U.S. Public-Private Sector Engagement:

Security and Defense


Public-Private Sector Engagement


The Third Offset and the Acquisition of AI Technologies

In 2015, the United States announced its “Third Offset Strategy,” its most recent warfighting strategy. As Deputy Secretary of Defense Robert Work explained at the Reagan Defense Forum, “offset strategies are focused on great powers,” and “making sure that our conventional deterrent is as absolutely strong as possible.” Rather than “match a great power tank for tank, ship for ship, airplane for airplane, or person for person,” an offset strategy does precisely that - “offset our potential adversary's advantages[6] As Secretary Work says, “It's all deterrence."

The Third offset

In the twenty-first century, the Third Offset Strategy seeks to offset through new technological capabilities. The plan is “to leverage AI technology, particularly in things like cyber defense, electronic warfare defense, missile defense.” Unique relative to the other offsets, “the technological sauce of the Third Offset is going to be advances in Artificial Intelligence (AI) and autonomy.” One facilitator of this strategy is the Defense Innovation Unit Experimental (DIUx), which acquires prototypes of private sector technology applicable for military use.[11] As Work observes, “almost all of the technology that is of importance in the future is coming from the commercial sector, and all of the technology base is global;" as a result, the DoD’s ability to acquire commercial technologies will be vital to the success of the Third Offset.

"The technological sauce of the Third Offset is going to be advances in Artificial Intelligence (AI) and autonomy" - Deputy Secretary of Defense Bob Work

DIUx: Its Past and Future

The Defense Innovation Unit Experimental (DIUx), is an organization within the United States Department of Defense tasked with expanding partnerships between the department and the private sector, particularly in the realm of emerging technologies, such as artificial intelligence. Announced in April of 2015 by former Secretary of Defense Ash Carter, DIUx was a part of Carter’s Defense Innovation Initiative. In August of 2015, DIUx opened at Moffet Field, California, right outside Mount View, CA in the heart of Silicon Valley. During its first year of operation, the organization struggled to achieve its mission. Initially branded as a mediator, DIUx was intended to help new companies navigate the defense contracting system. DIUx had a minimal budget and no authority to grant contracts.

According to a 2017 Government Accountability Report on military acquisitions, companies became frustrated as DIUx was not able to accelerate or improve the contracting process. In May of 2016, Secretary Carter announced DIUx 2.0, a revamp of the organization. The role of DIUx was changed from a mediator within the department to an actual contractor itself. Important changes included an increased budget of $30 million to award contracts, expansion to other centers of technical innovation such as Boston, new leadership headed by Raj Shah, and ability to report directly to the Secretary of Defense.

After the transition to the Trump administration, the future of DIUx was unclear. In August of 2017, Secretary of Defense Jim Mattis visited DIUx in California and announced his support for the organization and his intention for it to expand under the Trump Administration. According to Reuters, between June 2016 and August 2017 DIUx had awarded $100 million in contracts on 45 projects and has plans to expand its staff. However, DIUx has gone under recent organizational changes. Raj Shah, Managing Partner of DIUx, left his position in February of 2018 and has not been replaced since. Further, DIUx no longer directly reports to the Secretary of Defense, due to a reorganization within the department. While the organization appears to have found success in contracting with technology companies, the future role and influence of DIUx remains unclear.


DIUx: Procurement vs. Prototype Acquisition

As one Government Accountability Office (GAO) report notes, the reciprocal relationship between the research of the Department of Defense and the commercial sector drastically changed over the last thirty years. More than half a century ago, “[i]n the 1950s, the Air Force and the Defense Advanced Research Projects Agency funded research on speech recognition and artificial intelligence that enabled the development of the Cognitive Assistant that Learns and Organizes.” This in turn advanced commercial technologies, since “[i]n in the 1990s and 2000s, commercial companies started leveraging this research to develop commercial technologies like Siri, the iPhone assistant.” 


However, a rapid increase in private sector R&D investment radically changed the extent of “DOD’s influence on the type of technologies developed by U.S. companies.” Over the course of approximately thirty years (1987-2013), while DoD experienced a 10% growth in its R&D investments, the private sector experienced a 200% increase. However, this also meant that the DoD’s share of “research and development spending in the United States" decreased from “about 40 percent” to “less than 20 percent.” 


