5
Phase III Challenges and Opportunities

5.1
CHARACTERISTICS OF PHASE III

Phase III is defined in the authorizing legislation as commercialization of SBIR technologies beyond Phase II. It differs from Phase II in that the set-aside SBIR funding may not be used for Phase III; funding for this phase must come from elsewhere in agency budgets, or from nongovernmental sources.

At DoD, Phase III is especially important because it encompasses two of the primary objectives of the program: commercialization, and—more importantly to DoD—the transition of technologies from SBIR projects into DoD acquisition

BOX 5-1

Definition of Commercialization

“Commercialization is the process of developing marketable products or services and producing and delivering products or services for sale (whether by the originating party or by others) to government or commercial markets. A ‘Phase III’ is work that derives from, extends, or logically concludes effort(s) performed under prior SBIR funding agreements (Phase I & II). Phase III contracts are not SBIR funds and may be for products, production, services, additional R/R&D, or any combination that is funded by the government, defense or nondefense commercial vendors, or individuals.”


SOURCE: U.S. Small Business Administration, SBIR Final Policy Directive, September 2002.



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5 Phase III Challenges and Opportunities 5.1 CHARACTERISTICS OF PHASE III Phase III is defined in the authorizing legislation as commercialization of SBIR technologies beyond Phase II. It differs from Phase II in that the set-aside SBIR funding may not be used for Phase III; funding for this phase must come from elsewhere in agency budgets, or from nongovernmental sources. At DoD, Phase III is especially important because it encompasses two of the primary objectives of the program: commercialization, and—more importantly to DoD—the transition of technologies from SBIR projects into DoD acquisition BOX 5-1 Definition of Commercialization “Commercialization is the process of developing marketable products or ser- vices and producing and delivering products or services for sale (whether by the originating party or by others) to government or commercial markets. A ‘Phase III’ is work that derives from, extends, or logically concludes effort(s) performed under prior SBIR funding agreements (Phase I & II). Phase III contracts are not SBIR funds and may be for products, production, services, additional R/R&D, or any combination that is funded by the government, defense or nondefense commercial vendors, or individuals.” SOURCE: U.S. Small Business Administration, SBIR Final Policy Directive, September 2002. 

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9 PHASE III CHALLENGES AND OPPORTUNITIES programs. Small businesses are critically important to technology development at DoD. According to Michael Caccuitto, DoD SBIR program administrator, after assessing 255 industrial capabilities, DoD concluded that 36 percent of the companies with relevant products have less than 100 employees.1 “Phase III” is not funded by any line item. It is a phrase that describes post- Phase II commercialization or agency acquisition of SBIR-sponsored technology. There is no formal program or budget for “Phase III.” In the early years of the SBIR program, Phase III was not a very high pri - ority. SBIR topics were defined and awards were made largely in line with the interests and activities of the wider R&D programs—for example, the Army Research Labs. During the 1990s, following the renewal of the program, grow - ing pressure from Congress, and changes in priorities of the leadership in the Pentagon, gradually shifted the SBIR program’s emphasis toward serving the warfighter more directly, and specifically to the issue of Phase III. 5.1.1 Congress Over the past fifteen years, Congress has repeatedly directed SBIR programs generally, and DoD in particular, to emphasize commercialization and to promote the use of SBIR-sponsored technologies in acquisition programs. Congress has considered the Phase III component of SBIR at the time of each reauthorization. In 1992 the SBIR Reauthorization2 increased the emphasis on commercialization. In 1999, Sec 818 of Defense Authorization Act required “favorable consideration [for SBIR projects] in acquisition planning process.” 3 More recently, the 2005 Defense Authorization Act, House Armed Services Com- mittee (HASC) report “directs USD (AT&L) to encourage DoD acquisition man - agers and prime contractors to make significantly more SBIR Phase III contract awards . . . and to report on DoD Phase III contracts during last three years.”4 The 2002 SBIR law reauthorization directed the SBA to strengthen SBIR guidelines by mandating Phase III commercialization “whenever possible.” House Report 108-491 accompanying the National Defense Authorization Act—FY2005, directed the Under Secretary of Defense for Acquisition, Technol- ogy & Logistics to encourage acquisition program managers and prime contrac - tors to make significantly more SBIR Phase III contract awards and to report to the congressional defense committees on actions taken by March 31, 2005. 1 Presentation by Michael Caccuitto, DoD SBIR/STTR Program Administrator, at National Re - search Council Symposium on SBIR: The Phase III Challenge, June 14, 2005. 2 PL 102-564. 3 Sec 812 of the 2000 Act, House Report 106-244, and Senate Report 106-50 all emphasized in - creased use of Phase III contracts by acquisition programs. 4 Presentation by John Williams, Navy SBIR Program Manager, October 15, 2005. Available at .

