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Public Contract Law Journal

Public Contract Law Journal Vol. 49, No. 3

Leveraging the Department of Defense’s Other Transaction Authority to Foster a Twenty-First Century Acquisition Ecosystem

Douglas Donald Steinberg


  • Describes in detail the U.S. Department of Defense's "Third Offset Strategy" aimed at reestablishing technological military superiority over potential adversaries.
  • Explains why the U.S. Department of Defense's efforts to adequately equip the military for credible deterrence are in jeopardy.
  • Advocates for the use of Other Transaction authority as a work-around to the acquisition system to more effectively achieve credible deterrence.
  • Lays out proposed legislative reforms to the U.S. Department of Defense's OT authority.
Leveraging the Department of Defense’s Other Transaction Authority to Foster a Twenty-First Century Acquisition Ecosystem
Melodie Yvonne Ramey via Getty Images

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I. Introduction

Twenty-four years ago, the Third Taiwan Strait Crisis began when the People’s Republic of China initiated an aggressive series of military exercises aimed at intimidating Taiwan (also known as the Republic of China) in the leadup to Taiwan’s elections. The People’s Republic of China’s military held live-fire missile drills and mock amphibious assaults in an apparent threat to invade the island of Taiwan. The small island nation would have been overwhelmed in any military conflict with China. In response, President Bill Clinton sent two U.S. Navy Aircraft Carrier Groups, along with an amphibious assault ship, into the Strait of Taiwan. The massive show of naval power forced the Chinese military to back down, and the situation in the Strait of Taiwan eventually stabilized. The Chinese military recognized that the U.S. Navy’s capabilities significantly outmatched their own, even right off the coast of the Chinese mainland. In this crisis, the United States demonstrated that it could credibly deter aggression because of its military superiority.

Today, if a similar crisis arose, it is much less certain that the U.S. military could exercise the same degree of credible deterrence. The Chinese military has significantly improved its capabilities, especially in terms of missile technology, electronic warfare, and cyberspace. The Russian invasion of parts of Eastern Ukraine and annexation of Crimea further demonstrate the erosion of the U.S. military’s ability to credibly deter aggression. U.S. military superiority has waned in the decades since the Third Taiwan Strait Crisis.

This Note begins with an in-depth look at the “Third Offset Strategy,” the U.S. Department of Defense’s (DoD) effort to reestablish technological military superiority over potential adversaries. As part of the examination, this Note analyzes the evolving nature of threats to international security, specifically looking at the technological improvements to the Chinese and Russian militaries.

This Note next explains why the DoD’s efforts to equip the military for credible deterrence are in jeopardy. It examines the incompatibility of the current defense acquisition system with that of technological supremacy. The primary reason for this is the failure of DoD’s acquisition system to harness the capabilities of the U.S. commercial technology sector. Without the ability to procure the most cutting-edge weapons capabilities, the DoD will not be able to sustain its technological supremacy.

After thoroughly analyzing the problem, this Note advocates for the use of the DoD’s Other Transaction Authority (OTA) as a work-around to the acquisition system. An “Other Transaction” is a type of contract that allows the DoD to procure technology from the private sector without following the regulations in the traditional acquisition system. The analysis of OTA will center on a recent case in which the Army attempted to use OTA to procure a new cloud computing system, but had its OTA award nullified by the Government Accountability Office (GAO) because it violated the OTA statute.

Finally, this Note lays out proposed legislative reforms for DoD’s OTA. These reforms include eliminating restrictions for awarding follow-on contracts to Other Transactions. In addition, Congress should move away from micromanaging OTA through process-oriented regulations and instead establish an oversight framework for OTA based on resource allocation. The proposed reforms would enable DoD to more effectively partner with America’s commercial technology sector in support of the Third Offset Strategy.

II. The Third Offset Strategy

The DoD announced the “Third Offset Strategy” in November 2014. The Third Offset Strategy is a DoD initiative aimed at establishing military technological superiority over potential adversaries like China and Russia. It is centered on equipping the military with advanced technology that is developed primarily in the commercial sector. With the U.S. military engaged in the wars in Iraq and Afghanistan in the first decade of the twenty-first century, the DoD significantly tapered its efforts to maintain a technological gap over potential adversaries. Fighting insurgencies against technologically unsophisticated enemies like the Taliban necessitated reshaping the U.S. military and orienting it away from its traditional preparation for great power conflict. Investment in research and development for conventional threats, such as new types of missiles or unmanned vehicles, dwindled. However, over the past two decades, the Russian and Chinese militaries significantly upgraded their respective capabilities in missile technology and conventional ground forces. Once the DoD had diverted its resources away from the wars in the Middle East, it recognized the need to regain its conventional supremacy. The Third Offset Strategy was thus born.

What makes the Third Offset Strategy unique from the first two offset strategies is the nature of the global commercial market in relation to the defense market. Former Secretary of Defense Ash Carter characterized the erosion of the U.S. technological advantage as deriving ”not from adversaries’ numerical superiority or superior volumes of investment, but from the increasing global and commercial nature of the innovation environment and the increasing applicability of commercial technologies to military operations.” In the defense market landscape since the Second World War, traditional contractors have largely outpaced the technological advancements of the commercial sector as the Internet and Global Positioning System (GPS) were all, to a large extent, products of DoD research and development funding. But technological innovation is no longer led by military funding, and today’s private technology companies have largely outpaced the capabilities of the traditional defense industrial base. The 2018 National Defense Strategy, a document that outlines the grand strategic vision of the DoD, describes that “[t]he drive to develop new technologies is relentless, expanding to more actors with lower barriers of entry, and moving at accelerating speed.” Thus, the DoD must identify a means of adapting its acquisition system to harness the capabilities of the private sector.

