National Academies Press: OpenBook

An Assessment of the SBIR Program at the Department of Defense (2009)

Chapter: 5 Phase III Challenges and Opportunities

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Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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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 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.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

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 priority. 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, growing 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 Committee (HASC) report “directs USD (AT&L) to encourage DoD acquisition managers 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, Technology & Logistics to encourage acquisition program managers and prime contractors 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 Research 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 increased use of Phase III contracts by acquisition programs.

4

Presentation by John Williams, Navy SBIR Program Manager, October 15, 2005. Available at <http://www.onr.navy.mil/about/conferences/rd_partner/2005/docs/past/2004/2004_williams_navy_tap.pdf#search=%22Navy%20primes%20initiative%22>.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

These efforts highlight the longstanding interest in Congress in the success of Phase III at DoD, and the consistent congressional encouragement to the Defense 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 researchers focused specifically on Phase III issues. Many of the comments at the meeting 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.

FIGURE 5-1 Phase III awards total in millions of dollars, 1999–2005.

FIGURE 5-1 Phase III awards total in millions of dollars, 1999–2005.

SOURCE: John Williams, Navy SBIR Program Manager, April 7, 2005.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
FIGURE 5-2 Return on Investment for SBIR at DoD.

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.

Nonetheless, the DD350 data do show that the amount of Phase III contracts 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 noting 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.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
FIGURE 5-3 Reported commercializations vs. SBIR budget.

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.

FIGURE 5-4 Distribution of Phase III sales.

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

From an agency perspective, SBIR offers important and unique opportunities, which should be reflected in a strong and growing Phase III program. In particular,

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
FIGURE 5-5 Number of Phase III awards at PEO SUBS.

FIGURE 5-5 Number of Phase III awards at PEO SUBS.

SOURCE: Richard McNamara, PEO SUBS, Presentation to SBTC SBIR in Rapid Transition Conference, Washington, DC, September 27, 2006.

  • Flexibility. SBIR offers an unusual degree of execution year flexibility, unlike most RTD&E accounts which have to be described in detail in the 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 prototypes 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 commercialize 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 effort, 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.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

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 relevant 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 impede 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

Percent

BA

(Stage in Technology Development)

Title

(Description of Level of Technology Development)

6.1

6.2

6.3

Basic Research

Applied Research

Advanced Tech. Development

6.4

6.5

6.6

6.7

Adv. Component Dev. Prototypes

System Dev. And Demonstration

RDT&E Management Support

Operational System Development

SOURCE: Navy FY 2003 SBIR Assessment.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

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 program 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 Technology 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 Unconventional 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 Transition: 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 <http://akss.dau.mil/dag/DoD5000.asp?view=document>. It was last updated December 16, 2004.

12

USD (AT&L), Interim Defense Acquisition Guidebook, October, 2002, p. 41.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

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 elements 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. Examples 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 transitioning 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.

13

A 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.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

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.

  1. 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 laboratory environment or in simulated operational environment.

  2. 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 prototype in a test bed aircraft.

  3. Actual system completed and qualified through test and demonstration.

    Technology has been proven to work in its final form and under expected conditions. 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.

  4. Actual system proven through successful mission operations.

    Actual application of the technology in its final form and under mission conditions, 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 Readiness 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.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

Who pays for technology risk mitigation? Both the Department of Defense Instruction 5000.2 (May, 2003) 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 development 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 company that uses ceramics technology for several DoD systems:

ACR is just one example of the small businesses that are succeeding in developing 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 currently 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.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

BOX 5-3

Prime/SBIR Success Stories

Representatives from the primes at the NRC Phase III Symposium also noted that there had been some important success stories in working with SBIR projects, including:

  • Virtual Cockpit Development Program (Boeing).

  • Advanced Adaptive Autopilot project, part of the Joint Direct Attack Munitions Program (JDAM) (Boeing).

  • Cruise Missile Autonomous Routing System (CMARS) for the Tomahawk Mission Planning System. (Boeing).

  • Mark 54 Torpedo Array Nose Assembly (Raytheon).

  • Exo-Atmospheric Kill Vehicle (Raytheon).

capitalists, which are not, in any case, attracted to government contracting opportunities for a variety of reasons such as the expected limited market size, long lead times, and the level of regulatory “red tape” encountered in the procurement process. Similarly, firm founders are often reluctant to dilute their equity position to accommodate the needs of venture investors.

  • Phase III Funding Size. Phase III may not be large: Mr. Mark Redding, CEO of Impact Technologies, noted that his company had successfully won more than 30 Phase III awards—but that these had averaged only $50,000 each (often not enough to get the technology to TRL 6).