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0 SBIR AT THE DEPARTMENT OF DEFENSE These efforts highlight the longstanding interest in Congress in the success of Phase III at DoD, and the consistent congressional encouragement to the De - fense Department’s management to take the steps needed to support this phase of the program. 5.2 PHASE III OUTCOMES The 2005 symposium on the Challenge of Phase III Commercialization at the National Academy of Science, arranged as part of this study, was the first gathering of programs officers, small businesses, prime contractors, and research- ers focused specifically on Phase III issues. Many of the comments at the meet - ing highlighted successes but also the difficulties that different actors had with Phase III transitions. As with many aspects of the program, data on Phase III activities are very limited. DoD analysis is focused almost exclusively on reporting via the DD350 form—a form completed by contracting officers for all RDT&E contracts at DoD. The form has a check box to indicate that the project in question is a Phase III, or results from a Phase II (see definition above). Data from the DD350 suffer from serious deficiencies. For example, contracting officers are often unaware that a contract is a Phase III. In other cases, there may be insufficient emphasis on careful reporting. As a result, DD350 data tends to undercount the real number of SBIR-related RDT&E contracts. Millions of Dollars Year FIGURE 5-1 Phase III awards total in millions of dollars, 1999–2005. SOURCE: John Williams, Navy SBIR Program Manager, April 7, 2005. 5-01

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 PHASE III CHALLENGES AND OPPORTUNITIES 200 157 150 141 121 DoD Return on Investment Percent 100 Navy Return on Investment 61 50 43 14 11 9 6 9 0 2000 2001 2002 2003 2004 Year FIGURE 5-2 Return on Investment for SBIR at DoD. NOTE. The chart only includes Phase III dollars from DD350 for that fiscal year. Phase III funds that go to the firm indirectly via prime contractors or funding that is not marked as Phase III on DD350 are not included. (Return on Investment = Phase III dollars divided by Phase I-II dollars.) SOURCE: John Williams, Navy SBIR Program Manager, April 7, 2005. new 5-2 Nonetheless, the DD350 data 8/21/07 the amount of Phase III contracts do show that generated have been climbing steadily in recent years, particularly at the Navy. According to these data, the Navy accounted for about 70 percent of all DoD Phase III contracts in FY2005 (with PEO SUBS accounting for about 86 percent of Navy’s total). Navy’s Phase III awards started to grow very rapidly in FY2002, and continued to grow until a slight decline in FY2005. However, it is worth not - ing that these substantial results are based on a relatively low number of actual Phase III awards. These data are also reflected in Navy efforts to calculate the return on investment for SBIR funding by dividing Phase III awards by the total of Phase I and Phase II funding (see Figure 5-2). For DoD as a whole, Michael Caccuitto, DoD SBIR program administrator, also noted that the amount of commercialization generated from SBIR projects leads the total amount spent on SBIR, with about a 4-year lag. For DoD, with its focus on getting technology into production for use at DoD, the distribution of commercialization is also important. The DoD data in Figure 5-4 indicate the distribution of Phase III sales by sector and show that while there is a strong focus on DoD and the prime contractors is unsurprising, more commercial activity occurs with the private sector outside DoD. Only 44 percent of Phase III contracts can be attributed to DoD and DoD primes. Forty- seven percent comes from the private sector.

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 SBIR AT THE DEPARTMENT OF DEFENSE 1800 Hundreds of Millions of Dollars 1600 1400 1200 1000 • 800 • 600 •••• •••• 400 • ••••• 200 •• •• 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Year • SBIR Investment Commercialization FIGURE 5-3 Reported commercializations vs. SBIR budget. SOURCE: Michael Caccuitto, DoD SBIR/STTR Program Administrator, Presentation to SBTC SBIR in Rapid Transition Conference, September 27, 2006, Washington, DC. 5-3 This fixed is a image. We have replaced the type in order to make the changes () ( ) ( ) ( ) ( ) FIGURE 5-4 Distribution of Phase III sales. SOURCE: Michael Caccuitto, DoD SBIR/STTR Program Administrator, Presentation at NRC Conference SBIR: The Phase III Challenge, June 14, 2005, Washington, DC. 5.3 PHASE III OPPORTUNITIES AND NEEDS 5.04 From an agency perspective, SBIR offers important and unique opportuni- ties, which should be reflected in a strong and growing Phase III program. In particular,

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 PHASE III CHALLENGES AND OPPORTUNITIES 6 Number of Phase III Contracts 5 4 3 2 1 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 Fiscal Year FIGURE 5-5 Number of Phase III awards at PEO SUBS. SOURCE: Richard McNamara, PEO SUBS, Presentation to SBTC SBIR in Rapid Transi - tion Conference, Washington, DC, September 27, 2006. • Flexibility. SBIR offers an unusual degree of execution year flexibil- ity, unlike most RTD&E accounts which have to be described in detail in the 5-05 President’s budgetary message.5 • Shorter Planning Cycle. SBIR allows a much shorter planning horizon. Most R&D programs at DoD had to be planned years ahead of the budget cycle. And in some cases, agencies have taken advantage of that flexibility. The Navy issues a “quick response IED topic” in 2004, and had made 38 Phase I awards within 5 months of topic development. These have developed into 18 Phase II awards, and results from those were to be available in 2006–2007. The first pro - totypes were expected in Iraq in fall 2006. • Faster Development Time. Products and services from SBIR can often be developed within a relatively short time frame. In the view of John Williams, Navy SBIR Program Manager, the notion that it takes 5–10 years to commer- cialize most technologies—and that Phase III results could take 5–10 years—is a myth. He argues that, for the Navy, if some Phase III funding (sales or further development funding) is not achieved by two years after the end of Phase II ef- fort, the probability of a Phase III success is very low.6 The substantial increase in Phase III activity at Navy in recent years suggests that there may be room for similar increases elsewhere—both in other services and 5 Presentation by Michael McGrath, Navy, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005. 6 John Williams, Navy SBIR Program Manager, April 7, 2005.