A. The Necessity of the “Third Offset Strategy”

This section explains why the Third Offset Strategy is a crucial element of the future of U.S. national security. First, it will illuminate how potential adversaries like Russia and China have modernized their military capabilities, and how those capabilities pose a threat to U.S. superiority. Next, this section will explain how commercial technological innovation has matched, and in many ways surpassed, the defense industry establishment. This section concludes by arguing that the DoD must look to the United States’ commercial technology sector, including nontraditional defense contractors, to effectuate the Third Offset Strategy. In the words of the scholars Maura McQuade and Andrew Hunter:

History demonstrates that technological superiority may not always win wars; however, refusal to adapt to changing technology will almost always lose wars. Future success is therefore dependent on our ability to field systems, which can quickly adjust to uncertainties in threats, nimble adversaries, rapidly emerging (and obsolescing) technologies, and new relationships between the domains of war.

1. There Are New Types of Threats to International Security for Which the DoD Is Unprepared.
The U.S. military has grown used to enjoying dramatic technological advantages on the battlefield over the past half century. However, in the event of a conflict with a technologically advanced foreign state, the U.S. military would likely find these technological advantages significantly diminished, or gone altogether. Foreign militaries have acquired many of the conventional capabilities that the United States pioneered in the “Second Offset Strategy,” especially precision munitions and advanced sensors. In addition to conventional military threats that have followed U.S. innovation, novel security threats abound, particularly in the electronic and cyber realms, as noted in the most recent National Security Strategy, a guidance document published by the White House:

[D]eterrence today is significantly more complex to achieve than during the Cold War. Adversaries studied the American way of war and began investing in capabilities that targeted our strengths and sought to exploit perceived weaknesses. The spread of accurate and inexpensive weapons and the use of cyber tools have allowed state and non-state competitors to harm the United States across various domains. Such capabilities contest what was until recently U.S. dominance across the land, air, maritime, space, and cyberspace domains. They also enable adversaries to attempt strategic attacks against the United States — without resorting to nuclear weapons — in ways that could cripple our economy and our ability to deploy our military forces.

U.S. warfighters may have to contend with tactical disadvantages that have long seemed relegated to past conflicts. For instance, not since the Korean War have U.S. ground troops been subjected to an effective attack from enemy aircraft. If a conflict broke out with Russia or China, U.S. troops would undoubtedly encounter such an attack. Comparably, U.S. troops have often enjoyed information superiority in combat zones due to use of unmanned aerial vehicles (UAVs or drones) and other technologies. However, in a conflict with a modern military, the adversary may not only be able to limit the availability of U.S. drones, but also will bring their own UAV capabilities to the fray. The evolving nature of the threat environment underscores the DoD’s need to regain military technological superiority.

a. China and Russia Have Improved their Military Capabilities and, in Many Areas, Now Match or Surpass the Capabilities of the U.S. Military.

While the U.S. defense acquisition process stumbles in acquiring leading technology, near-peer competitors like Russia and China do not self-impose the same bureaucratic hamstrings. Russia and China’s military capabilities have now matched (and may soon surpass) those of the United States in key areas. The Russian military has established a potent regional threat to NATO in Eastern Europe. Specifically, the Russians have developed a regional advantage in “integrated air defense, long-range artillery, anti-armor munitions, and electronic warfare.” These technologies pose a direct threat to the DoD’s doctrine and force structure, which is almost certainly why the Russians worked to develop them. According to Army Major General Eric Wesley, “some analysts have said that of 10 major capabilities that we use for warfighting, that by the year 2030, Russia will have exceeded our capability in six, will have parity in three, and the United States will dominate in one.” The conflict in Ukraine provided a chance for the world to observe Russia’s capabilities.

In a 3-minute period … a Russian fire strike wiped out two mechanized battalions [with] a combination of top-attack munitions and thermobaric warheads…. If you have not experienced or seen the effects of thermobaric warheads, start taking a hard look. They might soon be coming to a theater near you.

In addition to Russian military improvements, the Chinese military has also dramatically enhanced its capacity and capabilities. According to James Stavridis, a retired four-star U.S. Navy Admiral:

Chinese hypersonic missiles, satellite targeting, and quiet diesel submarines can threaten U.S. warships within 800 or so miles of the Chinese coast. As China’s technology and defense spending increase over the coming years, this narrow U.S. advantage in maritime and air forces will reduce further…. [China and the United States] have a roughly equal level of capability in offensive cyber tools. The Chinese have shown the ability to blend commercial, military and political objectives seamlessly in cyberspace, and are more advanced than the U.S. in developing a dedicated cyber force. Their PLA Cyber Unit 61398 is well-known for its military operations — which led the U.S. to indict five officers in 2014 for their attacks on private U.S. companies.

