All of the defense-acquisition-reform legislation passed in recent years by Congress has been well-intentioned; some of it has also been helpful.
Various rapid acquisition and Other Transaction Authorities have helped speed new capabilities to the field. Other changes have helped protect the national security innovation base, shoring up the process by which the Treasury Department reviews foreign investments in U.S. manufacturers, countering Huawei’s dangers, and urging DOD to protect its supply chains. Still other provisions have usefully encouraged more commercial practices in DOD.
But too much recent legislation is burdensome beyond its benefits. The FY 2020 National Defense Authorization Act, or NDAA, contains over 3,400 pages of law and explanation of law. This act contains no provision as helpful as those listed above, and even repeals an earlier waiver authority designed to promote flexibility. It requires extensive reporting on costs and then directs GAO to do a report on these reports. It contains 77 provisions dedicated to acquisition policy – the third-highest number in 15 years. And yet the FY 2020 NDAA is hardly a recent outlier. On average, each of the last five NDAAs contained 79 acquisition provisions, up from an average of 47 over the decade before that.
It’s time for Congress to take a strategic pause in defense acquisition reform; in Hippocratic terms, to do no harm for a year or two. Current laws and regulations are sufficient to protect the interests of the government. Adding new laws and regulations (even salutary ones) increases complexity, bureaucracy, and work for an already burdened industry compliance force. Instead of adding more rules and regulations, Congress should focus on strengthening and empowering the defense acquisition workforce, incentivizing acquisition staffs to tolerate more risk, and take full advantage of the flexibilities already in law and regulation. This need not result in new legislation. Instead Congress could use advisory report language without reporting requirements, or provide its guidance through the regular oversight and hearing process.
Congress should encourage the Defense Department to benchmark commercial practices and use these as a guide or mode for commercial contracts — again, exercising its will through advisory reporting and the oversight process. A case in point is the source selection process. In an effort to engineer best value and avoid protests by losing bidders, DOD’s acquisition process generates extremely complex requirements and adds both years and millions of dollars to the process. This does not deliver the best value to the government or protect the interests of the taxpayers. If it did, industry would be quick to adopt DOD’s acquisition process.
Another way that we can unleash innovation is by letting the markets set more government pricing. No bureaucratic mechanism, statute, or reporting requirement can perform better than free markets. The government’s (especially Congress’s) obsession with cost in determining fair and reasonable price is misplaced. Cost is but one factor contributing to fair and reasonable pricing. The government’s approach fails to take into account prior investment, assumed risk, return on investment, and, yes, the elasticity of the buyer’s demand. These are additional elements of price that only the market can fully incorporate. That is why the market often yields prices that result in high profit margins for some technology industries and sectors with very high R&D costs and risky enterprises.
DOD sometimes pays more than it should as a result of its own failure to efficiently manage its own supply chain. For example, the Pentagon, at times, will dramatically reduce its order quantities and purchases items with irregular frequency––costly practices which are completely beyond the contractor’s control and result in price inflation. The root problem here is execution, which Congress often tries to fix through legislation. But this often is ineffective and can cause new problems. In my experience, public hearings that shine light on poor execution usually lead to better results than trying to legislate good execution.
Under these conditions, the Pentagon’s efforts to control costs via mechanisms such as a proposal to restrict defense suppliers’ profit margins to artificially low levels are inimical to innovation. Such actions drive agile companies away from doing business with DOD in favor of pastures where the market determines prices and business processes are far more inviting.
The best thing that Congress can do right now to unleash and protect defense innovation is to do no harm. For now, the market is the best medicine. If we do this, then even China, with its formidable STEM capacity, all-of-society commitment to technological dominance in areas like AI and 5G, and its predatory cyber-economic tactics cannot prevail against our comparative innovation advantage.