"Non-Traditional Companies"

As noted above, the Department of Defense seeks technologies largely developed in the private sector, from “non-traditional companies.” As the DIUx Commercial Solutions Opening How-to Guide explains that broadly, “a nontraditional contractor is one who has not performed significant development work for the Government in the previous year.” However, the Department of Defense faces additional obstacles in terms of procurement. First, “DOD is not a significant customer for top innovative companies.” In fact, the report illustrates that such companies (e.g. Microsoft, IBM, Tesla, Facebook, Apple, etc.) gain 0-2% of their profits “from contracts directly with DOD.” Even if the profits were higher, “DOD’s acquisition environment presents unique challenges to non-traditional companies that they otherwise do not experience in the private industry.” As a result, they may be deterred from contracting with the Department. The GAO’s report identifies “six key areas of DOD’s acquisition environment that create challenges for non-traditional companies, according to these companies,” including the “[c]omplexity of DOD’s [c]cquisition [p]rocess,” “[l]engthy [c]ontracting [t]ime,” “[g]overnment-specific [c]ontract [t]erms and [c]onditions,” and “[i]nexperienced DOD [c]ontracting [w]orkforce."


At present, there are two processes by which the DoD can invest in new technologies and innovations to further the Third Offset (or any strategy). The traditional process is that of procurement, wherein DoD officials with the authority to settle contracts (“DOD contracting officers”) must do so according to the Federal Acquisition Regulation, a nearly two-thousand-page document, as well as the “Defense Federal Acquisition Regulation Supplement (DFARS) to procure the product.” This process, however, produces “high barriers to entry” for such non-traditional companies. The DIUx Commercial Solutions Opening How-to Guide recognizes that these “barriers, including the long timelines inherent to the federal acquisition system, make the DoD an unattractive customer for some companies focused on selling to the commercial market.”


On the other hand, “Congress also provides Other Transaction Authority (OTA) that allows DOD to enter into agreements with companies to complete research and development and prototype projects.” By contrast, “OTAs are flexible agreements that typically include very few required terms and conditions and instead allow the parties to negotiate terms and conditions specific to the project.” It should be made clear that this is a tradeoff rather than a regulatory difference. As the GAO notes, OTAs have one significant drawback: “[They] are not procurement contracts. DOD would still follow the FAR or another express authority to procure products successfully developed through an OTA.” Still, the OTA presents the DoD an (albeit temporary) avenue for technological acquisition that is more attractive to the private sector.


Prototype Acquisition

According to the Unit, DIUx has pursued the OT approach and developed its own “first-of-its-kind acquisition mechanism called the Commercial Solutions Opening, or CSO.[44] This “is the mechanism by which DIUx solicits solutions to problems that our warfighters are facing. Selected solutions are ultimately awarded other transactions for prototype projects." DIUx argues that its CSO produces “a process that is fast, flexible, and collaborative.” 


The CSO began “in June 2016, and by the end of FY16, three months later, awarded 12 OTs totaling ~ $36M. These awards took an average of 59 days to complete from a company’s initial submission of a solution brief to the awarded OT, with the first award being made in 31 days.” In addition to increased efficiency, the CSO provides “Negotiable payment terms,” and “All intellectual property (IP) rights are negotiable and the Government does not plan to own any IP.” Furthermore, “Capital is non-dilutive." 


As of April 2018, DIUx has a portfolio of 40 companies, including Adobe, Palantir, and ShieldAI. As noted above, DIUx is only one organization in the Department of Defense that facilitates the acquisition of new technologies; however the CSO Guide notes, “It is our hope that this guide will encourage other DoD Components to not only take advantage of the flexible nature of OTs, but to also be aware of the guiding principles used by DIUx as a possible starting point to design a process that meets their particular mission - and hence broaden the defense industrial base to include more nontraditional vendors.” As a result, other divisions of the Department of Defense can acquire new technologies and may follow similar or different approaches.