Page Title

Defense Market Insights

The Department of Defense is mandating that future acquisition programs evaluate prototype systems prior to initiating system development and demonstration (SDD). The move is the latest in a series of initiatives intended to gain control over R&D programs that have seen spiraling growth in cost and schedule. The prototyping rule embodies a general trend toward the DoD placing greater value on low-risk defense systems.

But much remains to be seen in how the Department handles the new rule. The way in which DoD implements this new regulation will have critical implications for the defense market. Both the defense systems and acquisition services markets may be affected by this new policy. It is vital that companies understand how to account for, and if possible, take advantage of, this new regulation.

Potential Effect on Budgets and Opportunities

The cost of developing prototypes prior to SD&D is significant. Thus, the new mandate could lead to increased cost for programs in the advanced component development and prototype (ACDP) phase, with the promise of reducing costs following Milestone B. But the objective of reducing risk in the SD&D period is likely to be realized only slowly over time. This means that in the next several years, the Pentagon’s RDT&E budget will be sustained at high levels relative to the procurement account.

Despite the higher level of RDT&E spending that this measure would prompt, the Department would not be able to initiate more new start programs;. Marginal growth in the RDT&E account would be consumed by existing and planned programs that require more funding to meet the prototyping requirement. The need for more rigorous development earlier in the process could constrain the number of new program starts DoD can afford.

The prototyping policy also has the potential to affect the nature of competitive opportunities, not just their number. The promise of a prototype system will focus the attention of DoD customers on particular qualities that the objective system must have. Any pre-SDD prototype is likely to be a far cry from a service-ready item, complete with full functionality for the battlefield. So, customers will have to specify certain characteristics that prototype systems must emphasize: Are there particular capabilities that must be demonstrated? Is the customer interested principally in design maturity for advanced development and production? The answers to these questions could confer competitive advantage on one or another player, and the firm that can successfully influence these decisions may gain the pole position.

Potential Effect on the Industrial Base

The new regulation states that early, competitive prototyping will “exercise and retain certain critical core engineering skills in the government and our industrial base.” With sufficient funding to sustain competing prototyping efforts, the new regulation should serve that purpose. But funding limitations may force the Department to be selective in its application of the new rule.

For industry, the effect of this new policy could be more focused on existing rather than new designs. The Department’s desire for relatively rapid acquisition could create incentives for firms to propose existing designs for emerging requirements. Companies that are able to present adaptations of existing designs as prototype candidates for new requirements may gain an inside track, offering a low-risk path to production.

Key Unanswered Questions

Since the new policy was announced in September 2007, the Department has been assessing how to implement it. While the Services have made a few steps in that direction, their decisions have been vague.

The Navy has issued guidance stating that “all pending and future” ACAT I programs utilize two or more competing teams using prototypes, either of full systems or critical sub-systems. But the guidance is vague on some key points, including how the Service will determine what aspects of the overall system are essential to be demonstrated in a prototype. The Navy promises a “collaborative environment” for this decision, which could leave the door open to industry influence.

There are a series of issues that will critically influence what effect the prototyping policy will have on the defense market:

Resources. Will DoD fully pay for the effect of this policy with added resources in the RDT&E budget? The FY 2009 budget, due to Congress in February, may offer a hint of DoD’s seriousness in executing the prototyping policy. If necessary increases in funding are not available, how will the Department meet this new requirement?

Acquisition Workforce. Will the new rule require added government personnel or other capabilities to manage and review prototypes? At a time when DoD’s acquisition workforce is already stretched to the breaking point, how will the Department undertake what could be a substantial increase in workload?

Prototype Definition. How will the Department define what sort of prototype is required in any given program? What level of functionality, compared with the objective system, will a prototype need to feature?

Waivers. Will there be provisions for waivers of prototyping requirements? Some capabilities may be provided by largely non-developmental items. Others feature effectively no competition due to an industrial base that has narrowed to just one contractor. Given funding limitations, will the DoD be tempted to go this route often?

It remains to be seen whether and how this new policy will affect the competitive landscape in the defense market. It has the potential to reward firms that are able to rapidly transform paper concepts into working systems. It may also favor firms that can use their relationships with customers to drive the prototype requirement to a set of favorable design points. But to be fully effective, this policy would cost money, and it is not clear the Department has money to spare.

The Pentagon’s New R&D Rules Leave Many
Questions Unanswered

January 22, 2008

Point of Contact:

Douglas Berenson

dberenson@avascent.com

About the Avascent Group

The Avascent Group is a premier provider of business consulting services to clients in industries that operate at the intersection of business, technology, and public policy, including commercial aerospace and aviation, defense, space, homeland security, and transportation. From market and competitive assessments to acquisition strategy development and M&A support, Avascent combines the analytic rigor and breadth of large general management consultancies with the sector depth of a boutique firm to deliver sophisticated, fact-based, and pragmatic solutions for our clients.

For more information on The Avascent Group, please contact Jay Korman, jkorman@avascent.com.

If you would like to receive future issues of Defense Market Insights, or would like to be removed from the mailing list, please contact The Avascent Group at dmi@avascent.com.

Implications for Non-Primes

At first blush, the new DoD policy on the use of prototypes in competitive awards seems relevant mainly to prime contractors involved in systems design and production. Certainly, that is where the Department expects the effect to be felt. But the implementation of this rule has the potential to affect the market for an array of other firms, including those one might not associate with hardware design and manufacturing. Companies specializing in a variety of technical services may also see a rise in demand.

The use of modeling and simulation in prototype development and evaluation will be essential. The task of delivering a prototype can be very costly, so both the government and competing primes will be looking for ways of confining expensive aspects of the prototyping process just to the essential design features. Programs will likely make trades between the ideal breadth and degree of performance on the one hand, and a more focused approach to prototyping that addresses only key areas of risk and performance emphasis on the other. Modeling and simulation could be the key to filling in the gaps in between.

Implications for Government

The government itself will be affected by this new policy. The ability of DoD’s own acquisition infrastructure to manage complex programs has been severely strained. The need to manage the process of specifying, soliciting, and evaluating prototypes will require significant program management and engineering expertise. The debate over how much to rely on contractors for acquisition management services may be rendered moot simply by the sheer volume of workload.