Keynote remarks delivered at the Canadian Aerospace Summit
Ottawa, Canada, November 16, 2016
It’s a pleasure to be in Ottawa for the Canadian Aerospace Summit organized by the Aerospace Industries Association of Canada.
This morning, I’d like to share some lessons learned in commercial acquisition, and some recommendations on how best to deliver innovation to the warfighter. There are two primary considerations I’ll be addressing today: Access to innovative technology and acquisition of that technology.
My hope is that the Canadian defense and commercial industries will benefit from the lessons learned in the U.S., and build upon them to create an environment where innovation and defense acquisition are synonymous.
For those of you who haven’t had the pleasure of working with Rockwell Collins, let me take just a minute to tell you a little about us.
We’re an industry leader in developing and deploying aviation and high-integrity solutions for both commercial and government applications. Our expertise in flight deck avionics, cabin electronics, mission communications, simulation and training, and information management is delivered by a global workforce and a service and support network that crosses more than 150 countries.
Rockwell Collins is known for bringing innovation to the aerospace industry. We not only develop innovative products, we also bring an innovative approach to delivering these products. Our commercial and defense businesses work seamlessly to share engineering talent, research and development, and, ultimately, products.
For more than 20 years, this approach has enabled us to bring leading-edge commercial technology to defense customers faster, more efficiently, and more cost effectively than if we were only a defense company. We deliver this innovation to global customers through subsidiaries such as Rockwell Collins Canada.
Our commercial and defense businesses work seamlessly to share engineering talent, research and development, and, ultimately, products
Rockwell Collins has deep roots in Canada’s manufacturing base. Our commitment to the region has led us to be a technology provider to the Canadian military and to export “made in Canada” solutions to allied countries. This investment in Canada has established our Ottawa-based operations as a center of excellence for our global ground fixed-site and maritime communications business.
It’s because of the work we do in Canada, that we are excited to hear that you may institute a program similar to the U.S. Small Business Innovation Research program. The SBIR program is highly competitive and encourages domestic small businesses to engage in Federal Research and Research-and-Development that has the potential to be commercialized. By including qualified small businesses in the nation’s R&D arena, access to and acquisition of high-tech innovation is stimulated.
Based on our experience of working with and alongside small businesses throughout the world, I recommend Canada include a provision in their small business program to allow small subsidiaries of larger companies to qualify as a type of small business.
Doing this will broaden the growth of new ideas and enable the full potential for bringing real innovation to the warfighter.
At present, all small foreign-owned subsidiaries are excluded from some of the benefits offered to small businesses in Canada. This is ironic, because it is this very affiliation with an industry-leading, global parent company that offers a distinct advantage in the marketplace.
While small businesses can certainly deliver innovation, they oftentimes lack the resources and market access to get their innovative products to market quickly. They need to partner with traditional primes, or work hard to become part of an OEM’s global supply chain, which can be facilitated by working with foreign subsidiaries of larger companies.
At times this can lead to small businesses becoming mere store-fronts or pass-throughs for global companies—little more than small-business smoke-and-mirrors. We believe that the small business should provide real value in order to realize the benefits of a small business plan.
While small businesses can certainly deliver innovation, they oftentimes lack the resources and market access to get their innovative products to market quickly.
So we believe that Canada should consider including foreign-owned subsidiaries—that are making significant investments in Canada—as part of their overall SBIR-like strategy. This will provide greater access to innovative, leading edge technology.
But while access to innovation is necessary, it is not sufficient.
For more than five years we have been engaged in an effort to convince the DoD that the crux of their quest for leading-edge military innovation is not better access to innovation, but, rather, is less burdensome acquisition of innovation.
The U.S. DoD has had access to the world’s leading commercial innovation since the mid-1990s, when Congress passed the Federal Acquisition Streamlining Act of 1994. Subsequently, Federal Acquisition Regulation Part 12 created a DoD acquisition framework that recognizes the value of commercial investment and technology for military application.
These reforms enabled companies such as Rockwell Collins to eliminate redundancies between our commercial and military business units. For example, our state-of-the-art cockpit displays developed commercially for the Boeing 787 were subsequently modified for military use on the KC-46 Tanker and internationally by Embraer for their KC-390 program.
This was good news. The problem, however, is that DoD acquisition of commercial innovation is increasingly challenging and has become an industrywide issue. In 2014, the Defense Business Board confirmed that the entire industry’s ability to provide the DoD with leading-edge commercial technology is under increasing threat.
… we have been engaged in an effort to convince the DoD that the crux of their quest for leading-edge military innovation is not better access to innovation, but, rather, is less burdensome acquisition of innovation.
Here’s why. U.S. regulations state that as long as a product is “of a type” that is currently commercial, then the DoD must classify the product as commercial. The military version of the commercial product can be designed a little differently, but if it is “of a type”—or similar to—then it is a commercial product. This distinction is very important, because few commercial items can be used by the military “as is” with no modification for their specific needs.
Everything works well as long as the military item is classified as commercial “of a type.” But when products are mistakenly classified as military items, the manufacturer is subject to overly burdensome cost-based accounting and the Government is responsible to pay for items such as obsolescence management and the addition of ongoing, commercially-developed innovation in that product.
In essence, this separates the military’s product from the commercial item and often requires the addition of a distinct, low-volume production line for a special customer. This limits the manufacturer’s ability to generate a return on R&D investments of tens- or hundreds of millions of dollars or more.
