Defense Firms Could Be Skeptical of Investing in Research

Despite a recent push by the Defense Department for companies to invest more in research projects, the Pentagon might continue having trouble getting firms to spend more of their own money for this, experts say.

Unless DOD creates “more compelling threats of potential lost business” so-called prime contractors -- such as Lockheed Martin, Boeing, Northrop Grumman, Raytheon and General Dynamics – will be less likely to boost research spending, a new report by analyst Byron Callan at Capital Alpha Partners has found.

Callan’s report comes just days after the Pentagon officially launched a project to find new technologies that it hopes will give it an edge on the battlefield decades from now.

The project, called the Long-Range Research and Development Planning Program, is akin to the so-called “offset strategies” that the Pentagon employed after World War II and again in the 1970s. The terminology refers to offsetting an enemy’s military with a technology. Deputy Defense Secretary Robert Work, the driving force behind the effort, has termed the latest effort the “third offset strategy.”

Nuclear weapons were considered the first offset and stealth and precision weapons were considered the second offset. So-called smart bombs, that could hit targets hundreds of miles away with pinpoint accuracy, have given the U.S. military a battlefield advantage for nearly four decades, but now other nations are catching up.

Work envisions a future where the U.S. military will have to fight from farther away with stealthy air, sea and ground weapons. Technologies, including biotechnology and robotics could all play into this concept as well as using different technologies in concert with one another.

“The key thing is, what is something that we believe that will give us a competitive advantage?” Work said during an interview at the Defense One Summit last week.

And other countries, including adversaries, will try to duplicate this strategy, Work said. The Pentagon’s first two offset strategies were “relatively hard to duplicate.” Not the case anymore as adversaries will be able to copy the way DOD uses the technology.

“We have potential competitors who are very, very good in this business and cannot only steal our [intellectual property], but can duplicate things very fast,” he said.

The prior offset strategy has lasted about four decades, but “it is unlikely the next one will last that long,” Work said.

Parts of the new offset strategy will classified and kept secret while others will be remain in the open.

“There are certain capabilities that might surprise us so much that we say: ‘Hey, we would not want to reveal this capability,’” Work said. He likened this to the development of the Air Force’s fleet of F-117 stealth fighters, which were battle-ready for years before they were publically acknowledged.

“We did not want our potential adversaries to know we had the capability,” Work said. And they didn’t until 1988.

Defense firms were integral to the last offset strategy and Pentagon acquisition chief Frank Kendall is trying to get companies to buy in to this latest round. Over the next six months, DOD leaders will build a “conceptual framework” for the new offset strategy.

( Related : Hagel’s Right-Hand Man on Acquisition Reform )

Defense leaders argue that companies that spend their own money on research projects will be better positioned to win contracts down the road when Pentagon spending rebounds from the current decline.

Companies with large commercial businesses oftentimes spend multiples more on research than pure defense companies. That’s because there is a far greater chance of recouping investments with a successful commercial technological breakthrough. That is not the case with defense technology.

So if Apple develops a new phone, it could sell hundreds of millions of them worldwide leading to billions of dollars in profit. If Lockheed Martin develops a new missile with sensitive military technology and DOD doesn’t want it, the company loses the money it cost to build the weapon since there are not as many sales options.

Even though the Pentagon has been spending less in recent years, defense firms have still been able to turn sizable profits by downsizing, reorganizing and expanding commercial business. DOD’s research spending has been slowing in recent years as well. But as Pentagon spending continues to fall, it will be difficult for DOD to convince companies to tap into profits to expand research spending.

Companies are not required to say how much they’re spending on research, but many have been more open about disclosing figures, particularly over the past year as DOD has challenged firms to step it up.

Lockheed officials have said the company would boost research project spending in 2014 to about $730 million, but that’s still well below the $822 million the company spent in 1999.

And leadership is key to keeping the military services focused on the effort, particularly making sure they budget money for research projects, according to experts.

Work called the effort a “very big priority” for Pentagon leaders of the remaining two years of the Obama administration. Despite budget constraints, Pentagon officials are trying to free up money for prototyping projects, Work said.

Defense Secretary Chuck Hagel in September put an emphasis on using prototyping as a way to keep company design teams fresh when there are fewer DOD funded research projects.