Defense Industrialist

November 6, 2014

Open for Innovation

By James Hasik

 The pursuit of intellectual property rights in weapons buying cannot focus solely on today’s price.

 

About a year ago, Assistant Secretary of Defense for Research and Engineering Al Shaffer offered some views about the department’s view on open architectures for information systems. As reported by Inside Defense (13 & 14 November 2013), he had three comments, offering contractors some views they’d likely consider generally positive: 

 

  1. Open architectures are important for helping Defense increase competition and ward off obsolescence.
  2. The Pentagon’s willingness “to pay a premium for the requisite intellectual property” was growing.
  3. That said, the use of open architectures should not be mandated.

 

Just this week, as reported by Federal Computer Week, Assistant Secretary for Acquisition Katrina McFarland went one further, as she tried “to allay fears on intellectual property.” The department, she stressed at a conference hosted by Defense Daily, “does not want to own IP when it amounts to business secrets a firm can leverage for competitive advantage.” Defense has no ambition to prize away “the secret sauce of the company.”
 
One the one hand, it is the Pentagon’s policy to pursue ‘Better Buying Power’ for the government through a variety of sensible tools. One of those might be squeezing high margins, as Pentagon Pricing Director Shay Assad has been aiming to do. That does run the risk of souring strategic supplier relationships, but as Roger Sterling might ask—who cares? Why wouldn’t the government want to drive the hardest bargain it could? Why not mandate open architectures everywhere, offer insulting prices for intellectual property, and scoff at the blood and sweat that firms shed building those intangible assets?
 
The War and Navy Departments actually tried playing that sort of hardball with manufacturers in the nascent aircraft industry in the 1920s, and with results that seem obvious in hindsight. The military ordered prototypes, but then asserted rights to the designs, and competed subsequent production. The designers had little opportunity to earn a return on their troubles. The issue is what my Atlantic Council colleague Steve Grundman described as the monopsonist’s dilemma. The senior leaders in the Building generally understand that they
 
     cannot induce private firms to undertake projects if their expected returns do not cover their cost of capital. The tension between these competing objectives illustrates the classic dilemma faced by a customer with market power who wants to drive prices as close to marginal cost as possible while concurrently incentivizing commitment, quality, and innovation.
 
In truth, the government usually won’t push too hard a bargain because it mustn’t. That’s why Under Secretary Frank Kendall’s most recent revision of BBP stressed that openness belongs on the margins. Government buyers, he said in his introductory talk on the policy, “need to do a better job of ensuring that our designs are modular—and that the government is in a position to control all the relevant interfaces so that competitors have the opportunity [to] win their way onto our programs.” Interfaces, not every nut and bolt in the design—that expression of self-restraint will hopefully direct the government and its contractors towards some dynamically efficient of price and quality in the quest for the newest kit. If not, we’ll wait for BBP 4.0, and adjust.
 
James HasĂ­k is a senior fellow at the Brent Scowcroft Center on International Security.