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 SBIR AT THE DEPARTMENT OF DEFENSE within Navy at some of the other commands. More than 86 percent of NAVSEA’s Phase III awards are accounted for by SUBS. Put another way, the substantial recent successes at Navy (and at SUBS in particular) would suggest that there are opportunities available elsewhere in the Department for similar levels of success if the senior management and the rel - evant Program Executive Officers are encouraged to identify and exploit those opportunities. 5.4 PHASE III CONCERNS In theory, there would be a smooth flow of technology and funding from Phase II to Phase III and then into systems eventually adopted by the agencies for use by warfighters. In reality, this process is much more complex, requiring multiple champions at different phases in addition to effective management and product development by the SBIR firm. The process can, and does, work. There are important success stories. Nonetheless, there are substantial barriers that im - pede Phase II projects from successfully transitioning into Phase III. To begin with, acquisitions officers have traditionally viewed SBIR more as a tax on their other research projects than an opportunity. This may be an inevitable result of the flow of funding generated by SBIR where the set-aside funding for SBIR draws more from the applied part of the technology development spectrum. Table 5-1 shows that 84 percent of SBIR funding comes from the acquisitions- dominated elements of the Navy development cycle (6.4–6.7) rather than from earlier in the technology development cycle. Perhaps as a result of these attitudes, small businesses are still not as fully engaged in the work of defense acquisitions as they might be. Allocation of R&D funds from above remains quite centralized. The top 10 DoD contractors received 62 percent of DoD RDT&E funding in 2003, and the top 100 (including TABLE 5-1 Sources of Navy SBIR Funding Title BA (Description of Level of Technology Percent (Stage in Technology Development) Development) 3 6.1 Basic Research 16 6 6.2 Applied Research 7 6.3 Advanced Tech. Development 21 6.4 Adv. Component Dev. Prototypes 51 6.5 System Dev. And Demonstration 84 2 6.6 RDT&E Management Support 10 6.7 Operational System Development SOURCE: Navy FY 2003 SBIR Assessment.

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 PHASE III CHALLENGES AND OPPORTUNITIES one acquired small business) received 88.9 percent of 2003 RDT&E funding—up from 85.5 percent in 2001, according to the Small Business Technology Council (SBTC).7 Conversely, according to a 2005 Small Business Administration report,8 small businesses generated 60 to 80 percent of net new jobs annually over the last decade, employ 39 percent of high tech workers, produce 13 to 14 times more patents per employee than large patenting firms. Small businesses also account for a significant percentage of nonfederal expenditures of R&D.9 And, according to DoD, an assessment of 255 industrial capabilities determined that 36 percent of the companies with relevant products have less than 100 employees. 10 At the same time, DoD is strongly committed—on paper—to the integration of SBIR into acquisitions: the Interim Defense Acquisition Guidebook directly addresses use of SBIR technology in Sec. C2.9.1.5: The Program Manager shall develop an acquisition strategy that plans for the use of technologies developed under the SBIR program, and gives favorable consideration for funding of successful SBIR technologies. At milestone and appropriate program reviews for ACAT I programs, the PM shall address the program’s plans for funding the further development and insertion into the pro- gram of SBIR-developed technologies.11 Comments made by all the stakeholders at the NRC Phase III Symposium, and in discussions with case study companies and DoD officers, all underline the problems and difficulties faced by companies in making the Phase III transition. Some of the more notable issues and concerns are discussed below. 5.4.1 The TRL Gap The Interim Defense Acquisition Guidebook12 includes the DoD Technol- ogy Readiness Level (TRL) table. This tool, derived from NASA practice, is the accepted means of classifying the maturity of technologies. As the TRL table in Box 5-2 shows, technologies must be at TRL 8 for effective transition into an acquisition program system. TRL 3-5 is common for DoD SBIR technologies at 7 Small Business Technology Coalition, Fighting an Unconentional Enemy, January 20, 2005. 8 SBA Office of Advocacy (2005) data drawn from U.S. Bureau of the Census; Advocacy- funded research by Joel Popkin and Co. (Research Summary #211); Federal Procurement Data System; Advocacy-funded research by CHI Research, Inc. (Research Summary #225); Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration. 9 Several of these issues are discussed in Robert-Allen Baker, “Incentives and Technology Transi - tion: Improving Commercialization of SBIR Technologies in Major Defense Acquisition Programs,” SBTC White Paper, Washington, DC, September 21, 2005. 10 Michael Caccuitto, Department of Defense SBIR Program Manager, April 2005. 11 USD (AT&L), Interim Defense Acquisition Guidebook, October, 2002, p. 46. The guidebook has now become an online decision support system, at . It was last updated December 16, 2004. 12 USD (AT&L), Interim Defense Acquisition Guidebook, October, 2002, p. 41.