Looking again at the Third Taiwan Strait Crisis example in the introduction, it is clear that these improved Chinese military capabilities pose an existential threat to the United States’ ability to credibly deter aggression. If the Chinese were able to neutralize U.S. naval power through the hypersonic missiles, satellite targeting, and submarines that Stavridis assessed, then the United States would not be able to intimidate China in a fourth Taiwan Strait crisis.

b. The Unique Threat of Anti-Access/Area Denial (A2/AD) Systems

While the Third Offset Strategy is aimed at generally improving the DoD’s technological capabilities as a whole, it is also specifically focused on the challenge posed by anti-access/ area denial (A2/AD) weapon systems. A2/AD systems are designed to prevent adversaries from projecting military power into a region by creating an impermissible operating environment. The U.S. military is structured around projecting power into foreign regions, and the military heavily utilizes aircraft, surface warships, submarines, and other mobile platforms. A2/AD systems like naval mines, anti-aircraft missiles, anti-shipping missiles, electronic warfare platforms, and cyber warfare platforms have the potential to neutralize U.S. military power and are systems that the Third Offset Strategy is intended to counter. When former Secretary of Defense Chuck Hagel announced the Third Offset Strategy, he listed priority areas for investment. These areas included “robotics, autonomous systems, miniaturization, big data, and advanced manufacturing, including 3-D printing.”

A prime example illustrating the imperative for the Third Offset Strategy is the recent introduction of the new Russian S-400 air defense system, a mobile missile launcher designed to shoot down enemy aircraft. The S-400 is a quintessential example of an A2/AD weapon system, and it represents a dramatic technological improvement in Russian air defense capabilities as it has a 200-mile range, autonomous tracking system, advanced electronic warfare package, and may be capable of tracking U.S. stealth aircraft. Its lethality, combined with its long-range, poses a serious threat to any aircraft. The S-400 is so capable that U.S. warplanes in Syria, even those that have stealth capabilities, alter their flightpaths to steer well clear of Russian air defenses. When deployed along Russia’s border with European countries, the S-400 creates a massive area (that includes airspace over NATO countries and Ukraine) where any U.S. aircraft would be at extreme risk in the event of a conflict. If an armed confrontation were to take place, NATO forces are trained to depend on the airpower that the S-400 denies. A2/AD systems pose a direct and existential threat to the U.S.’s ability to deter aggression.

c. Commercial Technology with Military Applications Has Proliferated in the Global Market, Enabling Modern Combatants to Rapidly Acquire Leading Military Technology.

A significant element of the changing international security environment is the role played by commercial technology. When commercial technology with military applications proliferates into the global market, combatants on modern battlefields can acquire leading military capabilities without having a sophisticated supply chain. For example, as the U.S. military fought against ISIS in Iraq and Syria over the past several years, they found that the terrorist group was able to procure commercial drones and employ them on the battlefield. In at least one instance, ISIS has been able to rig an explosive device onto a commercial drone and use it to attack U.S. soldiers in Syria. The U.S. Army quickly realized that it lacked the capability to effectively shoot down or neutralize ISIS’s drones. Since encountering this novel threat in Iraq and Syria, the Army has prioritized the development and acquisition of a means to deny adversaries the use of commercial drones on the battlefield.

B. The DoD Must Engage with the Commercial Technology Sector to Address the New Security Threats.

The Pentagon is in serious need of new technologies to address the threat posed by the S-400 and comparable A2/AD systems in order to rebuild America’s deterrent. The U.S. commercial high-tech sector may well have the ability to equip the DoD with the technology necessary to defeat threats like the S-400. Technology communities like those in Silicon Valley, Boston, and Austin regularly produce breakthroughs that are likely applicable to the Third Offset Strategy. In fact, a congressionally mandated DoD report recently called for Congress and the DoD to find new ways of enabling more rapid maturation, acquisition, and fielding of leap-ahead technologies developed in the commercial sector. But the DoD’s acquisition process in large part effectively prevents the military from harnessing the power of these communities to adequately equip the military against modern threats.

The DoD is likely unaware of many possible solutions that exist in the commercial space. This unfamiliarity highlights the need for more “push” solutions from innovative companies as opposed to “pull” solutions originating from the military. According to the Center for Strategic and International Studies, “the Army has struggled to define what it wants and needs.” The military cannot be expected to ask industry for solutions that it does not know exist or are even technically feasible.

[T]echnology proliferation has made potential state and nonstate adversaries increasingly capable; shrinking the U.S. overmatch advantage and in some cases surpassing it …. [T]he Army’s modernization strategy should explicitly set aside room in the Program Objective Memorandum (POM) for quickly developing, prototyping, and deploying capabilities in response to emerging threats and opportunities. Because the Army’s technology pipeline currently has serious gaps, some of these capabilities may need to leverage developments undertaken outside of the Army’s technology development process by adapting mature designs to meet the Army’s needs.

The implications of DoD acquisition policy for the Third Offset Strategy are immense. Near-peer competitors such as Russia and China are not wasting time and resources on the regulations that cripple DoD’s engagement with the commercial technology sector. The DoD cannot afford to lag behind on Third Offset technologies like hypersonic missile tech. The risk of DoD disengaging from some of the nation’s best companies is a critical threat to national security.

1. Executing the Third Offset Strategy Through Modular Systems: Payloads as Opposed to Platforms

Success in executing the Third Offset Strategy depends largely on DoD’s engagement with small and mid-size commercial technology companies that are not traditional military contractors. Commercial technology companies are vital to the success of the Third Offset Strategy because they can provide incremental upgrades to existing military platforms. For example, while a small Silicon Valley technology company is probably not capable of offering a new class of warships for the Navy, it might be able to offer a better software package for the weapons or sensors that are currently employed by Navy warships. This is what an incremental upgrade offers: the rapid improvement of military capabilities.

The DoD recognizes the importance of incremental upgrades to its future capabilities, which is demonstrated through its commitment to requiring modular systems in its new acquisition programs. A modular system is a system comprised of separate components that can be removed, improved, and replaced without compromising the whole. For example, in a military aircraft with a modular design, an engineer could remove the aircraft’s engine, improve the engine design, and then replace it. The result is a platform (in this example, the aircraft) that is perpetually capable of employing new cutting-edge technology.

