An Intro to Understanding the Defense Innovation Ecosystem

by Patrick Collins

DEF is just one of many entities in the defense innovation ecosystem, to better understand our organization, it is necessary to understand its place within a web of others. This article is the first in a series that will explore that ecosystem, spanning government, corporate, and non-profit entities. In this installment we set the stage and then explore innovation as a result of cooperation between the Defense Department and large defense companies.

The defense innovation ecosystem is complex and diverse, and at times, confusing. It can be easy to get lost in the mix of private, public, and hybrid organizations that try to drive innovation for the military. However, stepping back and taking a systematic approach provides a better understanding on key players in the national defense community. For entrepreneurs, a holistic look at the ecosystem can help uncover opportunities like funding or useful networks for navigating the process of building a new firm or bringing new innovation to the U.S. government.

Innovation in the American defense sector is unlike innovation anywhere else. There are a few good reasons for this, like the need to protect sensitive technology, or the risk associated with working on the fringes of technological knowhow, and of course high monetary costs. The most important feature that makes defense innovation truly unique, however, is the relationship between companies and their U.S. government customer.

A Game of Risk

Innovation is an inherently risky business. Most venture projects are failures, but the gains for a successful one more than make up for the losses elsewhere. Innovation in the defense sector is no exception. What’s different is how the financial risk is spread. In almost every other industry, a firm takes the risk and puts up the capital in advance, hoping that the new product will sell and make enough revenue to turn a profit. For example, as a customer you would never pay Nike to create a new shoe, then pay again to buy that shoe. Yet time and again, the US government plays the roles of both investor and customer in the defense sector.

An aerial view of the Pentagon.
Photo by Ingram Publishing/Newscom

Washington takes on this burden because the stakes for national security are high, as are the dollar figures. Firms in the defense sector are hoping to earn contracts from a few slices of the budget. In fiscal year 2021, the DoD requested $136 billion for procurement and $106.6 billion for research, development, testing, and evaluation (RDT&E). Additionally, firms that sustain existing programs also compete for the maintenance part of the total $230.4 billion operations and maintenance (O&M) budget. An already large sum, this still doesn’t even include related organizations like the National Air and Space Agency (NASA), the Intelligence Community, and the Department of Energy. These federal budgets are the wellspring of the American defense sector.

The Top of the Ecosystem

When most people think of the defense industry, they think of the well-known firms like Lockheed Martin, Raytheon, Boeing, Northrop Grumman, General Dynamics and the like with multibillion dollar revenues. They are the whales of the defense sector: important players in the defense innovation ecosystem, who are happy to boast about their past innovative successes. Some of the most legendary examples include Lockheed Martin’s Skunk Works and Boeing’s Phantom Works. These prestigious, and secretive, entities represent what is conventionally considered to be the path to innovation; a large company with modern facilities, workforces brimming with engineers, and healthy research and development budgets to come up with the next revolutionary innovation.

The reality of innovation in the defense sector at this level is more complicated than that. Most of what the defense primes do is provide mature programs of record. Their bread and butter are large contracts, worth hundreds of millions to billions of dollars, that deliver an agreed upon system with little risk. When you are responsible for fielding hundreds of jets, or an aircraft carrier with thousands of sailors on board, you don’t want any surprises.

Lockheed Martin’s X-35 jet.
Lockheed Martin’s X-35, photo from Avion Legendaires

When these firms do create new products, those efforts are not funded entirely out of hide. Instead, they’re financed to some degree by the Defense Department to build a prototype. Take the Joint Strike Fighter program as an example. When the DoD decided to replace a host of aircraft including the F-15, F-16, A-10, and Harrier jets, it early on tasked the Defense Advanced Research and Projects Agency (DARPA) to create the Common Affordable Lightweight Fighter program. This was later merged with Joint Advanced Strike Technology efforts to create the Joint Strike Fighter program. Ultimately, the department solicited bids from several companies and narrowed the competition down to Boeing’s X-32 prototype and Lockheed Martin’s X-35. According to a Wired Magazine article detailing the selection, DARPA invested $600 million into each company to develop the experimental jets. I’m not sure how much of their own money either Boeing or Lockheed invested into the project. The F-35 program isn’t unique, it’s a part of a regular pattern where the government takes on financial risk, in order to incentivize the research and development of a new capability that it will also be the primary customer for.

Earlier this month DARPA announced it was awarding contracts to General Atomics, Lockheed Martin, and Northrop Grumman for phase I work on the LongShot program. The size of these awards isn’t yet public, nor is what each firm is investing in the program. All the defense primes invest a portion of their revenues back into internal research and development. Lockheed Martin’s 2019 annual report disclosed the firm spent $1.3 billion in R&D in both 2019 and 2018. A question for those in a position to know is how do such firms and DARPA share the burden of developing new innovations? Please continue the discussion on this topic in the comments section.

The next part of this series will give an over view of the remaining defense innovation organizations: smaller research groups and mid-level firms, which make up the vast majority of the defense ecosystem. How these three groups interact is essential to understanding the industry as a whole.

Pat Collins was a DIA intelligence officer for ten years and holds a master’s degree in security studies from Georgetown and an MBA from the University of Cambridge. He joined DEF in the spring of 2020 and is interested in defense innovation.

The Defense Entrepreneurs Forum is a 501(c)(3) non-profit that inspires, connects and empowers people by convening events, forging partnerships and delivering tangible solutions. Our mission is to promote a culture of innovation in the U.S. national security community.

If you are a civil servant, military member, academic, entrepreneur, policymaker, or technologist (or just find the idea of helping solve tough problems enticing), we’d love to have you join the DEF Community!

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