Copyright Breaking Defense
WASHINGTON — The defense industry needs to become faster, more agile and less risk averse, Defense Secretary Pete Hegseth said in an address to defense CEOs and military program officials today, warning that companies that fail to change will “fade away.” The Pentagon’s industrial base mirrors the department’s own bureaucracy, with the department’s risk-averse culture echoed in an industrial base that is not set up to “scale with urgency during a crisis” and is instead “content to wait for money” rather than moving out on producing desperately needed technology, the secretary said. “This relates to the whole industrial base, and most importantly, to the large primes that we do business with today,” Hegseth said. “These large defense primes need to change, to focus on speed and volume and divest their own capital to get there,” he said. “If we do that, the Department of War is, of course, big time supportive of profits. We are capitalists, after all. But if they do not, those big ones will fade away.” The highly anticipated speech came to dozens of defense CEOs, with attendees spanning from legacy defense primes and Big Tech firms like Google to venture-backed defense startups like Anduril and even a few small suppliers of energetics, according to a draft list of invited companies obtained by Breaking Defense. The list was first published by Defense One. Hegseth later said that his speech was not meant to shame specific companies or people in the audience, and repeatedly footstomped the need to work together with industry. “To the men and women of this department, both military and civilian, who work on acquisition and our industry partners, let me say this: You are not our enemies in this effort. You are our allies. You are Obi-Wan Kenobi. You are our only hope,” he said, referencing a character from Star Wars. “We will award companies bigger, longer contracts for proven systems, so those companies will be confident in investing more to grow the industrial base that supplies our weapon systems more and faster,” Hegseth said. System Changes Hegseth’s speech heavily referenced changes from a draft Pentagon memo laying out its acquisition reform plan, which Breaking Defense reported on earlier this week. The memo, which has circled Capitol Hill and the defense industry, stresses the need for the Pentagon to prioritize speed in the weapons buying process as well as repeatedly emphasizing commercial technology and private investment. The Pentagon will also prioritize the acquisition of commercial solutions that can be purchased more quickly, he said. “It means that we will be open to buying the 85% solution and iterate together over time to achieve the 100% solution. It also means there will be no non compliant bids,” he said, repeating twice that the department wants to “increase acquisition risk in order to decrease operational risk.” Among the biggest changes include: A shift from “Program Executive Offices” to Portfolio Acquisition Executives (PAE), where a single official is accountable for many interrelated programs, with the ability to shift cash among weapon systems based on performance or schedule considerations. Longer, four-year periods of performance for PAEs, with compensation tied to “capability delivery time, competition, and mission outcomes.” Contractual incentives and penalties for industry tied to whether companies deliver product on time. A stated preference for commercial or alternative contracting methods instead of defaulting to the more burdensome Federal Acquisition Regulations. Language meant to reduce the possibility of single sources and “vendor lock,” where the Pentagon is forced to continue to use the original contractor. That includes a directive to “maintain at least two qualified sources for critical program content.” The establishment of “portfolio scorecards” to measure the performance of programs in a given portfolio. The memo states that portfolios could be scored on elements like percentage of dual-use or commercial content among more traditional metrics like schedule, cost and performance. Not outlined in that memo but noted in Hegseth’s speech is a decision to shift the Defense Security Cooperation Agency (DSCA), the Pentagon office that manages Foreign Military Sales cases, out from under the department’s policy office to its undersecretary of acquisition and sustainment. One industry official told Breaking Defense ahead of the speech that the mood amongst executives was “excited,” with companies seeing the changes in the memo as an opportunity to make long-contemplated reforms. “A lot of the details are yet to be defined. So there’s certainly an opportunity for industry to engage to actually shape what some of these reforms are going to be,” the official said. However, the official acknowledged that the proposed reforms provide more opportunity for commercial and dual-use firms to increase their business with the Pentagon than the pure-play defense companies. In a statement ahead of the speech, L3Harris CEO Chris Kubasik said the company was aligned with Hegseth’s vision for a more agile defense acquisition system. “We’ve embraced and invested in commercial products and business models for decades, adopting open architecture, scaling production and rapidly fielding innovative technologies,” he said in a statement. “We are committed to expanding the commercial business model within a streamlined and less bureaucratic acquisition framework.”
