CEOs Question DoD’s New IRAD Rule

WASHINGTON: Two major defense industry players have a suggestion for Frank Kendall, undersecretary of defense for acquisition, whose Better Buying Power 3.0 plan includes a new requirement that companies get the Pentagon’s blessing for internal research and development (IRAD) spending. Back off.

“I’m not sure there’s a lot of upside to a lot of DoD oversight of where industry spends its discretionary dollars,” Ellen Lord, president and chief executive officer of Textron Systems Corp., said during a Center for a New American Security conference last Friday. “That seems a little invasive to me, and I’m not sure that’s letting free markets play out. And free markets usually do pretty well.”

Former deputy secretary of defense Bill Lynn, chief executive officer of Finmeccanica North America and DRS Technologies Inc. said that while “it makes a lot of sense for DoD to know where industry is spending money” on IRAD – and DoD “doesn’t have a very good handle” on that – “I agree with Ellen. You certainly don’t want to get into a bureaucratic process where the government is trying to make or approve industry IRAD decisions.” His prescription: “More information, not more control.”

Lord seconded Lynn’s emotion. “The dialogue is what we need,” she said, adding that communicating is a declining practice between industry and their acquisition overseers thanks to a growing tendency among contract competition losers to file protests, which cost time and money to adjudicate.

“So many DoD employees are absolutely terrified of having somebody throw down the flag and protest that, frankly, there’s less dialogue than ever, and that’s very unhealthy,” Lord said. “We need to understand what current needs are. DoD needs to understand what we have to bring. So dialogue’s important. But approving IRAD spends — I’m not sure that gets anybody anywhere.”

Acquisition czar Kendall defended the IRAD requirement when he announced it in April as “minimalist” regulation. “Having someone in the government who has reviewed your planned work, your project, and said, ‘Yep, signed off; yeah, I think that that’s reasonable work for somebody to do.’ Just find anybody, anywhere in the Defense Department who will do that for you, essentially. I don’t think it’s a very high hurdle for people to get over,” he told an April 9 Pentagon news briefing.

Their criticism followed an admonition issued at the Paris Air Show by a Boeing executive upset by a Pentagon decision to pause the UCLASS drone fighter project, an IRAD investment for that company, because of congressional pressure to make the aircraft capable of long-range strike as well as intelligence, surveillance and reconnaissance missions. Chris Raymond, departing head of business development and strategy for Boeing Defense, told reporters in Paris – using an analogy we just can’t resist quoting one more time – that decisions such as the UCLASS pause are destructive because, “You spend a lot of money following your lead and then it just stops. Those are the kind of things that make it hard to climb up on the camel next time.”

Lynn didn’t say so, but that might be one reason for what he called a “pretty strong decline” over the past 15 years in defense company IRAD spending. Citing statistics he said came from defense industry analyst Byron Callan, Lynn said that while defense company IRAD “used to be about 3.5 percent of revenue in the ‘90s, it’s now down to 2 percent of revenue.” The result, Lynn said, is that none of the top five U.S. defense contractors ranks among the top 20 companies worldwide in spending on IRAD. In fact, he said, total IRAD spending by the top five U.S. defense companies currently totals perhaps $5 billion a year. “That’s about half of what Microsoft or Toyota spends on R&D,” Lynn said.

The explanation for the decline? “There’s been more power in the idea of returning cash either through dividends or stock buybacks to shareholders.” As opposed to investing in defense projects that might die on the vine.