The DoD’s two most modern combat aircraft illustrate the importance of modularity for long-term sustainability. Lockheed Martin designed the F-35 “Lightning II” Joint Strike Fighter with modular architecture. In 2015, the Air Force awarded a contract to Northrop Grumman to build a new strategic bomber, named the B-21 “Raider.” The Air Force decided to require modular, open systems on the new bomber to allow for incremental upgrades over the bomber’s lifespan. Tech companies will have the ability to work on improving many different aspects of the aircraft, including the software, sensors, engine, weapons payload, and electronic warfare package. Because of their modularity, the F-35 and B-21 aircraft have the potential to serve as platforms that innovative technology companies can continuously improve and adapt to new threats. But that promise of a continually upgrading platform rests on the ability of DoD to procure those upgrades from the commercial technology sector.

III. Why the Defense Acquisition Process Fails Commercial Technology Companies

The DoD’s traditional acquisition system fails to provide an adequate structure for engagement with the commercial technology sector. This failure occurs in three areas: DoD’s process for identifying its requirements, DoD’s system for acquiring those needs from industry, and the separation of the buying organization (DoD) from the funding organization (Congress). Taken together, these shortcomings make it nearly impossible for DoD to market itself as a good business partner for commercial technology companies.

A. Identification of Technology Requirements and Capabilities: The Joint Capabilities Integration and Development System

The DoD’s system for identifying new technology or equipment needs is called the Joint Capabilities Integration and Development System (JCIDS). Before a contracting office may begin to procure hardware or software offering a new technological capability, it must gain approval from its service branch and from the Pentagon. The JCIDS applies to situations where the DoD needs to do more than simply buy a good or service, but rather must design, engineer, construct, test, deploy, and sustain a new system from scratch.

JCIDS entails a DoD contracting office gaining service branch-wide approval for a new requirement or capability. For example, in the Army, the contracting office responsible for procurement for the infantry (PEO Soldier) would have to gain approval for a new capability from the PEOs responsible for helicopters, artillery, transportation, communication, and armor. The process is important for the service branch’s interoperability — all of the different elements need to work together to survive. Yet the approval process often languishes, especially for lower-profile products, and it typically takes over eighteen months to complete.

Once the contracting office has gained service-wide approval for the new capability, the Office of the Secretary of Defense at the Pentagon would need to approve the new program and provide for it in the Presidential Budget Request. For example, the Army’s Deputy Chief of Staff for Operations and Plans (G-3)’s Force Development Directorate has oversight for new capabilities. Approval frequently languishes within the Pentagon at this phase. Eventually, after a multitude of approval signatures, the project finally makes it into the next year’s proposed National Defense Authorization Act (NDAA) as an individual line item.

B. Measuring Progress in Acquisition: The Milestone System in the Acquisition Process and How It Fails Technology Companies

As the JCIDS identifies a requirement or capability, the contracting office moves in concert with the contractor to build and procure that capability. To acquire a new system or platform from the defense industry, the DoD’s defense acquisition system utilizes a “milestone” structure consisting of three different steps: Milestones A, B, and C. This milestone structure is anathema to commercial technology companies for a myriad of reasons. The primary reason is that the DoD is incapable of making a good business pitch to private companies in a timely manner (especially at the completion of the prototype phase).

At Milestone A, the contracting office, or PEO, identifies the technology and provides research and development funding to mature it. Once the contracting office has adequate proof of concept, it may proceed to Milestone B, or the prototyping and testing phase. After the successful completion of a prototype, the contracting office may then make a decision regarding a full production contract, which is Milestone C. The acquisition community often refers to the gap between Milestones B and C as the “valley of death” because of how it leaves the contractor in a precarious financing position. Post-Milestone B, the contractor must simply wait for the Milestone C decision, which can take months or even years. During that indefinite wait, smaller contractors often have few options for revenue, especially if they are restricted from selling their product elsewhere by the DoD’s intellectual property regulations in the DFARS. The JCIDS largely frustrates the commercial technology sector’s efforts to engage with DoD. Two defense policy analysts went so far as to mockingly brand JCIDS as the “Joint Cutting-edge Ideas Death Sentence” because of the process’s negative impact on technology acquisition.

C. The Uncertainty of the Annual Congressional Funding Process

The congressional funding process further exacerbates the problem of delays and uncertainty in defense acquisition for commercial technology companies. Once a contracting office has made a decision to move to Milestone C with a contractor, Congress would need to authorize and appropriate the funding for the new proposed line item in the NDAA. In recent years, political instability has meant that the NDAA is almost always delayed by months. Moreover, a lack of political support can present problems for a new company offering a brand-new contract, particularly in the absence of aligning parochial interests for a member of the congressional armed services or appropriations committees. For example, when the startup technology company Prox Dynamics was in the process of gaining congressional funding for its new handheld military unmanned aerial vehicle, it wisely chose to base its production in the district of the House Appropriations Committee Chairman. Although few insiders would admit it, the traditional acquisition system affords advantages to companies that are politically savvy. It is unlikely that many commercial technology companies would have the institutional capacity to conduct a lobbying campaign so most companies would be at a disadvantage in the acquisition process.