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 SBIR AT THE DEPARTMENT OF DEFENSE BOX 5-2 TRL Definitions Technology Readiness Level Description table 1. Basic principles observed and reported. Lowest level of technology readiness. Scientific research begins to be translated into applied research and development. Examples might include paper studies of a technology’s basic properties. 2. Technology concept and/or application formulated. Invention begins. Once basic principles are observed, practical applications can be invented. Applications are speculative and there may be no proof or detailed analysis to support the assumptions. Examples are limited to analytic studies. 3. Analytical and experimental critical function and/or characteristic proof of concept. Active research and development is initiated. This includes analytical studies and laboratory studies to physically validate analytical predictions of separate ele- ments of the technology. Examples include components that are not yet integrated or representative. Basic technological components are integrated to establish that they will work together. This is relatively “low fidelity” compared to the eventual system. Examples include integration of “ad hoc” hardware in the laboratory. 4. Component and/or breadboard validation in laboratory environment. Basic technological components are integrated to establish that the pieces will work together. This is relatively “low fidelity” compared to the eventual system. Ex- amples include integration of “ad hoc” hardware in a laboratory. 5. Component and/or breadboard validation in relevant environment. Fidelity of breadboard technology increases significantly. The basic techno- the end of the Phase II SBIR process.13 This underscores the higher-risk nature of DoD SBIR programs, especially from an acquisitions perspective. The “gap” between TRL 3-5 and TRL 6 can be characterized as the “TRL Gap,” and it is a critical element in the difficulties experienced in transition - ing Phase II technologies through Phase III into the mainstream acquisition process. Essentially, SBIR can fund technology development to the point of TRL 3-5, and the acquisitions programs, through their own RDT&E programs and funding, can “pull” technologies from the pool generated through SBIR (and of course outside SBIR) into acquisitions. But the TRL gap must still be bridged, and there are major difficulties in doing so. 13A conclusion confirmed in case studies and in discussions with program executive officers (PEOs) responsible both for SBIR programs and for Phase III and eventually for acquisitions.

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7 PHASE III CHALLENGES AND OPPORTUNITIES logical components are integrated with reasonably realistic supporting elements so it can be tested in a simulated environment. Examples include “high fidelity” laboratory integration of components. 6. System/subsystem model or prototype demonstration in a relevant environment. Representative model or prototype system, which is well beyond that of TRL 5, is tested in a relevant environment. Represents a major step up in a technology’s demonstrated readiness. Examples include testing a prototype in a high-fidelity labora- tory environment or in simulated operational environment. 7. System prototype demonstration in an operational environment. Prototype near, or at, planned operational system. Represents a major step up from TRL 6, requiring demonstration of an actual system prototype in an operational environment such as an aircraft, vehicle, or space. Examples include testing the pro- totype in a test bed aircraft. 8. Actual system completed and qualified through test and demonstration. Technology has been proven to work in its final form and under expected condi- tions. In almost all cases, this TRL represents the end of true system development. Examples include developmental test and evaluation of the system in its intended weapon system to determine if it meets design specifications. 9. Actual system proven through successful mission operations. Actual application of the technology in its final form and under mission condi- tions, such as those encountered in operational test and evaluation. Examples include using the system under operational mission conditions. SOURCE: Defense Acquisitions Handbook, 10.5.2. Technology Maturity and Technology Readi- ness Assessments. 5.4.2 Risk and Risk Management Bridging the TRL Gap is to a considerable extent a question of risk and risk management. Just as once upon a time, “no-one ever got fired for buying IBM,” so in the world of defense contracting, “no-one ever got fired for contracting with a prime contractor.” This caution is embedded directly in the DoD acquisitions manual: If technology is not mature, the DoD Component shall use alternate technology that is mature . . . [our italics and emphasis]14 Bridging the TRL Gap is expensive. Costs rise as a technology matures, and the testing and evaluation (T&E) needed to move a technology from TRL 3-5 to TRL 6 can be very costly. Moreover, bridging the TRP Gap requires that a DoD program executive assume risk that would not be associated with a technology with a higher TRL. 14 USD (AT&L), Interim Defense Acquisition Guidebook, October, 2002, pp. 9-10.

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 SBIR AT THE DEPARTMENT OF DEFENSE Who pays for technology risk mitigation? Both the Department of Defense Instruction 000. (May, 00) and the Interim Defense Acquisition Guidebook address this issue somewhat inconclusively. One formulation, found in various contexts in both baseline documents, suggests the impropriety of making industry pay: The PM shall structure the acquisition strategy to promote sufficient program stability to encourage industry to invest, plan, and bear risks. However, the PM shall not use a strategy that causes the contractor to use independent research and development funds or profit dollars to subsidize defense research and de - velopment contracts . . .15 So, as noted by many speakers at the NRC Phase III Symposium, the Phase III transition remains fraught with difficulties. This view is summarized by Anthony Mulligan, CEO of Advanced Ceramics Research (ACR), a successful SBIR com - pany that uses ceramics technology for several DoD systems: ACR is just one example of the small businesses that are succeeding in devel - oping technologies and capabilities that can provide significant cost savings to a wide and diverse array of military weapons systems. The difficulty is how these new technologies developed by small businesses can be transitioned into military program offices and picked up by the prime contractors. There are cur- rently very few mechanisms, if any, to help ensure that this technology transition happens quickly. Military program offices and large program offices do not have efficient methods to fold new technologies into programs once the program has been road-mapped and already started.16 5.4.3 Small Business Perspectives From a small business perspective, the lack of a defined and funded Phase III program makes Phase III transition a difficult and confusing matter. As noted by Anthony Mulligan, CEO of ACR, there is “no effective bridge between the acquisition community and those who are developing innovative technologies.” A number of different concerns emerged at the NRC Phase III Symposium: • Timing. Small businesses are often blocked by the very slow pace of acquisition partly because they do not have the resources to survive long stretches without revenue. • Complexity. The acquisition process is both complex and unique, and small firms face a steep learning curve. • Phase III Funding Beyond DoD. Few small firms have the staff or resources to do the market analysis necessary to attract funding from venture 15 USD (AT&L), Interim Defense Acquisition Guidebook, October, 2002, p. 46. 16 HASC Subcommittee on Tactical Air and Land Forces, hearing on small business technologies, June 29, 2005.

