Doug Beck, director of the Defense Innovation Unit. Photo: DIU

The way more non-traditional defense companies will grow their business with the Defense Department is for more of them to be successful in doing so, which will provide more courage for acquisition organizations within the department to accept the risk of working with startups, the head of the DoD unit focused on accelerating the use of commercial technology said this week.

The biggest challenge for DoD in working with startups is “culture,” which Doug Beck summed up as everything from “learned behavior” to “ego” to “rice bowls.” In the end, he said, “it’s human. And that takes time to change. And the way you change it is with success.”

“I think the door is open for businesses to enter,” Tara Murphy Dougherty, CEO of the defense software company Govini, said on Wednesday alongside Beck at the Aspen Security Forum in Colorado. But, she said, after the initial development and prototype contracts, it comes down to the procurement agencies like the contracting commands and program executive offices and they have not changed.

One example highlighted by Dougherty is a potential $1 billion, 10-year software multiple-award contract vehicle announced by the Army last spring to meet service-wide software development needs. That is something Govini would want to compete for but the problem is the contract is being structured as cost-plus rather than fixed-price, and no venture capital-backed company “can bid on that,” she said.

Later, Dougherty told Defense Daily cost-plus contracts are fine with services where the cost of business is having contractor personnel in place and the profit has a fixed-ceiling. For commercial companies that have developed software with their own resources, often with venture capital, the companies and their investors are expecting a greater return because they have better control of their product costs.

Compared to traditional defense contractors, the commercial companies believe they provide a greater value proposition to the government because their products require minimum further development and therefore can be delivered faster, and at higher quality with modern DevSecOps as part of their core business practices.

Cost-plus contracts are typically used when there are “unknowns,” like in development work where government takes on more risk but in return a company’s profit is lower, Jerry McGinn, executive director of the Baroni Center for Government Contracting at George Mason University told Defense Daily on Thursday. For commercial software companies, cost-plus is not their business model, he said.

Troy Demmer, co-founder and chief product officer of Gecko Robotics, said that even when high-level demand is present, obstacles remain. Gecko offers its customers a turnkey asset inspection solution that combines the Pittsburgh-based company’s robotic systems and artificial intelligence-powered software platform to quickly analyze and manage asset health.

Gecko’s solution has helped the Navy “drastically” reduce the time it takes to plan for a ship availability in dry dock, Demmer said.

“And so, this is a capability that the entire Navy wants,” he said. “However, we’re getting blocked at the contracting level because the contracting vehicles that exist today don’t fit that business model of a firm fixed-[price contract]. And so, we get into a scenario where the existing structures that Navy could use to directly contract with us don’t work. Now we’re looking at other avenues like GSA, etc., and there you run into some other challenges which is there’s not a PM (program manager) to staff it despite having a three-star Admiral bang on the table saying, ‘We want this.’”

Dougherty agreed that there is high-level support at DoD and among the armed services who are pushing for the adoption of commercially-developed capabilities but there is a “disconnect” when it comes to writing contracts and creating a program of record.

“What strikes me is that while this group broadly has been having this conversation about driving innovation in DoD for a decade now, it was always with the acquisition community, and we left the contracting community out,” she said. “We’ve got to bring that group of people into this conversation so that we can raise the aptitude about business models and our kinds of companies and how we can work with DoD and raise the comfort level to Doug’s point about culture to.”

Beck said there is still a long way to go to get the “broader acquisition community” on board with buying at scale from startups and that part of the solution is training, some of which is happening at the Defense Acquisition University. He wants more “points on the board.”

To get “points on the board,” the type of success that Beck said needs to be replicated to enable more of the acquisition engines within DoD to acquire from startups is U.S. Special Operations Command’s (USSOCOM) nearly $1 billion contract with Anduril Industries that was awarded in January 2022 to provide counter-drone capabilities. That effort began in 2020 by leveraging DIU’s rapid acquisition contracting vehicle and funding to acquire the defensive systems for eight sites, he said. When that was successful, SOCOM put its money on the table, Beck said.

“But we need lots more success stories like that, so that it’s easier both inside to say, ‘I’m going to take a risk on that.’ And it’s also easier outside to say, ‘I’m going to take a risk on that,” he said.

DIU in February released its plan for its next phase, which is to scale adoption of innovative, commercial technologies across DoD to achieve strategic effects. Part of the plan is further scaling DIU’s presence with the combatant commands and acquisition organizations to better “understand and shape the needs” for where commercial technology can quickly be sourced, and to work with “engines of scale,” he said.

DIU has also created the Defense Innovation Community of Entities to work across the various DoD innovation arms to identify synergies to better work together and define the “systemic barriers” that are in the way and “so we can go knock them down,” Beck said.

The DIU 3.0 journey began nearly a year ago and “we are further along at this point than I ever could have dreamed that we would be in just a year, and we have so much further to go for all the reasons that we were just talking about,” he said.

This story was first published by Defense Daily