D. A Comprehensive View of the Acquisition System Through the Lens of a Technology Contractor: Protonex

A small technology company in Massachusetts called Protonex provides an example of the obstacles faced by a startup technology company engaging with the DoD. The company designs and manufactures advanced power solutions for military use. The power adapters allow soldiers in the field to plug any type of power source into any type of battery or device. They can save a soldier or Marine from carrying up to thirty-five pounds of gear in the field because they eliminate the need for specialized batteries — an amount of weight reduction that dramatically simplifies and economizes battlefield logistics. The fuel cells are designed to power unmanned aerial vehicles.

The Army quickly realized the potential advantages of Protonex’s equipment, and after successful concept demonstrations, research and development grants, and prototyping, the contracting office dedicated to procuring equipment for the infantry announced plans to award Protonex a full production contract. Although it seemed like the company’s first bulk sales were within reach, more than seven years would go by before full production would begin.

Like many other non-traditional contractors, Protonex found that winning a full production contract (the Milestone C decision) entailed navigating a nightmare of roadblocks. In the time between the awarding of the contract and actually delivering products to the Army, Protonex had to figure out how to scrape together enough money to survive as a business. Eventually, Protonex decided that the only way to make payroll was to sell equity to a bigger company. A Canadian power source company, Ballard Systems, acquired Protonex in its entirety after three years of limbo. Thus, only by the saving grace of windfall foreign capital was Protonex able to stay in business and fulfill its contract to equip U.S. soldiers. Nonetheless, one imagines that the DoD would prefer not to be reliant on Canadian cash in order to equip its soldiers.

As a result of the drawbacks of the traditional contracting process, nontraditional defense technology companies face grim options for choosing a path forward. The Center for Strategic and International Studies found in a recent study that small business and new defense market entrants suffer from dismal survival and graduation rates. Furthermore, the DoD’s intellectual property restrictions on contractors are completely anathema to the private sector’s intellectual property practices.

E. Analysis: Few Good Options for Commercial Technology Companies in Engaging with DoD

Small and mid-size defense technology companies face a dismaying menu of options in engaging with the DoD acquisition process. These businesses generally must choose from one of three options. First, the companies can rely on alternative sources of business to supplement their engagement with DoD. Companies choosing route can find it extraordinarily difficult to acquire sufficient capital to bridge funding gaps. This is a significant gamble for many technology companies, as a strong possibility exists that they may simply run out of cash and fold as a business prior to the commencement of their full production contract at Milestone C.

Second, contractors may choose to be absorbed by larger traditional defense contractors. Protonex chose this option and sold most of its equity to the larger traditional defense contractors, who afford them the capacity to survive long gaps in funding. This reduces the overall competitiveness of the defense industrial base, contributing to the consolidation of market share in the hands of only a few companies.

Third, many technology companies avoid contracting with the DoD altogether. In the worst-case scenario for the defense industrial base, many innovators choose to avoid the DoD as a business partner, as they are completely deterred by the slow and uncertain sales cycle, intellectual property restrictions, and the interminable frustration that it entails.

IV. Going Outside the Traditional Defense Acquisition System in Pursuit of the Third Offset Strategy

This section looks at some of the methods that contracting officials have to move outside the traditional DoD acquisition process. It then analyzes their utility for the Third Offset Strategy. This section culminates with an analysis of Other Transaction Authority, which is a promising venue for DoD engagement with commercial technology companies.

A. Existing Separate Acquisition Funds

This section examines the numerous existing venues through which acquisition officers can bypass the regular acquisition process. Congress has set up several funds within the DoD dedicated to specific procurement purposes and with their own sets of governing rules and regulations. Two general types of funds exist: those that are administered from the Pentagon across the entire DoD, and those that are operated within a specific service branch (like the Army or the Marine Corps). Some commentators look to these acquisition vehicles as a means to fill in the proverbial gaps in defense technology acquisition.

1. DoD-Wide Acquisition Funds

DoD-wide acquisition funds include the Joint Rapid Acquisition Cell (JRAC) and the Rapid Innovation Fund (RIF). The JRAC was established during the Iraq War as a workaround for the regular defense acquisition process in order to address the Improvised Explosive Device (IED) threat faced on the battlefield. The JRAC successfully equipped the Army and Marine Corps with new devices to counter the threat in a relatively short period of time. However, the JRAC is focused on major acquisition programs that address urgent needs. It is not an optimal vehicle to improve DoD’s business relationship with small and midsize defense tech companies.

Funding for the RIF totaled $250 million in FY 2016 with multiple participating vendors, the vast majority of which were small businesses. Yet the RIF can issue no more than $3 million per vendor per year. Moreover, the RIF cannot contract with companies on more than a twenty-four-month basis. The RIF’s fundamental problem is a lack of scale in terms of both resources and timeline. Small and midsize defense technology companies need cash flow, and they rely on rapid innovation, and the government purchasing apparatus takes too long; additionally, small businesses would likely struggle to make long-term plans based on a $3 million, two-year contract. To its credit, the RIF is focused on leading small and midsize defense technology firms. However, it can only serve as a supplement to these firms from a financial standpoint and does little to accelerate the transition to a full production contract. Therefore, the RIF generally fails to address the main obstacles for non-traditional contractors.

2. Service Branch-Specific Acquisition Funds

Analogous programs at the service-branch level are similarly ineffective at addressing the roadblocks to non-traditional contractors. An example of a service-branch level acquisition fund is the Army’s Rapid Equipping Force (REF), which seeks to harness current and emerging technologies to provide immediate solutions to Army units that face imminent deployment. The REF is designed to increase the industry’s rate of innovation in support of the Army. The REF works directly with units in the field to identify urgent requirements ranging across the entire spectrum of aspects of warfare. The Army modeled the REF to equip operational forces with solutions in order to reduce operational capability shortfalls, increase soldier safety, and reduce overall operational risk.