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7 SBIR AT THE DEPARTMENT OF DEFENSE BOX 5-5 The Navy Primes Initiative The Navy Primes Initiative builds partnerships with Navy contractors to enhance new technology insertion in key programs by leveraging SBIR/STTR resources, in accord with best business practices of our partners. Actions • Established POC‘s at major primes offices. • Held multiple site visits with primes and helped them to identify strong potential partners. • Improved Search Database. • Identified opportunities to cost-share demonstrations and integrations with SBIR. • Prime and Acquisition Resources. • Two trial Primes Initiatives programs launched: Lockheed MS2 Ship Systems, Raytheon IDS. • One trial Partnering Workshop launched with DD(X) focus: PEO Ships-PMS 500, Northrop Grumman Ship Systems, Raytheon. • Transitions Newsletter published which profiles Prime/Navy/SBIR accomplishments. SOURCE: John Williams, Navy SBIR Program Manager. them through Phase I and Phase II.26 The impact of this change on topic take-up on Phase III success is captured in Figure 5-6. Commercialization Achievement Index (2000). The CAI for the first time provided a quantitative analysis of commercialization outcomes from prior SBIR awards—even awards at other agencies. There is some evi- dence (from interviews) that the Index is being used as part of the proposal assessment process. Phase II Enhancement (2000). The new Phase II enhancement program offers companies which can show matching funds additional SBIR funding, as an effort to partly bridge the TRL/Phase III gap. Its utilization appears to be growing, and it may be effectively replacing Fast Track as the option of choice for SBIR companies. Direct Program Executive Office (PEO) sponsorship pilot. A 2005 Army pilot program to allocate 10 topics to PEO’s has had the side-ef- fect of driving SBIR toward applied research, the normal horizon of PEO’s. This constituted a shift away from the traditional Army Research Office focus on more basic research. 26 Presentation by Michael McGrath, Navy, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005.

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77 PHASE III CHALLENGES AND OPPORTUNITIES BOX 5-6 DoD Commercialization Pilot Program (CPP) CPP is a new program to accelerate the transition of technologies, products, and services developed under SBIR to Phase III, including the acquisition pro- cess. The program was authorized under the National Defense Authorization Act for Fiscal Year 2006, section 252. The program asks the services to find ways to accelerate the transition of SBIR-funded technologies to Phase III, partly by improving communications be- tween the stakeholders. It allows agencies to spend up to 1 percent of SBIR program funds on these pilot activities. The agencies have responded in a range of ways (see above for the Navy program): Air Force • Hiring “Transition Agents” for each product center with the responsibility to act as a bridge between the laboratory and product centers. • Redistributing topic ownership more to product centers. • Establishing a link between laboratory and acquisition. • Ensuring selected Phase II topics meet needs of a program of record. • Tracking and documenting successful transitions. • Ensuring SBIR projects are included in program roadmaps. Army • Assessing and identifying SBIR projects and companies with high transition potential that meet high priority requirements. • Providing market research and business plan development. • Matching SBIR companies to customers and facilitate collaboration. • Preparing detailed technology transition plans and agreements. • Providing additional funding for select SBIR projects. • Applying metrics and measure results. DARPA • Providing Management/Technical and manufacturing mentoring to Virginia SBIR Phase II contractors. • Providing Regulatory/Management and Manufacturing mentoring to DARPA- selected SBIR Phase II contractors outside of Virginia. • Providing accounting/business plan assistance/business management mentor- ing to new Phase I winners located in California. Key elements of all the plans include an effort to develop better metrics and track- ing capabilities, and improved information flows between stakeholders. SOURCE: Michael Caccuitto, DoD SBIR/STTR Program Administrator and Carol Van Wyk, DoD CPP Coordinator, presentation to SBTC SBIR in Rapid Transition Conference, Wash- ington, DC, September 27, 2006.

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7 SBIR AT THE DEPARTMENT OF DEFENSE 120 IR 100 SB 9— d 199 ineere re Phase III Transitions FY ng o ee ude m r 80 incl gram t to pro emen lv invo 60 40 20 0 1994 1995 1996 1997 1998 1999 Cumulative topics to reach Phase III from a given year All topics for a given year FIGURE 5-6 Share of topics attracting Phase III funding. SOURCE: Adapted from presentation by Carol Van Wyk, Navy, at Navy Opportunity Forum, 2005. 5-6 Beyond initiatives undertaken across DoD as whole, the DoD services and agencies have introduced their own initiatives to address the Phase III problem. These include: • The Navy “Primes Initiative” (2002). This is an active outreach effort to connect primes to the SBIR program in more formal way. Primes have become increasingly interested in more access to the SBIR program. Extra-large awards (beyond $750,000) have sometimes used at the Air Force, partly as a way of “exciting the program officers.”27 The Transition Assistance Program (TAP) in the Navy provides mentoring and a management assistance program for supporting commercial- ization, i.e., transition through the Phase III maturation process. The Navy Opportunity Forum—part of the TAP—is another major initiative that brings together SBIR firms, primes, and PEOs/PMs, offering important networking opportunities. (See Chapter 6 for details.) • Training and education. The Air Force has implemented a training and education program for primes and program offices.28 • New funding initiatives such as OnPoint, the Army’s venture capital initiative. OnPoint makes equity investments in small entrepreneurial companies, 27 Presentation by Mark D. Stephen, Air Force, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005. 28 Ibid.

