Back to the Future? National Security Innovation and the Coming Decline of Traditional Defense Contractors

Although several massive companies have historically dominated national security contracting work in the United States, a new generation of firms is arising to challenge them.

The United States’ national security apparatus – and the companies supporting it – have historically been at the forefront of technological innovation. The Defense Advanced Research Projects Agency (DARPA), for example, developed the core technology for the internet. The strategic venture capital investor for the Intelligence Community, In-Q-Tel, has similarly backed game-changing ventures such as the database startup MongoDB and natural language processing company Basis Technology.

Over time, however, massive defense contractors such as Boeing, Lockheed Martin, and General Dynamics have become conservative, slow-moving, and far less innovative than they and their forebears once were. Their grip on the complex and opaque national security contracting process as well as their political clout have allowed them to continue collecting rents in the form of massive cost-plus contracts while running over budget and underperforming. The most glaring example of this is the F-35 Joint Strike Fighter program, which is “seven years behind schedule and $163 billion over budget” according to the senior military officer in charge of the acquisition program.

With a huge potential market (the fiscal year 2019 defense budget was $686 billion) and sclerotic incumbent firms, it is no wonder that upstarts are beginning to emerge. Furthermore, the transformative natures of new digital technologies are equipping these challengers with the tools to take on the politically entrenched behemoths. In the fields of data analytics and artificial intelligence (AI), augmented reality, and autonomous vehicles, several new (and some old) firms are seeking to capture more defense spending with advanced technology offerings.

Information processing and analysis contenders: Palantir and Primer AI

Given the asset-light nature of the software business, it is in this vertical that challengers to traditional defense giants have had the earliest success. Palantir Technologies, an In-Q-Tel and Founder’s Fund-backed company, emerged as an early standout in this field. In addition to signing contracts with the United States Intelligence Community, the data analytics firm also began muscling into traditional defense contractor territory. Most notably in its battle to win the contract for the Distributed Common Ground System (DCGS), Palantir proved that it could both deliver a useful product and compete with the lobbying influence of incumbents such as Raytheon, with which it ended up vying head-to-head for the contract. Palantir’s mostly off-the-shelf technology appears to have outperformed the legacy DCGS, plagued with poor functionality and cost overruns.

A more recent entrant to the national security software space is Primer AI, a company seeking to provide natural language processing and other machine learning solutions to organizations including the military and intelligence agencies. Its product, which is designed to extract meaning from massive amounts of text and other data sources, could potentially make redundant staff augmentation contractors such as Booz Allen Hamilton, which supply analysts to work directly with the Intelligence Community.

Challengers in this space, if they do manage to unseat the incumbents, will do so for several reasons. The fact that Palantir and others were born in Silicon Valley means that they have access to a vast pool of skilled engineers. Conversely, “Top A.I. talent doesn’t want to work for Lockheed Martin,” according to Jack Clark of the nonprofit OpenAI lab. Additionally, and likely as a result, their products will change paradigms rather than improve incrementally on existing solutions. Automating the jobs of highly-trained analysts, which Primer AI has the potential to do, is an order of magnitude more impactful than simply improving their efficiency in processing documents. With their success in loosening the grip that traditional players have had on defense contracting because of their experience and political connections, upstart companies will continue to transform the national security data analytics space.

Securing the border and assisting troops with augmented reality: Microsoft and Anduril Industries.

Although not traditionally thought of as a defense contractor, Microsoft began quietly entering the space with its Azure government cloud storage and computing offerings. More notably, it recently signed a $480 million dollar HoloLens contract with the United States Army. Employee protests notwithstanding, the company pledged to provide headsets that give troops improved battlefield awareness by projecting computer images over the real world.

Unlike Microsoft, which is focused on a broad array of products and whose employees have a diverse array of opinions with regard to defense contracting, Anduril Industries is laser-focused on the national security space. Founder Palmer Luckey, who also launched Oculus Virtual Reality, has publicly stated that his company’s mission is to ensure the United States remains better equipped militarily than its potential rivals – such as Russia and China – especially in the fields of AI and autonomous systems.

Anduril has recently deployed its Lattice system to the United States’ southern border in a pilot program with the Department of Homeland Security. A combined hardware-software system designed to supplant “comically ineffective systems” such as Boeing’s SBInet, Lattice helps border patrol agents identify illegal crossings, helping to crack down on human and drug traffickers. Using augmented reality to help users distinguish between people, vehicles, animals, and other objects at long range, Lattice has the potential to improve the situational awareness of both law enforcement officers and service members.

Microsoft and Anduril have a strong chance of dominating the augmented reality market in the national security space primarily because they enjoy first-mover advantage. Although Lockheed Martin’s F-35 comes with a famously expensive $400,000 helmet that incorporates some augmented reality features, the technology is not widely available to the American military, law enforcement, or intelligence communities. By outmaneuvering traditional defense contractors, new entrants to this market have a chance to grab substantial share quickly.

Conclusion

Although there appears to be increasing backlash against some technology firms that have done or are considering doing business with American military, intelligence, or law enforcement organizations, entrepreneurial companies will continue to challenge the traditional stalwarts of national security contracting. Both the size of the market and the weakness of the existing players are well-known, ensuring that venture-backed challengers will continue to arise. Furthermore, patriotic Americans seeking ways to serve their country outside of direct government service will have ample opportunity to make outsized impacts on the United States’ technological edge in potential future conflicts. Finally, considering the historical roots of American technology companies in defense-related work, it is no surprise that a new generation of firms is showing interest in helping to defend the United States.

Image from Anduril Industries via WIRED Magazine.

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2 thoughts on “Back to the Future? National Security Innovation and the Coming Decline of Traditional Defense Contractors

  1. Great article!

    I’ll be really interested to see who ends up dominating this space, between defense-specific startups and traditional big tech.

    There was an interesting Daily podcast today about how big tech companies are responding their employees’ protests at them entering the defense space. The jury’s still out on whether, in the long-term, involvement in defense will be too much of a drag on employee moral and hence the other profit centers of these organisations. But their technical expertise and ability to manage large contracts is definitely a significant advantage if they can overcome that!

  2. Great article! I could see one of the shortcomings that new tech companies might have being security clearances for their engineers and employees. It seems like that filter may prevent some of the smaller companies from recruiting the best talent that can also work on some of the most transformative stuff that the DoD would be interested in.

    It also seems to align with the DoD’s development of organizations like the Defense Innovation Unit (DIU) (https://en.wikipedia.org/wiki/Defense_Innovation_Unit), who are seeking to bring more commercial technologies to the DoD. In addition, I wonder if the DoD will open up more funding for companies to develop technologies that don’t have a commercial application and would only be viable if sold to the US Govt. For a company to set out and develop technology that doesn’t also have commercial application, seems very risky.

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