Service-branch-level funds are often born to address urgent needs in military operations, and are therefore narrow in either size or scope. The DoD planned to allot less than $6 million to the REF’s budget in 2019, which is probably not enough to put a dent in the overall acquisition system.

3. Limitations of Separate Acquisition Funds

The biggest shortcoming of the rapid acquisition programs is that they struggle to make a good business proposal to small and mid-size defense technology companies. These programs are able to make small targeted purchases of technology on an annual basis to supplement the regular acquisition system. However, the programs do not have the resources or authority to utilize economy of scale, nor can they accelerate companies through the milestone system for the regular acquisition process. Companies that are struggling through the gap between Milestone B and Milestone C can only look to rapid capabilities offices for limited funding options, rather than as a longterm solution to the acquisition. This gap completely fails to address the long-term planning issue, one of tech firms’ most significant concerns with the regular defense acquisition process.

B. Defense Innovation Unit, Experimental (DIUx)

To execute the Third Offset Strategy, the DoD set up an organization called the Defense Innovation Unit, often referred to as DIUx. DoD intended for DIUx to serve as a conduit between the traditional defense industrial base and the commercial high-tech sector. By establishing small offices in Silicon Valley, Boston, Austin, and Washington, D.C., DIUx staffers would identify potential non-traditional contractors and work to engage them with the defense industry. DIUx had several tools to effectuate this plan. It conducted substantial outreach to various startups and more mature companies to educate them about opportunities in the defense marketplace. These efforts would foster better communication about the needs of the military and the capabilities of the high-tech industry. DIUx also carried its own small budget (which was roughly $71 million in Fiscal Year 2019) for doling out research and development grants.

But to achieve its mission of furthering the Third Offset Strategy, DIUx needs to not only conduct research and liaise with businesses, but also to eventually get its portfolio companies’ products to market. While it can issue small contracts and provide unparalleled networking opportunities, DIUx is not endowed with the authority to entirely skirt the arcane, byzantine acquisition process with which private technology companies struggle. The next section of this Note explains how DIUx endeavored to utilize the DoD’s Other Transaction Authority to equip the Army with leading technology.

C. DoD Use of Other Transaction Authority (OTA) Could Help Solve the DoD’s Third Offset Acquisition Policy Problem.

Other Transaction Authority is a contracting method that the DoD can use for research, prototyping, or follow-on production to a prototype. By using OTA, DoD contracting officers have discretion in entering into contracts that the normal acquisition process does not permit. If DoD contracting officers could use OTA to engage with commercial technology companies, then they could avoid many of the obstacles inherent in the traditional acquisition process. This section explains the legal basis for OTA, then examines a recent attempt by the Army to use OTA to develop and procure a new cloud computing system. The failure of this attempt by the Army to use OTA informs this Note’s proposed statutory reforms to OTA.

1. Background on OTA

“Other Transactions” are legally binding instruments separate from procurement contracts, grants, and cooperative agreements. Congress originally crafted OTA to give NASA a method to rapidly procure leading technology to compete with the Soviet Union in the space race. When using other transactions, the government is not bound by the federal laws and regulations that usually apply to the government contracting process. Section 815 of the 2016 NDAA repealed the old Section 845 and in its place codified the DoD’s authority to use OTAs for prototype projects at 10 U.S.C. § 2371b. The statute provides for OTAs to be used for research prototyping. “OTA is not new, but the recent advent of using OTA for follow-on production contracts, combined with increased government interest in using creative alternatives to traditional procurement procedures, has made OTA agreements particularly popular in recent years.” A Production OTA (P-OTA) allows the military to scale the production of a successfully prototyped technology without entering into a full-scale federal contract. “Between April 2015 and March 2017, the offices facilitated 25 arrangements using OTAs between companies and D[o] D organizations worth $48.4 million.”

Because OTA allows the DoD to circumvent the traditional acquisition process, it has the ability to serve as a major conduit between the DoD and the commercial technology. DoD contracting offices could invoke their OTA to do away with the milestone system of JCIDS and commit to full production contracts with technology companies much earlier in the process.

2. GAO’s Oracle America Decision: Casting Uncertainty on DoD Use of OTA

The potential for the military to utilize OTA’s prospects of disrupting the traditional acquisition process, specifically through DIUx, hit a major roadblock because of a GAO opinion in 2018. The Army’s most significant attempt to leverage DIUx for new technology came in 2016, when it awarded a P-OTA to REAN Cloud LLC for a total of $950 million for a cloud storage system for the Army’s Network Enterprise Technology Command. A modern cloud network could allow the DoD to fully exploit the potential of artificial intelligence, deep learning, and other technologies of the future in a major step towards reestablishing America’s military technology superiority. This was the first Production OTA and the first major contract award in DIUx’s short history. In May of 2018, the GAO weighed in after a bid protest, declaring that the transaction was an overstep of the Army’s authority to circumvent the traditional contracting process.

Although the GAO’s decision is technically only advisory, as it is not a judicial entity, federal courts are generally deferential to the GAO’s findings regarding the technical aspects of contracting. Furthermore, the GAO essentially established that an interested party can successfully file a bid protest for an “other transaction.” GAO determined that Oracle had standing in its protest, even though it was not an actual bidder for the P-OTA originally awarded to REAN. This further diminishes the power of the DoD to utilize OTA free from the normal restrictions in the government contracting process.

