability.  In the commodity end of the DOD purchasing universe, the key asymmetries that should be captured are dramatic cost reductions, increased competition, and capacity improvements.

The fantasy scenario

Here’s what a success case for this kind of thinking would look like:

Jim and Sarah are engineers at Google, who are both a couple of years out of graduate school.  Jim’s a hardware designer, and Sarah is a software expert.  They know Bob, who is a successful serial entrepreneur in the bay area who’s led a few startups.  The three of them decide that they’d like to work together on a startup which they call Newco and start looking around for an idea that makes sense.  

The DOD has a website set up with a list of commodity products that they need in large quantities, with detailed specifications and requirements available behind a password protected site.  Bob sends in a one page description of the team, along with a bunch of personal information about the three potential founders and their resumes.  After a week-long AI-driven security check, they’re issued accounts that allow them to browse the list of DOD needs.

Each program identifies a specification for what the DOD wants, how much they buy or intend to buy, what the existing pricing is, and what tests the product has to pass.  

After spending a couple of weeks looking at possible options, they identify several opportunities that might be interesting, and they schedule informal one-on-one calls with the relevant program managers, where they can ask clarifying questions to understand any ambiguities in the solicitations.  The program manager uses a speech-to-text tool to record these conversations and put them onto the website, so that other bidders will have access to the same information.

Jim, Sarah and Bob get excited about a solicitation for a small, loitering drone munition.  The requirements are the same as a drone that’s already in use by the military in small volumes (10,000 a year), with an acquisition cost of $50,000 per drone.  The solicitation indicates that they will award take-or-pay contracts for vendors offering a credible path to hit the following cost and milestone curve:

• 12 months:  Demonstration of a prototype meeting or exceeding all specifications, with a detailed path to further milestones.  $1m payment.

• 24 months (or sooner):  Take/pay delivery for first 100 beta drones at $50k per drone ($5m)

• 36 months (or sooner):  Take/pay delivery for 1000 production drones at $30k per drone ($30m)

• 48 months (or sooner):  Take/pay delivery for 2000 production drones at $15k per drone ($30M)

They believe that by using advanced manufacturing techniques, they can easily hit these numbers, and that they can add some features that the incumbent prime charges a huge premium for – but Newco will add them for free as part of the base design.  In addition, they believe that they can make the product more modular and lighter than the existing system.  Because they lack substantial overhead, Newco believes that they can move much faster and drive costs down much more quickly than the incumbent prime.  

They submit a short proposal expressing their interest, outlining what they think they can do for this program, and delineating the amount of money they will need to raise.  Within a week, a DOD agent takes a quick look at it, reaches the conclusion that they’re a plausible candidate, and gets back to them with the following:

1. A $20k seed award to help them form the company, demonstrating DOD interest with no strings attached

2. Contact information for the team that drafted the award so that Newco can ask questions and dig into the requirements in detail

3. An NDA

4. A standard contract form that they can begin reviewing, so they understand what comes next, and a contract agent with whom they can interact to understand any nuances

5. Contact with people in the field who have used the drone system that they’re seeking to cost-reduce, so that the Newco team can talk to actual users and understand details of how they can improve things beyond the specs.

Over the course of several months, the Newco team pulls in a couple of additional founders with domain expertise, gets themselves incorporated, and puts together a detailed proposal for DOD review.  The DOD interaction team schedules a virtual meeting within two weeks of request where they go through the plan, making suggestions and comments, before certifying Newco as eligible for a DOD venture matching program.  

Now, the team is in a position to go raise venture on positive terms.  They believe that they need 3 million dollars to get to milestone 2, at which point they’ll be generating enough revenue to bootstrap or raise money on favorable terms.  They go pitch VC’s, telling them that they need $2M, and that DOD will provide up to a $2m non-dilutive match.  

Here’s where some magic happens:  The VC’s look at this company and they see that this is a chance to build a product with a customer already built-in, and a direct path to $30m/year of revenue at some reasonable margin, if the team can just execute and get to scale quickly.  No need to invent anything radically new:  This is a replacement for a system that is already known to work.  That means that if the team is successful, the company could be worth – just based on this contract alone – something like $150-200 million.    And there’s upside beyond that:  From other customers, other variants, and other products to be developed in the space.  So the Newco team has no problem raising their $2m from private venture – in fact, they are able to raise $5m, which matched with the DOD $2m, gives them $7m of operating funds, on a pre-money valuation of $14M – they’ve sold, in effect, a third of the company.  

Now they have the resources, contacts, and requirements to move forward and build something to the DOD requirements.  If they succeed, the program more than pays for itself – there’s a new competitor in the space to drive innovation and reduce costs.  Across the first 3000 production drones, DOD has spent a total of $68M, as compared to the $150M that they would have spent on the incumbent solution.  If Newco cannot deliver, DOD has only committed $2M up-front, and they get peripheral benefits from that small, leveraged investment:  The industrial base expands, and trained people are produced who know how to do DOD relevant things.  

From a DOD perspective, this is all upside.

This is the magic of being a good customer and committing to buy a final product, rather than funding research and development that’s open-ended.  