How many commercial companies would view this as an attractive business proposition? Moreover, it would be a dispiriting and needless loss if the independent and entrepreneurial personalities that establish innovative small businesses were to conclude that working with the DND and DoD comes with too narrow an interpretation of what is a commercial item.
If these concerns are not fully addressed throughout our industry, the DND will also have ongoing challenges with the acquisition of commercial industry innovation in an efficient and cost-effective manner—whether that innovation comes from a small Canadian business, Silicon Valley, or Cedar Rapids, Iowa.
I believe there are four areas in which steps can be taken to ensure the outreach to commercial Canadian and U.S. industry is a success:
Regulations … Recognize the broad definition of a commercial item—particularly commercial “of a type” products—and that prior commercial determinations should be allowed to carry forward. I’m pleased to say that we’ve made headway in this area. Rockwell Collins recently signed a Memorandum of Agreement with the DoD’s Defense Contracts Management Agency. The MOA clarifies a streamlined process to determine the commerciality of our products and what information should be provided to determine price reasonableness. So this is progress. But there is more to be done.
Training … Train the acquisition workforce in the meaning, importance, and intent of commercial acquisition.
Value … Keep the discussion away from restricting commercial profit and focus on the value received. For example, when the DND buys commercial items, it benefits from sunk R&D costs, ongoing obsolescence management, technology insertion, and further R&D expenditures, which are managed by the commercial company as a part of their business model. Companies and their shareowners deserve a return on this investment.
Intellectual Property … Protect intellectual property aggressively. Ensure the acquisition environment does not create barriers to the acquisition of commercial technologies, as companies invest, take significant risk to develop products, and then are made to give away their valuable IP to competitors.
Of these four areas, I want to spend the remainder of my time on intellectual property, or IP. In our digital age, a business’s retention of IP data rights is absolutely crucial.
It is well known that a key objective of a corporation is to maximize shareholder value. Clearly understood as crucial to maximizing shareholder value is the retention and protection of IP. Today, this concept is fundamental to the ongoing success of an enterprise. And growing more so.
But the necessity of protecting commercial IP goes beyond the company itself. Protecting commercial IP should be seen as equally crucial to the DND and DoD as national security imperatives for Canada and the U.S. Commercial IP enables a strong base of competitive businesses that deliver the innovation the DND needs. If this IP is shared with competitors—unwittingly or not— businesses lose their lifeblood, the competitive base shrinks, prices rise, and, inevitably, innovation suffers. It’s Business 101.
The current IP environment in the U.S. is creating barriers to the acquisition of commercial technologies. Companies invest, take significant risk to develop products, and then are being asked to give away their valuable IP to competitors.
Protecting commercial IP should be seen as equally crucial to the DND and DoD as national security imperative for Canada and the U.S.
What well-run company would give away its IP for no compensation? It would be a complete abdication of fiduciary responsibility. More to the point, what company would still be in business five years later if it did? So it’s no wonder that U.S. companies are aggressively pushing back against DoD demands for their IP.
However, every good argument has two sides, and we understand the government’s need for some IP. For example, U.S. Air Force Lt. Gen. Christopher Bogdan, the officer who runs the F-35 program, has reasonably stated, “… if I have an F-35 on an aircraft carrier out at sea, I can’t call on you to repair that part in Charleston, South Carolina. The Navy has to be able to repair that part on the ship. I need the technical data so I can build the repair capability.” 2
A fair and equitable solution may require some give on both sides of this issue. Here are some recommendations for the DND, that, if judiciously exercised, would go a long way toward enabling it to get the IP it needs:
Write Specific Contract Language … The DND should only get blanket rights if it is willing to pay for them. If the DND contracting officers and IP attorneys understand their programs well enough, they can determine early on what IP they are likely to require. Specific contract language can be written, and the DND will be more likely to get what it needs.
Budget for Data Rights … The DND does not own commercial data rights when it’s the business that has risked either all or a portion of its own R&D dollars to develop the product. Paying nothing for valuable IP rights is not a reasonable expectation. But the DND can budget for data rights up front. If commercial companies are expected to forego their aftermarket profits, they should expect reasonable compensation for doing so.
Train and Educate Contracting Officers and IP Attorneys … The DND must ensure that there is no disconnect between senior DND leadership and their contracting officers and IP attorneys. There cannot be an environment where senior defense leaders say they understand what IP means to a corporation’s future, yet contracting officers and attorneys insist on getting broad IP rights for free. This will discourage commercial companies and non-traditional defense contractors from doing business with defense customers.
Protecting commercial IP in defense programs must be seen as more than just a concern of industry. It’s a national security imperative. In order to deliver on this imperative, it’s important to understand that the objective of the corporation is to maximize shareholder value.
I have personally witnessed that when our customers grasp these two propositions, they find commercial industry waiting for them at center ice.
In closing, I want to emphasize that—despite my conviction that more needs to be done in the areas of commercial acquisition and IP data rights—it’s important to recognize that the DND, DoD, and our respective aerospace industries are all working toward the same national goal—to provide the best products for the warfighter at the best value for the taxpayer.
It’s this dedication that is creating an environment where innovation and defense acquisition are synonymous, and is ensuring that our warfighters have the innovative, leading-edge technology necessary to defend the freedoms we cherish.
Thank you very much.