On the merits, the GAO found that the Army overstepped its authority to use OTA in awarding the program to REAN in two ways. First, the GAO found that “the Army only has the authority to award a follow-on P-OTA if it was provided for in the prototype OTA.” The original solicitation for the prototype OTA only allowed for the possibility of a follow-on order, but did not necessarily provide for one. Second, the GAO found that the Army must have a fully completed prototype before it may award the follow-on contract. Although REAN’s prototype was complete with respect to the initial solicitation, the Army made several modifications to the requirements of the prototype prior to the award of the final P-OTA.

3. Impact of the GAO’s Oracle America Decision on the Future of the DoD’s OTA Use

The GAO’s decision does not completely slam the door on the DoD’s ability to use OTA to circumvent the traditional contracting process; however, it does significantly restrict the DoD’s flexibility in utilizing OTA. The Oracle decision settled the question of whether OTA agreements are subject to GAO review, dispelling the notion that the government might avoid bid protests through OTA. Because of the lack of frequency of OTA litigation (either through the Court of Federal Claims or the GAO), the government will likely hesitate to use OTA where the stakes are high. The DoD would run the risk of having a significant program, like the cloud program thrown out by the Oracle America decision, cancelled because it misinterpreted or overlooked the law governing OTA. In a report on the Third Offset Strategy, the Center for Strategic and International Studies identified the pervasive fear of litigation amongst contracting officers:

Su Jin Chang, a Principal at the Center for Acquisition Management Sciences in The MITRE Corporation, cited a related issue: government [C]ontracting [O]fficers are incentivized to be risk-averse because they are measured by a standard of “perfect is better than protest.” Lowering cost and avoiding protest are more important than speed of delivery. Even in cases when [C]ontracting [O]fficers are willing to risk using innovative acquisition techniques, Ms. Chang continued, they often avoid spreading knowledge of the technique, because they feel like they have “dodged a hammer” in not getting in trouble for sticking their necks out.

The GAO’s holding that the government failed to provide for a follow-on production order before REAN completed its cloud prototype also hamstrings the DoD’s flexibility in utilizing OTA. By adopting a narrow definition of a “completed prototype,” the GAO will likely significantly extend the amount of time in between a company’s initial engagement with DoD and it receiving a full production contract for its product.

V. Solution: Amending DoD’s OTA Statute

Even in the wake of the GAO’s Oracle America decision, OTA can still form an integral part of effecting the Third Offset Strategy. The potential benefits are immense. Through OTA, the DoD’s ability to bypass the processes and regulations inherent in the traditional acquisition process offer an unparalleled avenue to getting high-tech solutions into the defense market. But, if Congress were to loosen some of the restrictions on the DoD’s use of OTA, then the Pentagon would likely be significantly less reticent to exercise it. This Note proposes amending the U.S. Code to eliminate many of the restrictions that Contracting Officers face when executing OTA. In addition, this Note advocates for Congress to shift towards an oversight system for OTA that is based on the amount of money each service branch spends on Other Transactions. In Appendix A, this Note lists the statutory amendments that would be required to effectuate the proposed reforms.

A. Amend the Statute in Order to Give the DoD the Ability to Make a Good Business Proposal to Leading Technology Companies.

Congress should amend the language in 10 U.S.C. § 2371b to provide statutory authority for the use of OTA for full production contracts. There are three major elements for an effective expansion of OTA to support the Third Offset Strategy. First, Congress ought to articulate a broad definition of “prototype” sufficient to provide certainty to Contracting Officers in selecting contractors. Second, Congress should eliminate the competition requirements for follow-on contracts to a P-OTA. Third, Congress should eliminate the need for the Contracting Officer to demonstrate a completed prototype prior to awarding a follow-on contract. The goal of these reforms is to make OTA a more robust and secure tool for DoD acquisition officers to develop and procure leading technology from the private sector.

1. Adopt a Broad Definition of the Term “Prototype” in the OTA Statute

Congress should adopt a definition of “prototype” that allows DoD Contracting Officers to target any technology that could support the Third Offset Strategy. The current statute providing for OTA fails to define the term “prototype,” creating uncertainty regarding the scope of OTA. This Note proposes defining a prototype as: “any novel application of technology that could serve to improve the capabilities of the Department of Defense.” This definition is intentionally vague, as it gives contracting offices extensive flexibility in utilizing OTA. It may seem contradictory to advocate for a nebulous definition in order to provide clarity. However, if it adopted the definition that this Note proposes, then Congress would effectively ensure that Contracting Officers could utilize OTA on any technology project without leaving the scope of the statutory authority.

2. Eliminate Restrictions for Issuing Non-Competitive Follow-On Contracts to Other Transactions

Congress should also remove the restrictions for issuing a non-competitive follow-on contract. According to the statute,

A follow-on production contract or transaction provided for in a transaction under paragraph (1) may be awarded to the participants in the transaction without the use of competitive procedures . . . if—
(A) competitive procedures were used for the selection of parties for participation in the transaction; and
(B) the participants in the transaction successfully completed the prototype project provided for in the transaction.

As shown by the GAO’s opinion in Oracle America, the competition requirement creates prohibitive uncertainty for Contracting Officers seeking to utilize the full potential of OTA. There is no bright line rule for what the GAO would consider “competitive”; thus there is no way for Contracting Officers to be sure to avoid a bid-protest if they issue a follow-on contract to an initial prototyping Other Transaction. By eliminating the requirement for a competitive selection process in order to award a follow-on contract, DoD contracting officials would be able to procure a solution as soon as possible.

