New DoD Rule Might Cripple Silicon Valley Efforts: Sen. McCain

WASHINGTON: The day before Defense Secretary Ash Carter heads to St. Louis to promote outreach to the high tech communities, Sen. John Mccain blasted a proposed new DoD rule that “would have the unfortunate effect of undermining many of the key objectives” of Carter’s efforts to entice Silicon Valley to do much more business with the Pentagon.

The new rule was crafted in response to language in the 2013 National Defense Authorization Act (NDAA). Why the Pentagon chose this time to come out with such a rule, right about the time this year’s NDAA is to come out with its bountiful bunch of acquisition reforms, has tongue’s wagging on Capitol Hill.

Here’s what McCain said in bis letter to Defense Secretary Ash Carter:

“I am deeply concerned by a new proposed Defense Federal Acquisition Regulation rule on commercial item acquisition (DFARS Case 2013-D034), which could effectively preclude any significant participation by commercial firms in defense programs,” McCain says. “Indeed, this regulation was released just weeks before your latest visit to Silicon Valley and would have the unfortunate effect of undermining many of the key objectives of your visit.” And McCain’s letter, of course, was released the day before Carter’s latest trip to try and encourage advanced high tech development.

(Note that Carter will address a DARPA conference — the “Wait, What? Forum — as well as pay a visit to Boeing. Carter, of course, visited Silicon Valley and encouraged tech leaders to work with the Pentagon’s new Defense Innovation Unit Experimental.)

McCain is so worried about this rule he wants to it killed immediately. He also wants the Defense Secretary to send “a clear message to those in the Department who are working to maintain the current acquisition status quo that they are not only doing serious damage to our national security, but that they also appear to be completely out of step with one of your highest priorities as Secretary.” Translation: Tell whomever in the acquisition community suggested, wrote and approved this measure that they are on the wrong path and better never do something like this again as long as McCain remains chairman.

In technical terms, McCain says the rule would force commercial firms “to build entirely new accounting systems just to do business with DOD.” Commercial companies — especially high tech companies in Silicon Valley — have eschewed doing business with the Pentagon for more than three decades precisely because of its cumbersome oversight and regulations. Also, tech companies make a smaller profit doing business with Pentagon, and their federal business is a small part of their market. McCain says the new rule “sends a signal that DOD has little interest in realistic commercial acquisition practices and will continue to operate under its archaic, defense-unique, cost-based oversight system. This will drive our leading innovators away from DOD and continue the dangerous erosion of our defense technological advantage.”

Why else does the chairman of the Senate Armed Services Committee think this new rule is bad?

“This rule would undermine the commercial item exemptions in existing law through a new percentage of market-based criteria that would significantly limit the use of commercial market pricing and price-based analysis to determine the reasonableness of price paid by DOD,” he tells Carter.  This would create a major disincentive for high-tech commercial firms to venture into the development of innovative new defense capabilities—such as first-to-market cyber tools, disruptive solutions that compete with existing DoD systems, and products similar to those in the commercial marketplace but modified to meet national security needs—thereby denying them to our warfighters.

Note to those in industry reading every tea leaf about the final form of the acquisition reforms in this year’s NDAA, McCain included this line: “The Senate and the House have also included provisions in the National Defense Authorization Act for Fiscal Year 2016 to entice new firms into the defense market and retain them once there, including by expanding the application of commercial item acquisition exclusions. This legislative effort is just a first step in removing the accumulated detritus of law, process, and regulation that has effectively pushed some of our most innovative firms away from DoD.”

While I understand the conference really has come to agreement on the acquisition reforms (outstanding disagreements primarily relate to personnel benefits), there remains the chance it could come unglued over something.

I will, of course, ask Secretary Carter about this on tomorrow’s trip to St. Louis, especially after a Hill aide cited the headline on my story about Carter’s Silicon Valley visit, which was headlined: “Can SecDef Carter Win Over Silicon Valley?” The aide’s answer: No.