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79 PHASE III CHALLENGES AND OPPORTUNITIES BOX 5-7 The NAVSUB Program at Navy Under the leadership of Richard McNamara, NAVSUB has developed a cohesive program aimed at providing strong incentives for program managers to use SBIR to help solve their technical programs, while developing processes that make it easier to award Phase III contracts. NAVSUB uses the following measures to promote SBIR projects: • Acquisition involvement. PEO SUB is the most successful Phase III program at DoD. It advertises SBIR opportunities through a program of “active advocacy.” PMs compete to write topics to solve their problems. • Topic vetting. Program Executive Officers keeps track of all topics. PM’s compete in rigorous process of topic selection. SBIR contracts are seen as a reward, not a burden. • Treating SBIR as a program, including follow-up and monitoring of small businesses to help keep them alive until a customer appears. This encourages program managers to demonstrate commitment by paying half the cost of a Phase II option. • Providing acquisition coverage, which links all SBIR awards to the agency’s acquisition program. • Awarding Phase III contracts within the $75 million ceiling that avoids triggering complex Pentagon acquisition rules. • Brokering connections between SBIR and the primes. • Recycling unexploited P1 awards, a rich source for problem solutions. See Figure 5-5 and details in discussion of NAVSUB SBIR operations in Chapter 6. including those that would otherwise not be doing business with the Army. It is focused on mobile power and energy for the soldier.29 • Roadmaps. Initiatives focused on developing joint technology maps and coordinated planning processes, including: The Navy Advanced Technology Review Board process for evaluat- ing across programs.30 The Joint Strike Fighter Technology Advisory Board, which reviews program priorities and includes a program office, the contractor team, and the S&T organizations of every service partner.31 29Availableat . 30 David Bailey, Advanced Technology Review Board, Process Overview Brief for ONR Partnership Conference, August 5, 2004. 31Available at .

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0 SBIR AT THE DEPARTMENT OF DEFENSE • Modifying the Company Commercialization Report to identify man- ufacturing innovations and collect Phase III contract numbers. 32 • The Commercialization Pilot Program (CPP)—See Box 5-6 Other DoD initiatives could also have a positive impact on SBIR companies, which might be able to find Phase III funding via these new programs. These initiatives include: • The Technology Transition Initiative (TTI). Although this initiative is focused on technologies at TRL 6 or 7, it could provide a bridge mechanism for some projects across at least part of the TRL Gap. • The Defense Acquisitions Challenge (DAC). This is an agency-wide initiative focused on identifying and supporting technologies that could quickly improve affordability, manufacturability, performance, or capabilities, with pro - posals that “challenge” existing technologies or methods.33 5.6 BEST PRACTICES The structure of the DoD SBIR program can make it hard for companies to transition effectively into Phase III (as described earlier in this chapter). However, among the many initiatives discussed above, a number have emerged that could be considered best practice within DoD. These include: • “Returning the tax.” Over time, a growing number of SBIR topics have been “set aside” for the needs of program officers. By effectively returning the SBIR funding to acquisitions programs—with the continuing proviso that research be allocated via the SBIR mechanism—program officers can see a more direct connection between the SBIR program and their own needs. • Acquisitions involvement in topic development and selections. The direct impact of this change can be seen in a chart from Navy showing the jump in the number of topics that eventually attract Phase III funding (See Figure 5-6). • Closer acquisitions involvement in the “downselect” process. To the extent that acquisitions officers participate in the decisions on which Phase I projects should be funded at Phase II, it is more likely that Phase II recipients will get Phase III contracts from DoD. • Linking information flows between small businesses, primes, DoD acquisition offices, and SBIR programs. One theme of the NRC Phase III Symposium was the difficulty of sharing information between stakeholders. A variety of efforts have been made to remedy this situation, with some success. These efforts include: Pre-release of topics. 32 Presentation by Michael Caccuitto, DoD SBIR/STTR Program Administrator, at National Re - search Council Symposium on SBIR: The Phase III Challenge, June 14, 2005. 33 See for more information on these initiatives.

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 PHASE III CHALLENGES AND OPPORTUNITIES Electronic communication systems. The Navy Opportunity Forum and other SBIR gatherings. The SBIR database. The Primes Initiative. • Commercialization training. The Navy Transition Assistance Program (TAP) is a 10-month program and the most ambitious of all SBIR training pro - grams. TAP is designed to focus small businesses on transition, to mitigate risk, and to improve return on Navy’s’ investment. While outcomes data are not yet fully available, participation rates have increased substantially each year. (See Chapter 6 for details.) • “Focused call” approach to solicitations. Navy has developed what it calls a “focused call” approach to solicitations. This involves defining five to six related topics (e.g., Sensors, Algorithms, Materials, Manufacturing), through which are allocated a total of about 20 Phase I awards and 10 Phase II awards, of varying sizes. According to Carol Van Wyk, then-SBIR Program Manager at NAVAIR, a focused call might provide two small Phase II awards (~$300,000), two medium sized Phase II awards (~$500,000), four standard Phase II awards (~$750,000), and two large Phase II awards (~$1.5 million). The focused call ap- proach encourages strategic planning, is seen as cost-effective, and reduces staff workload. • Contracting improvements. NAVAIR pioneered IDIQ (Indefinite de- livery/indefinite quantity) contracts within the DoD SBIR program. These mesh well with SBIR, allowing increased program manager flexibility and speed to delivery, outside the normal competitive bidding process. The Universal Phase III Contract outlined in Figure 5-7 could be another significant step forward. 5.7 RECOMMENDATIONS Recommendations for improving Phase III activities and outcomes can be grouped into a few major categories. Within these, the initiatives and best prac- tices above provide a menu from which programs and agencies might wish to develop pilot programs or more for their own use. • Developing and gathering metrics on Phase III. The growing focus on Phase III contracting dollars as the key metric of program performance ap - pears to be gathering momentum across DoD. However, implementation of this metric is uneven, and better data are needed. Data from Phase III contracts funded via the primes continues to be absent. The 2005 GAO Report has already recommended that “DoD develop data and measures that can be used to assess short- and long-term impacts of the programs and take other actions to further strengthen selection, management and oversight . . .”34 34 U.S. Government Accountability Office, Defense Technology Deelopment: Management Process Can Be Strengthened for New Technology Transition Programs, GAO-05-480, Washington, DC: U.S. Government Accountability Office, June 2005, pp. 3-4.