In addition to eliminating competition requirements for follow-on contracts, Congress should also eliminate the need in 10 U.S.C. § 2371b(f)(2)(B) for a completed prototype for issuing a follow-on contract. As seen in the Oracle America case, if a contractor has only partially completed a prototype (even for a software project), then the GAO will not allow the contracting office to award a follow-on production contract. By eliminating the need for a completed prototype, Congress would empower DoD Contracting Officers to make good business proposals to contractors at any point in the development process.

3. Establish a New Set of Constraints for OTA Based on Total Dollar Amount per Service Branch

In lieu of the restrictions on DoD’s OTA that this Note advocates eliminating in the preceding section, Congress should establish constraints that are based on the amount of money that the DoD spends on Other Transactions. Instead of regulating the award of follow-on contracts to Other Transactions based on whether there has been a completed prototype or adequate competition, Congress should instead give DoD free reign to award follow-on contracts as it sees fit. Congress should only seek to constrain the amount of resources that DoD uses on OTA.

The simplest and likely most effective way for Congress to allocate resources for OTA would be by authorizing a dedicated OTA budget for each service branch. Congress could easily add a service branch-specific OTA budget as a line item in either the Procurement or Research, Development, Test & Evaluation sections of the NDAA (which is Congress’s annual defense bill). The service branches would then be free to apportion their OTA budget among their individual contracting offices as they determine necessary. For example, Congress could initially establish a $1 billion budget for the Army to use on OTA. The money would be allotted among the Program Executive Offices according to need. In the context of a DoD budget that spends nearly $300 billion per year solely on acquisition, an initial annual budget of $1 billion per service would be a reasonable starting place for the revamped OTA framework.

A framework based on dollar amount constraints serves two purposes. First, it allows contracting offices to avoid the traditional contracting process when they deem it necessary. DoD acquisition officials are well-positioned to make sound decisions regarding the capabilities of industry and the needs of the service. Therefore, Contracting Officers are the right people to empower to make better acquisition decisions. Second, it keeps the traditional acquisition process intact, as most (if not all) major defense acquisition programs would still need to comply with that process. Congress and the Pentagon would retain control over the vast majority of DoD contracting.

4. Reforms Will Make DoD a Better Business Partner

If Congress were to enact the reforms that this Note proposes, it would significantly improve the DoD’s ability to make a sound business proposal to commercial technology companies in the early stages of production. America’s vaunted private technology sector often addresses technology challenges by rapidly purchasing small quantities on an ad hoc basis. The proposed reforms to OTA in this Note would give the DoD a better tool to do the same. Contracting Officers would be empowered to award follow-on contracts at any point in their relationship with a contractor, dramatically reducing the time of the acquisition cycle. They would also be able to address the needs of their overall contracting office as soon as they become apparent, without wasting time having the contractor complete a prototype or conduct a competitive bidding process.

But potential drawbacks are inherent in the proposed reforms. The biggest casualty would be public, open competition. OTA allows Contracting Officers to move entirely outside of the framework of the traditional contracting process, including essentially all competition requirements. Congress necessarily would lose a significant amount of oversight power. But this downside is mitigated by several factors. First, nothing in the OTA statute exempts any party from basic ethical violations. Therefore, while DoD Contracting Officers would have significantly expanded power, they would still ultimately be accountable for any contract awards. Second, while the proposed reforms allow for non-competitive contract awards, OTA still exists in the context of the highly competitive U.S. commercial technology sector. In addition, the proposed reforms would likely expand the pool of companies that are willing and able to do business with the DoD. Therefore, in the aggregate, the reforms would likely increase competition in DoD contracting.

Historically, Congress has been hesitant to expand OTA because it is uncomfortable with the large degree of discretion it affords the procuring agency. Again, OTA allows government agencies to circumvent the congressionally mandated competition requirements and regulations governing the acquisition process. Congress’s 2019 defense authorization act established new reporting requirements on OTAs. Moreover, the House of Representatives proposed requiring DoD to notify Congress if it intends to award a follow-on contract to an OTA. However, if Congress is serious about giving DoD the tools it needs to reestablish technological supremacy over powers like Russia and China, then it will have to accept some diminished oversight.

B. In Addition to a Statutory Amendment, the GAO Should Provide More Clarity on DoD’s Exercise of OTA

Even if Congress is unwilling to expand the statutory basis for OTA, the GAO and the DoD should work together to provide DoD with definitive guidelines for exercising OTA. DoD acquisition officials are perpetually apprehensive of bid protests, such as the one successfully launched in Oracle America. From the perspective of a procurement officer, bid protests result in monumental wastes of time and resources.

If the GAO were to publish a series of advisory opinions designed to educate the DoD about how to smoothly execute Other Transactions, it would likely alleviate much of the apprehension surrounding OTA. Procurement officers would likely be much more comfortable leveraging OTA to engage with the commercial tech sector.

VI. Conclusion

Congress and the DoD created the framework for the traditional defense acquisition system with the best of intentions. They sought to ensure a fair and competitive defense marketplace. For the better part of a century, the system proved largely effective. Yet the rate of technological innovation in the commercial sector has outpaced that of the defense market. The reforms proposed by this Note would significantly change the acquisition structure of the DoD. The speed of acquisition is now a paramount value, particularly in the context of the Third Offset Strategy. Congress must allow the DoD to move outside the regular acquisition framework in order to harness the commercial technology that it needs. The ability of the DoD to deter potential adversaries in the future depends on it.