Congress Looks To Shake Up Pentagon Acquisitions With A ‘Hedge Portfolio’

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The House Defense Appropriations Subcommittee is recommending that DoD’s Defense Innovation Unit build a “hedge portfolio” of weapons systems, munitions and suppliers outside the scope of the Pentagon’s normal channels.

In a report accompanying the 2024 DoD Appropriations Bill, the Committee observed that, “Given mounting global security risks, the Department must do more to mobilize a broader industrial base.”

The lack of a broad, diverse defense industrial base and military requirements-setting that hamstrings innovation and fast materiel solutions, combined with the Pentagon’s crushing bureaucracy has put America’s military and its defense establishment on the back foot at a time when threats U.S. adversaries are as high as in living memory.

An increasing number of defense analysts and observers, including a core within Congress, now acknowledge that Pentagon is not moving fast enough (if moving at all) to respond to the challenges the U.S. faces.

In calling for a hedge portfolio the chairman of the Defense Appropriations Subcommittee, Rep. Ken Calvert (R-Calif.), is seeking to create an alternative organization focused on “rapidly fielding new capabilities from new sources at scale.”

The effort will be channeled through and managed by the Defense Innovation Unit (DIU) which was recently elevated to report directly to the Secretary of Defense. DIU’s new director, former Apple
executive Doug Beck, will brief Secretary Austin on the development of the portfolio for which the Committee has set aside $1 billion in funding. Part of that funding will be used to establish one organization within each Service to build and execute the hedge portfolio.

They’ll be known as NIFEs – Non-traditional Innovation Fielding Enterprises – independent units focused on acquiring quickly-fieldable technologies and systems from non-traditional commercial suppliers. They’re intended to not only field systems far more quickly than present Pentagon organizations but to get them to military combatant commands in tactically relevant quantities at prices that afford mass.

The Committee is directing the Service Secretaries to provide a brief to congressional committees 60 days after the enactment of the 2024 defense appropriations bill identifying the NIFE for each service (potentially extant organizations like the Air Force’s AFWERX innovation hub). The DIU director will report to congress on a plan for the hedge portfolio within 90 days and details on the Service NIFEs within 120 days.

The impetus to get the Services and the Pentagon off their proverbial rear-ends is a laudable one but getting them to quickly acquire effective-enough, affordable weapons in quantity from outsider companies will be a tall task. To see if Rep. Calvert and his colleagues understand that reality, I put a slate of questions to the Defense Appropriations Subcommittee. Its responses were sometimes candid.

The first question asked what inspired the hedge portfolio idea?

A number of factors inspired the Chairman’s decision to include a hedge portfolio, but the biggest was observing how incredibly risk-adverse the DoD and the Services have become over time. There is little incentive to disrupt programs or incumbent providers. In the meantime, our warfighters are stuck with outdated technology and equipment that will put them at a disadvantage – an outcome that is unacceptable. That is why it is urgent that we field meaningful and affordable operational capability to defeat and deter our adversaries in a timeframe of relevance.

I noted that in recommending the portfolio, the Committee cited the “promise” of pre-existing organizations like the DIU, the Chief Digital and Artificial Intelligence Office, the Office of Strategic Capital and others in potentially creating a hedge. I asked whether recognizing these organizations is essentially an acknowledgement that they have not demonstrated the ability to rapidly, effectively develop and actually field systems and hardware to warfighters?

Many of these organizations have made notable progress in going beyond experiment, to delivering real capability. However, to move at the pace necessary to counter China, we must scale these organizations this year. This bill provides the focus and funding to these organizations to now deliver capability at scale.

In the report the members observed that, “it is not clear to the Committee that the Department is properly focusing, staffing, organizing, or resourcing these organizations, or fully exploring options to evolve requirements…” Why does the Committee believe the Department of Defense is failing to do these things I asked?

Change is hard. Shifting resources to a new acquisition paradigm means the Department must say “no” to other priorities. Additionally, this new strategy might require different talent management programs, potentially creating new career fields. Change must start this year.