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 SBIR AT THE DEPARTMENT OF DEFENSE Transition Enabler: Phase III Universal Contract • Advantages • Flexible tasking options √ Streamlines negotiations Exploratory application study √ • Creates central Phase III Fur ther R&D √ contract System Integration Analysis √ • Pool for PMAs Customized prototype for √ • Easier for PMAs to use SBIR specific platform needs √ Capitalizes on positive SBIR Test & evaluation attributes: √ • Rapid response in fast Production buy √ moving technology market Suppor t √ • Innovative solutions to benefit Training √ the warfighter • Cost effective • Flexibility in competitive • 5 years duration environment • $25 million in total funding √ Permits one agency to leverage another FIGURE 5-7 Phase III Universal contract. SOURCE: Carol Van Wyk, NavAir. • Incentives. Better incentives5-07 be needed in several areas. Acquisi- may tions officers need career-oriented incentives that will reduce risk and enhance the benefits of participating actively in the SBIR program. However, incentives might also be needed to encourage the primes to participate more fully in the program. This could include financial incentives of several kinds for meeting SBIR inclu - sion goals on major contracts, or even—as suggested by SBTC—requirements that large contracts meet certain SBIR goals, similar to current targets for woman- and minority-owned businesses. Some programs similar to this are already in place. For example, PEO SUB offers a small business subcontracting incentive in its Virginia-class program through a formal plan incorporated as clauses in the Virginia-class construction contract which allow for the payment of a Small Business Subcontracting Incentive Fee (SBSIF) for increasing the level of small business subcontracting participation. 5.7.1 Improving Program Officer Use of SBIR A number of symposium speakers noted that acquisition officers were the key to moving SBIR to Phase III. They controlled the funding, and their involve - ment was critical. And active championing by Program Executive Officers seems to be a critical ingredient in Phase III success. A clear cultural shift was observed at Navy once Program Executive Officers became active champions of SBIR involvement in acquisitions.

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 PHASE III CHALLENGES AND OPPORTUNITIES • Senior acquisitions involvement. For DoD, there appears to be no substitute for the systematic support and involvement of acquisitions officers, especially at the most senior level. PEO SUB has driven major changes in the SBIR culture within that component of Navy, with transformative results. Only senior managers can insist that all program managers integrate SBIR fully into their acquisition programs—and give them strong incentives to do so. • Follow-on funding. Some suggest that further improvement in this area include the development of a fund for the provision of matching funds for Phase III (which would reduce the risk level for program managers, and would follow NASA practice). • Tools for better integration with acquisitions. There are very real barriers to the smooth flow of information within DoD and among key SBIR stakeholders. Companies are naturally reluctant to share important technical information, and small businesses in particular are well aware of the potential dangers of sharing key intellectual property with companies that could easily turn out to be competitors (i.e. the primes). This leaves SBIR companies in many cases with Hobson’s choice: share their IP and hope for the best, or stay private and be frozen out of partnerships with the primes that dominate DoD spending. Finding ways to address these issues—possibly through better protection of small business IP, or at least better training for acquisitions officers about SBIR IP protections, is an important area for further exploration. • Educating Program Executive Officers that the SBIR-supported tech- nologies can be big time- and money-savers, and that small companies can produce to scale and on time. Richard Carroll, then-CEO of Digital System Resources, noted that SBIR training had been part of the general Program Ex - ecutive Officer training curriculum for one year, but was later deleted.35 In the Navy, SBIR management has tried to provide a consistent message to Program Executive Officers and program managers: “SBIR provides money and opportu- nity to fill R&D gaps in the program. Apply that money and innovation to your most urgent needs.”36 In essence, SBIR’s unique advantages can be used to solve specific kinds of problems for acquisition officers. • Incentives. The evidence above suggests that DoD needs to find ways to reduce the risk to program mangers of utilizing SBIR Phase II technology. Various options might be considered, not least on a pilot basis. 5.7.2 Roadmaps and Technology Planning Because the integration of subprojects (such as those funded by SBIR) into larger weapons systems is such a complex and long-cycle process, speakers from the primes stressed that coordination is key: 35 National Research Council, Symposium on SBIR: The Phase III Challenge, Washington, DC, June 14, 2005. 36 Presentation by John Williams, Navy SBIR Program Manager, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005.