  • Planning. A number of agency staff and prime contractors noted that companies needed to be concerned with commercialization and Phase III activities right from the start—even during Phase 0, before the first Phase I was awarded. If an acquisitions program was unaware of a promising technology until after the Phase II had been completed, the relatively slow pace of acquisition meant a very substantial delay before the technology could be integrated into the program, even in the best of circumstances.

  • Roadmaps. Much technical planning in DoD acquisition is driven by roadmaps developed by program officers and prime contractors. Failure to integrate SBIR and small businesses generally into these roadmaps means that they are likely to be excluded from acquisition programs, regardless of their technological success.

  • Contract Downsizing. Even once a substantial Phase III has been awarded, there are no guarantees that the budget will be maintained at the contracted level.17

17

For example, Orbitec’s $57 million NASA Phase III contract was reduced by more than 80 percent after its first year.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
  • Budget Squeeze. In general, small businesses may lack the influence to maintain budget levels when agencies change priorities—and this can be devastating for companies with few other resources.

5.4.4
Prime Contractor Perspectives

There is considerable evidence that prime contractor interest in—and engagement with—the SBIR program has been growing rapidly in recent years (see Chapter 6). This is reflected in growing contractual linkages. Raytheon, for example, estimates that the value of technology leveraged through SBIR jumped from $3.8 million in 2004 to $11.6 million in 2005, and looks set to grow as rapidly in 2006. Raytheon is involved with 36 Phase I projects, 17 Phase II projects, four Phase III projects (with three more in the works), and has been a subcontractor on other projects.18

A number of points regarding the relationship of prime contractors to SBIR projects were expressed at the NRC Phase III Symposium. These included:

  • Increased interest in SBIR. Strikingly, representatives of prime contractors testified both that there was already a substantial amount of prime involvement with the SBIR program, and also that recently several primes had made significant efforts to increase their levels of involvement. For example, Boeing had recently decided to increase its emphasis on SBIR—its lead SBIR liaison was now working on the program 100 percent time (up from 20 percent). At Raytheon, some divisions (e.g., Integrated Defense Systems) had been working formally with SBIR for some years. Half to two-thirds of a typical program for Raytheon Missile Systems was outsourced to subcontractors, and more than half of the companies involved meet the SBA’s small business definition.

  • Agreement on the TRL Gap problem. Speakers from Lockheed observed that the key to the transition from TRL 4-5 to TRL 6-8 was the presence of available funding on hand. This reflected the comments of many speakers that smoothing the funding path across the route from TRL 4-5 to TRL 6-9 was the single most important step to improved take-up of SBIR projects into acquisition programs.19

  • Lack of efficient links to small firms. Many speakers noted the important example of the Navy Opportunity Forum as a means of making connections between the agency and program officers, SBIR program officers, primes, small businesses, and other funders such as venture capitalists. However, the Forum was seen as unusual, largely because other DoD agencies do not make the funds available for similar activities.

18

Lani Loell, SBIR Program Manager, Raytheon Integrated Defense Systems, presentation to SBTC SBIR in Transition Conference, September 27, 2006, Washington, DC.

19

Presentation by Mario Ramirez, Lockheed Martin, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
  • Inadequate SBIR database for awards and solicitations. Prime contractors need better capabilities for matching up their technology needs with the capacities of small firms.

  • Lack of evidence and cases. Cases that demonstrate involving small business can lead to a real positive return on investment for the primes might help generate more such partnerships.

  • Real concerns about risk. The risk of working with a small business extends far beyond issues of technology. As Mr. Fisher of General Atomics noted

BOX 5-4

SBIR and Boeing—Expanding Prime Activities

Boeing is one prime contractor that has taken a substantial and increasing interest in SBIR. According to Rich Hendel, SBIR program manager at Boeing, two primary divisions at Boeing—Phantom Works and Integrated Defense Systems (IDS)—are currently working with 32 small businesses on SBIR contracts, including five Phase I, 26 Phase II, and one Phase III. Over the past ten years, Boeing has worked with more than 100 companies on more than 200 projects.

Topic development. DoD sometimes requests that Boeing provide ideas for potential SBIR topics. Boeing solicits ideas from researchers and programs within the company, while working to make sure that potential topics are aligned with Boeing strategic roadmaps.

SBIR advisory council. In October 2005, Boeing formed an SBIR advisory council, with members from 7 IDS and Phantom Works groups. The council meets monthly to map out SBIR strategy.