By the time that year 5 has rolled around, the DOD is in a position to confidently shift most of their purchasing to Newco and away from incumbents – at potentially an 80 percent cost reduction, and thus a 5x increase in the number of systems delivered for the same dollars.  Now there is an opportunity to open up the requirements and create an open marketplace among the NATO allies for these drones, where companies can sign contracts to deliver these commodity drones at a specific place, price, and volume, with the various customers bidding for the right to take production.  DOD can become the market maker, and guarantee a minimum volume by absorbing any excess capacity, and providing a volume floor.  Over time, with multiple players in the market, these drones can drop dramatically in price as volumes increase.

MAKING AMERICA AN ‘ARSENAL OF DEMOCRACY’, ONCE AGAIN

Industry thrives on open markets, contractual certainty, and transparent pricing.  If the DOD can move out of the mode of monopsony and monopoly, and give up its addiction to sole-sourcing, it will become possible to fully leverage the power of competition and of the free market for defense acquisitions.  This will be especially effective if DOD can make it easy to both buy from and sell to our allies, through the use of whitelists.

This is not a matter of forcing vendors of cutting-edge hardware to cross-license their most advanced designs to competitors, though such expedients can be perfectly justifiable in wartime.  This is instead about identifying commodity parts, where the specs and requirements are well-understood and mature, and allowing market forces to drive prices down and volumes up.  For more advanced consumables and systems, the key is to mature them with DOD R&D dollars to the point where a clear specification and set of requirements can be furnished to multiple vendors.  This sort of program will be challenging for the most advanced systems, but for everything else, this should be eminently possible.   If the ability to surge capacity is important - as it should be - contracts can specify the need to install and demonstrate spare capacity, by buying options on the delivery of larger volumes of parts in the future.  

Our allies are experiencing desperate shell hunger for munitions whose manufacture was well-understood 70 years ago.  The current system is broken.  Fighting peer adversaries requires a plentiful supply of weapons, C5ISR systems, electronic warfare systems, drones, munitions, and all the other basic elements of warfighting.  It also requires a diverse, multi-sourced industrial base, and a plethora of people trained in development, manufacturing, quality control, and technical leadership.  

Our current purchasing system is not fit for purpose to produce the equipment or the manufacturing infrastructure that we need to fight today’s wars, let alone the wars of tomorrow.  It’s time for radical changes, and those radical changes need to leverage the free market, rather than diving into a statist, monopsonist, bureaucratic sink-hole of regulation and inefficiency.

Michael Hochberg earned his PhD in Applied Physics from Caltech and is currently a visiting scholar at the Centre for Geopolitics at Cambridge University.  He is the President of Periplous LLC, which provides advisory services on strategy, technology, and organization design.  He co-founded four companies, representing an exit value over a billion dollars in aggregate, spent some time as a tenured professor, and started the world’s first silicon photonics foundry service.  He co-authored a widely used textbook on silicon photonics and has published work in Science, Nature, National Review, The Hill, American Spectator, RealClearDefense, Fast Company, Naval War College Review, etc.  Michael’s writings can be found at longwalls.substack.com, and his twitter is @TheHochberg.

Leonard Hochberg taught at Stanford University (among other institutions), was appointed a Fellow at the Hoover Institution, and co-founded Strategic Forecasting, Inc. (i.e., STRATFOR).  He has published in Social Science History, The Journal of Interdisciplinary History, National Review, The Hill, American Spectator, RealClearDefense, Naval War College Review, Orbis, etc.   Len Hochberg earned his PhD in political theory and European history at Cornell University.  He is a Senior Fellow at the Foreign Policy Research Institute and serves as the Coordinator of the Mackinder Forum-U.S.

Isaiah (Ike) Wilson III earned his PhD in Government (Intl Relations and American Politics) from Cornell University and is a professor of practice with the School of Politics & Global Affairs at Arizona State University (ASU). He is president emeritus of the Joint Special Operations University (JSOU), and founder and CEO of Wilson W.i.S.E. Consulting LLC, which provides advisory services on strategy and operational planning, technology & teaming integration, transitions (change) leadership coaching and organizational redesign and innovation.  A decorated combat veteran with combat tours in the Balkans, Iraq, and Afghanistan, and direct strategic and operational planning and advisory service to six (6) 4-Star Commanders, three Secretaries of Defense, numerous ambassadorial chiefs of mission, and the presidents of three foreign country partner nations, Wilson’s civil-military career has spanned troop-leading, staff-planning, strategic advisory and teaching assignments. His book, Thinking beyond War: Civil-Military Relations and Why America Fails to Win the Peace, along with his service on the 2003 Operation Iraqi Freedom Study Group, helped to increase public attention to the problems and errors in U.S. post-war planning for the Iraq War and sparked governmental movement toward policy reforms. His scholarship spans grand strategy, global and US arms market and defense reforms, to civil-military relations. He has published in International Organization, Foreign Affairs, The American Interest, Parameters, Small Wars Journal, among other forums, and has executive directed, taught, and conducted research at several top-tier and top-ranked colleges and universities, including Yale, Columbia, West Point, and the National War College. He is a Life Member of the Council on Foreign Relations and a Senior Future Security Initiative Fellow with New America.