While the Committee’s recommendations suggest some sense of urgency, its own estimation that “change is hard” for the Pentagon led me to ask if the representatives who made them expect that the NIFE organizations for each Service will actually be given the power to quickly build a hedge portfolio, to demonstrably field systems and reward non-traditional companies supplying them?

Working with non-traditional companies requires a new acquisition culture. Fortunately, the Department has been building pockets of cultural change in what have been called “innovation organizations.” Now it is time to scale those organizations with this new funding and new focus… the Service-level NIFE leaders must be empowered to move quickly with the authority to contract with non-traditional companies. This is how we disrupt a broken, slow acquisition system that demands a 100% solution that will arrive in 30 years if at all, rather than a 90% commercial solution that exists today. It will be equally important that all of these innovation enterprises have a clear pathway into [programs of record], if appropriate.

But can a clear pathway quickly, affordably generate materiel to fight with? I asked if the $1 billion the Committee recommends can yield systems and weapons (drones, vehicles, munitions, sensors, AI agents etc.) in effective operational mass in a few years time? Specifying “smart, affordable, modular, and sustainable systems” as the report does has been tried previously in various defense reform programs. It has not panned out.

Shifting to a distributed strategy that leverages affordable mass is difficult if the taxpayer must pay for the full development and manufacturing capitalization of these systems. Fortunately, a key part of this strategy is leveraging external capital and talent by using dual use technologies that in many cases are already being developed or sold in a commercial market. Since these manufacturing lines are likely used for larger commercial markets, this strategy has the added benefit that if we go to war, we have the ability to mobilize American and allied manufacturing for war, rapidly shifting from commercial to military production in ways that have not been possible since World War II.

Rapidly shifting from commercial to military production during WWII was possible because the will to do so was there. In its report the Committee calls for developing software and hardware for fielding at scale “within three years using small teams of warfighters, acquirers, and technologists”.

It sets aside $220 million specifically for DIU to provide support to these teams to accelerate fielding of capabilities. Is the funding also meant to allow DIU to work outside the Pentagon I wondered? The Committee didn’t answer directly.

As these innovation organizations transition to fielding organizations, this direct funding for Combatant Command priorities ensures close connectivity to the most difficult operational problems that are not being addressed by our traditional approach.

Among the most important points of the recommendations was the Committee’s focus on “Flexibility and Accountability” in building the hedge portfolio. Flexibility and accountability have not been hallmarks of the Pentagon’s leadership and rank-and-file for the last 20 years. The failure is thanks in part to the massive bureaucracy that exists within DoD and the Services – top heavy and intransigent.

In its deliberations, I wondered if the Committee recognized the problem, whether it had given any consideration to reducing the overall size, staffing and number of decision-making tiers within the Department of Defense? The Committee noted that;

The Chairman has been very critical of the growth of DoD bureaucracy and this bill also includes important reforms for workforce optimization and reporting requirements to inform the Committee how the Department can better manage its own business practices.

What reforms for workforce optimization the Committee is referring to weren’t made clear. One thing that should be clear across the government is that until officials have the power to fire and hire federal employees expeditiously, including within DoD, the U.S. will continue to make little progress in defense and every other area.

The Defense Appropriations Subcommittee’s hopes for a shakeup with a hedge portfolio (and its inclusion in the 2024 Bill) rest, as it says, on “closing the gap” between warfighters in the field and acquisition functionaries in non-descript offices.

The iterative and flexible requirements development approach in this strategy specifically closes the gap between the warfighter, acquirer, and technologists that exists in our traditional approach. This allows real data to be collected with fielded hardware. This model expedites acquisition decision cycles with earlier insights into cost, capability, and capacity…

As of last week, the recommendations in the report had been favorably received by the broader defense community. But in Washington DC shakeups are more often than not rhetorical. Where America’s defense is concerned, it’s past time for a real one.

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