The Pentagon is yet to explain how its twin defense-industrial strategies will interact.
The Pentagon’s Better Buying Power (BBP) initiative, launched four years ago and recently in its third version, is meant to unlock the government’s monopsony power in its relations with industry. BBP speaks considerably of improving productivity, but the details of the various memoranda, and their implementation so far, have been clearly focused on reducing cost. The Pentagon’s Defense Innovation Initiative (DII), launched just this month, is meant (naturally) to encourage innovation for defense, though not along traditional trajectories, and particularly from sources not typically serving the defense establishment. In contrast to BBP, then, the DII is foremost about better and faster, and not strictly cheaper. But there are issues with both big ideas, and how they may interact.
As Atlantic Council fellow Steve Grundman has written, it’s important that the government’s buying power not overpower, suppressing industry’s incentive for innovation. As Under Secretary Frank Kendall has admitted, some of the implementation of BBP by the bureaucracy has been overreaction to mere guidance. The DII is so far a paper product, but one on which Deputy Secretary Bob Work has pinned great hopes. So it’s reasonable to wonder whether the mandarins of the department gave the question much thought: how might this new DII affect BBP, and vice versa? From an outside perspective, it seems that there are at least two ways events could unfold.
In the first version, suppose that the department pursues relatively uncoupled strategies on buying power (BBP) and innovation (DII), but with more of that overzealous implementation of the former. Suppose Director of Defense Pricing Shay Assad then releases the hounds of cost accounting, and extracts the remaining supplier surplus from the stalwarts of industry. The rendered whale oil could then be used to fuel the innovations of those up-and-coming non-traditional suppliers. If you’re in the business of bending steel, that prognosis is not so good. It may better if you have an idea for a lethal iPhone app (whatever that might be). In theory, destruction then fuels creation.
Alternatively, consider a more measured and coupled strategy, through the analogy of a business trying to reduce costs (BBP) while increasing revenues (DII). The implementation can easily be botched: a mindless war on costs can leave product quality as collateral damage. That tears down a company’s top line, with lasting damage to the brand (the analog here is military performance and reputation). But with enough management attention, the dual foci can provide great rewards. Lower costs can themselves improve revenues, through a shifting intersection of the supply and demand curves. In that case, the business makes out like a bandit.
Pulling up from the commercial metaphor, what could the Pentagon accomplish with simultaneous progress on both fronts? Process innovation—whether in software engineering, additive manufacturing, or just basic logistics—could slash costs without requiring that feared war on profits. The savings could then be plowed back into product innovation, perhaps permitting the department to invest in 21st century payloads without abandoning the hedge of 20th century platforms. (Think of how the Washington Naval Treaty shifted money from battleships to aircraft carriers, if not so intentionally.) In this version, creation fuels destruction—of wartime enemies.
Finally, what of the contractors? Do BBP and the DII together open possibilities for new business strategies, for either incumbents or entrants? It’s probably too early to tell. BBP has been with us since 2010, but without clear success. The DII has been with us since a week ago Saturday, and with no clear indication of what lies next. Together, these initiatives could be taken as portentous, but with no clear signal of what they signal together, industry is left not so much to plan, as to guess.
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.