SpendLogic, LP — Department of Defense STTR Phase I: HR001121S0007-06

Description

Page 2 of 2 The Department of Defense (DoD) must negotiate profit that is fair and reasonable to both the Buyer and the Seller. The DoD relies on profit to both attract the investment capital of innovative contractors and provide an incentive to perform efficiently. It relies heavily on the concept that the relationship between profit and risk should be proportional. At first, this seems to be a tidy and highly efficient method of analyzing profit. And in practice, it works reasonably well. Or at least well enough that traditional defense contractors agree to play along. But the world is changing. “Traditional defense contractors,” those characterized by highly capital-intensive, tight-tolerance manufacturing capabilities, are not necessarily what the DoD needs right now. Wars are increasingly being fought in the cybersphere. The next act of war on United States soil is very likely to be not physical, rather, it will likely be an attack on critical assets and infrastructure, which are increasingly linked to each other through the internet. Safeguarding these attack vectors requires the DoD to work with the best of the best. It just so happens that the “best of the best” are not accepting anything other than top dollar for the work they do. For these “non-traditional contractors,” promises of long-term contract opportunities and funding for specialized equipment do not make up for an offer of 15% fee on cost. The problem, it seems, is one of misalignment of priorities. Top knowledge work firms see the world differently than the DoD. These companies do not present plaques on work anniversaries and they don’t do Hawaiian shirt Fridays. Their employees do not work 7-3:30 and they don’t force Excel to churn on problems it was never designed to solve. These companies solve unique problems with unique approaches. I can say this because I have seen it myself. Straight out of college, I spent 7 years at Boeing. I was presented a unique opportunity, so I left Boeing and worked for Microsoft. What I saw blew my mind. The difference could not have been more pronounced. (See previous paragraph for a few examples.) We do not claim to know what motivates the world’s top innovators in technology. But what we are confident of is this: The DoD’s desire to attract Top Innovators is never going to be successful using profit recommendations generated by the current DFARS Weighted Guidelines. There are certain aspects of the Weighted Guidelines worth saving and we do believe that a systematic approach to profit analysis can be defined and built. Attempting to do that in a vacuum by simply analyzing in-house data, past performance, or industry rates of return will just lead to the next iteration of a tool that misses the mark. No doubt all this analysis needs to be done, but perhaps more importantly is understanding the priorities and motivations of today’s top innovators.