Appropriators Square Off Over Defense Innovation Reform

House appropriators want to multiply the budget of the Defense Innovation Unit tenfold, turning what has been a modestly funded initiative into the $1 billion centerpiece of a new technology strategy. They ultimately aim to build an expansive portfolio of cutting-edge commercial equipment that can compensate for shortcomings they see in existing technology systems and the defense industry companies that build them.

Technology areas DIU currently focuses on include artificial intelligence, autonomy, cyber and telecommunications capabilities, energy, space, and human systems. According to the appropriators’ proposal, the expanded portfolio would comprise similar technologies that could be fielded on a timescale of one to three years, citing as examples “low-cost, light-logistics multi-domain drones, satellites, and munitions; agile communications, compute, and sensor nodes; and artificial intelligence agents and users.”

Beyond DIU, the appropriators are also backing the Office of Strategic Capital, a related initiative the Department of Defense created last December to fund companies scaling up strategically important technologies and dissuade them from accepting investment from rival nations.

The House appropriators’ plans for DIU and OSC could run aground this fall during negotiations between the House and Senate to finalize spending legislation for the coming fiscal year. In their counterpart proposal, Senate appropriators spell out concerns about the recent proliferation of defense innovation initiatives. They also decline to fund OSC, proposing to instead fund a similar but smaller-scale pilot initiative that would operate through one or more public-private partnerships.

House proposal aims to build up a technology ‘hedge’

DOD created DIU in 2015 as an experimental effort to foster contracting relationships with fast-moving technology companies that do not usually work with the department. The unit was made permanent five years ago and now has satellite offices in four regional innovation hubs: Silicon Valley, Boston, Chicago, and Austin. Congress has at times wavered in its funding for DIU, but for the current fiscal year delivered an increase from $43 million to $112 million (excluding funding for the National Security Innovation Network, an organization the unit oversees).

In April, DOD hired Apple executive Doug Beck as DIU’s new director and elevated the unit so that it reports directly to the defense secretary, restoring a status that it held from 2016 to 2018. Speaking this summer, Beck said he is developing plans for the unit’s “next phase,” which will emphasize scaling commercial solutions to military needs. The Biden administration’s budget request for the office sought a small increase to $120 million.

In proposing over $1 billion for DIU, House appropriators note the amount is “approximately one-tenth of 1%” of the administration’s entire request for DOD. The goal is to assemble a “hedge portfolio” of technologies compensating for “innate tactical and logistical risks” in current weapons systems, which involves channeling funds to “organizations capable of developing non-traditional solutions from non-traditional sources.” They argue the hedge would mitigate risks associated with a “lack of capacity and diversity” within the established defense industrial base and note the role that “non-traditional” weapons have played in the war in Ukraine.

The hedge portfolio concept traces to ideas advocated last year by the previous DIU director, Mike Brown, and Rear Adm. Lorin Selby, who just retired as chief of naval research. Brown endorsed the appropriators’ proposal in a recent interview with news outlet DefenseScoop, saying still more funding would be needed to build the portfolio but that the envisioned increase for DIU would be a “huge start.”

Hedge concept links R&D, financing, and deployment

Beyond multiplying DIU’s budget, the House appropriators’ proposal includes provisions aimed at facilitating the movement of technology from development through to its adoption in military operations.

About $650 million of the DIU funding would be via a new account within what is known as “budget activity eight,” a category recently created to facilitate software-related expenditures. The House appropriators propose repurposing the category to allow spending on certain items other than software to more easily straddle budget categories such as R&D, test, and evaluation; procurement; and operations and maintenance.

Outside DIU, the hedge concept also incorporates other DOD “innovation organizations,” such as AFWERX, SpaceWERX, NavalX, the Navy’s Task Force 59, the Marine Corps Warfighting Lab, and the Army Applications Laboratory. The appropriators propose that each military service department designate one such organization as a “Non-traditional Innovation Fielding Enterprise,” or NIFE, and that DIU and the NIFEs collaborate to “mature” and “propagate” technology acquisition and fielding models these organizations have developed.

The Office of Strategic Capital is likewise looped into the hedge effort. Leveraging loans and loan guarantees, the office aims to partner with private capital firms to provide the “patient capital” companies need to move technology prototypes into scaled production. It is separate from National Security Innovation Capital, an initiative DIU has administered since 2021 that uses an expedited contracting authority to fund awards ranging between $500,000 and $3 million to technology startups developing “very early-stage” hardware.

The House appropriators’ proposal for OSC meets the requested budget of $99 million, but because the office would employ loan mechanisms rather than direct funding, it would be able to provide sums exceeding its topline. Other federal technology initiatives are already making heavy use of the model. Last year, the Inflation Reduction Act vastly expanded the Department of Energy’s lending authority, and the CHIPS and Science Act gave the Commerce Department similar authorities as part of its initiative to promote semiconductor manufacturing.

Aside from the appropriators, the hedge concept also has buy-in from the House Armed Services Committee, which attached an authorization of the NIFE designation to its version of this year’s National Defense Authorization Act alongside other relevant policy provisions. These include a proposal to make commercial technology a main focus of the under secretary of defense for research and engineering and a requirement that DOD report annually on how its R&D portfolio balances near-term and long-term technology projects.

The House appropriators argue that the hedge concept’s design and aggressive focus on deploying commercial technology can have implications beyond the portfolio it develops. “If properly executed, this hedge has the potential to reduce the taxpayer’s burden by leveraging private capital, expand America’s economic advantage by accelerating emerging technology, and broaden the pool of talent supporting national defense,” they state.

House appropriators’ enthusiasm not shared in Senate

Appropriators in the Senate are throwing cold water on the notion that it is possible to make a meaningful change in defense innovation policy through added funding and new organizational constructs. Their spending proposal for DOD includes only a small funding increase for DIU, and, while it does not directly respond to the House proposal, it does include a detailed discussion of their reluctance to embrace new innovation initiatives.

They explain that DOD already has “ample authorities” to support flexible technology acquisition and that their proposal would appropriate over $1.2 billion for various existing “transition funds that promote the prototyping and maturation of promising, early-stage, and commercial capabilities.” In addition, they note that DOD’s Small Business Innovation Research and Small Business Technology Transfer programs are currently receiving another $2 billion annually, which they suggest represents an “underutilized pathway to fund innovative and promising technologies.”

The Senate appropriators express further concern that accelerating technology acquisition will involve circumventing controls set up to prevent cost growth and wasteful expenditures. They also flag an increasing “dispersal” of acquisition authority among entities set up to promote defense innovation, arguing it could dilute “meaningful acquisition leadership” and harm the work of DOD’s ordinary acquisition officials.

In proposing no funding for OSC, the Senate appropriators observe that while they broadly support the use of loans and loan guarantees, they feel DOD must formally request authorization for the office to employ them and that the requested funds are therefore “unexecutable.” The House appropriators’ proposal would explicitly provide such authority.

As an alternative, the Senate appropriators propose providing $20 million to launch an “Advanced Defense Capabilities Pilot” initiative proposed in both the House and Senate versions of the National Defense Authorization Act. That initiative involves creating at least one public-private partnership to support small businesses and “non-traditional” businesses in the defense industrial base, with a focus on supply-chain and manufacturing resilience. The partnerships would be allowed to issue loan guarantees or invest directly in the businesses’ equity.

The Senate appropriators argue that the initiative would follow the successful model established by In-Q-Tel, a federally funded nonprofit venture capital firm that backs technologies relevant to intelligence and national security. They also note that the public-private model would limit direct government involvement in program administration, which they suggest “manages the risk to the government.”