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 SBIR AT THE DEPARTMENT OF DEFENSE • Roadmaps are a key to successful coordination of small business ac- tivities with the primes: “To make successful transitions to Phase III, SBIR tech - nologies must be integrated into an overall roadmap.”37 For example, Lockheed Martin uses a variety of roadmaps, including both technical capability roadmaps and corporate technology roadmaps. Roadmaps allow program officers to gener- ate effective “pull,” via the leads to the prime and to smaller subcontractors. • Start early. The long development cycle of major weapons systems means that for SBIR projects, panning activities must start very early in the technology development cycle—if possible during Phase 0—the stage at which topics are developed. 5.7.3 Outreach and Matchmaking Suggestions focused on the need for more events like the Navy Opportunity Forum, on better communications channels, and on improved databases that shared technology results more effectively across agencies: • Improved information flow. New electronic tools are needed to help share technologies and opportunities between and among stakeholders. Current databases are not sufficient. • Very-early-stage outreach. As stakeholders have noted the importance of very early planning, new mechanisms may be needed to bring small business into the planning process at an earlier stage than is currently the case. • More funding for outreach. The Navy’s TAP program appears to con- stitute a best practice model. It would therefore be appropriate to provide the fund- ing necessary to support similar activities at other agencies and components. 5.7.4 Integrating the Primes and SBIR Elements of an improved relationship between SBIR programs, acquisitions offices, and the primes are already in place, though these elements are scattered across DoD. Some of the reforms that might improve relationships among these parties are: • Extensive outreach by SBIR program managers to primes’ Technical Management and Strategic Sourcing staff. • Education for managers of the prime contractors about the competitive advantages of participating in the SBIR program, and about congressional interest in the success of Phase III. • Improved mechanisms for participation of the primes in topic development. 37 Presentation by Mario Ramirez, Lockhead Martin, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005.

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 PHASE III CHALLENGES AND OPPORTUNITIES • Improve primes’ subcontract reporting to include a separate breakout for SBIR firms, similar to those currently provided for woman-owned and minority- owned firms. • Improved reporting could be matched by expanded requirements, for example that all new contracts over a specified size should include SBIR subcon - tracting goals and incentives. • Making the SBIR subcontracting plan part of the evaluation criteria for major contracts. • Make sure primes are paid for “Technology Insertion,” and that it is a major element of their contract. 5.7.5 Funding for Program Management • Add management funding. The success of the Navy Phase III effort is at least partly predicated on the extensive and expensive outreach and com- mercialization support activities it has implemented. While funding is currently provided by the Navy out of its administrative budget, similar funding has not been available at other components and agencies—and hence similar programs have not developed. Additional funding for these purposes should be provided. In contrast, the entire Air Force SBIR program is managed by four staff members at Wright-Patterson AFB. While the program has experienced 70 percent growth since 2000, there has been no additional funding for transition assistance or program administration. As a result, the Air Force has no funds to document or track success—which is an important component in helping acquisi- tion program managers see the value of the program.38 5.7.6 Training • Acquisitions officers. Improved understanding of SBIR among acquisi- tions officers is probably a necessary condition for overall increase in Phase III success rates. Several possible options here include: R equiring SBIR training through the Defense Acquisition University. Requiring Phase III reporting by acquisition offices. Requiring acquisition programs to include SBIR projects and the planned transition path in milestone reviews. 5.7.7 Reduce Time from Topic Selection to Award • Ensure acquisition offices are aware of and leverage Phase II to Phase III gap-funding programs. 38 Presentation by Mark D. Stephen, Air Force SBIR Program Manager, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005.

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 SBIR AT THE DEPARTMENT OF DEFENSE 5.7.8 A Flexible Approach to Other Possible Agency Initiatives and Strategies A number of suggestions seem to be best addressed through the design and rollout of carefully designed pilot programs. This would require in some cases waivers from SBA for activities not otherwise permitted under the SBA Guide- lines. SBA should be encouraged to take a highly flexible view of all agency proposals for pilot programs. Some possible options that could be explored in this way include: • Small Phase III awards. These could be a key to bridging the “valley of death” between technology development and commercialization. Providing even small Phase III awards—perhaps enough money to fly a demonstration payload—for a technology not ready for a full Phase III might be explored. • Unbundling larger Phase III awards. Organizing larger contracts into smaller components would open Phase III opportunities. For example, the unbundling of a large contract for a complex life sciences module being competed by Lockheed and McDonnell Douglas in 1995 led to Orbitec’s major $57 million Phase III award. • Redefining T&E within SBIR. DoD and SBA could adopt a wider view of RTD&E, so that SBIR projects could qualify for limited T&E funding. That in turn would help fund improvements in readiness level. • Spring loading Phase III, by putting place in milestones that could help to trigger initial Phase III funding. This could occur in the context of larger, staged, Phase II awards in which additional stages fund more Demonstration and T&E when non-SBIR funds or resources are leveraged (beyond current Phase II-plus). This chapter’s focus is on a key phase of the program, the transition from a successful Phase II to Phase III. It describes the multiple challenges participat - ing firms, program managers, and senior management face in maximizing the returns on the SBIR program at DoD. Also described, however, are a wide range of measures developed over a decade to meet the transition challenge and ad- dress congressional concerns about the need for greater commercialization. This active experimentation, and the flexibility that permits it, are hallmarks of the SBIR program at DoD. The recommendations made here are intended to contribute to enhanced out- put from the program that is increasingly seen as an asset by Program Executive Officers and others in the Defense acquisition process. The growing interest of the prime contractors, the new incentives provided by Congress, and the growing recognition of SBIR companies as a valuable source of innovation are all positive trends that these recommendations are intended to enhance.