Phase III tactics. Boeing sees success at Phase III resulting from a number of key components, including:

  • Finding champions early within the government agency who will see technology development through to insertion and implementation.

  • Finding champions within Boeing to push development and implementation.

  • Availability of funding for Phase III at both customer (agency) and prime.

  • Early establishment of the project team—small business, prime, customer.

  • Resolution of proprietary IP issues.

Key Phase III challenges:

  • Difficult to find the right technology and the right provider among the sea of possible partners and technologies.

  • Technologies at low TRL levels (TRL 3-4 after Phase II).

  • Provider track records, especially within Boeing.

  • Funding for Phase III.

SOURCE: Presentations by Mr. Rich Hendel, Boeing SBIR Program Manager at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005, and SBTC SBIR in Rapid Transition Conference, September 2006.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

recently, “Even the best technology cannot overcome small business’ financial instability concerns, particularly on fixed price contracts.”20

  • Cycle time mismatches. SBIR projects can be completed “too soon” for entry into acquisition programs, leaving a timing gap that could stretch into years.

  • Difficulties in integrating SBIR projects into the planning process for acquisitions. The relatively high level of technical risk involved in many SBIR projects means that it is not clear ex ante that SBIR-funded technologies would be sufficiently successful for eventual inclusion in the acquisitions program.

  • Agreement that VC funding is not likely at DoD. Speakers from the prime contractors also noted that venture capitalists were unwilling to step into the Phase III funding gap partly because government contracts might not be large enough to ensure commercial viability, and partly because the longer time horizons and significant uncertainty involved in government contacting did not fit with the relatively short time horizon and private market focus of venture capital firms.

  • Misalignment between agencies, primes, and small business. Several speakers, including Senate staff, noted that communication was not always good between the agencies, the primes, and the small business research community. Primes often had difficulty identifying the technology assets of small businesses. Small businesses often had weak linkages into the primes. Boeing noted that it was eager to partner with small businesses and had a significant track record in doing so within the SBIR program, but small businesses rarely came to Boeing seeking partnerships.

5.4.5
Program Officer Perspectives

A considerable part of the NRC Phase III Symposium focused on the role of program acquisition officers, and their difficulties in participating fully in Phase III. A number of speakers noted that program officers were critical to effective transition because they controlled acquisition funds needed to eventually move SBIR technologies into weapons systems.

Several speakers observed that acquisition program managers did not traditionally see SBIR as part of their mainstream activities. The CEO of Trident, Inc., Mr. Karangelen, observed more specifically that 89.9 percent of all federal R&D was currently being performed by the 100 largest contracting companies. Less than 4 percent went to small businesses. Only about 0.4 percent of all R&D generated by the government went to small technology businesses, even though one-third of all U.S. scientists and engineers were employed there.

20

Fisher, General Atomics, presentation at the SBIR in Transition conference, Washington, DC, September 27, 2006.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

Many speakers noted that few program managers and Program Executive Officers had historically taken an interest in SBIR. There appear to be real barriers to overcome in this area. Most notably, program officers were trained to reduce risk to the minimum, and SBIR-based projects offered a number of added technical and reputational risks, compared to working with prime contractors.

Risk aversion is entirely understandable at DoD, where lives are often ultimately at stake. It is therefore important to understand that from a program officer’s perspective, introducing an SBIR project into acquisition programs can carry with it numerous risks. These include:

  • Technical risks, including the possibility that the technology will not prove sufficiently reliable for use in weapons systems.

  • Company risks, in that SBIR companies are by definition smaller and have fewer resources to draw on than prime contractors. In addition, many SBIR companies have only a very limited track record, which limits program manager confidence in their ability to deliver.

  • Funding risks. The $850,000 maximum for Phase II may not be sufficient to cross the TRL Gap, or to fund a prototype appropriate for subsequent take up by Program Executive Offices.

  • DoD-specific risks, as SBIR companies are often unfamiliar with the very high level of testing and engineering necessary to meet DoD acquisition requirements.

  • Timing risks. DoD planning, programming, and budgets work in a two-year cycle, and it is difficult for Program Executive Officers to determine whether a small firm will be able to actually produce to meet perceived needs, even if the research is successful.

  • Effort/resource risks. Carol Van Wyk (Navy) noted that program managers had a negative view of SBIR partly because they saw it as involving substantial effort, especially in terms of guiding small businesses through the DoD acquisition process, while larger companies were already well versed in these matters.21

In short, it appears that resolving the Phase III transition challenge at DoD will require a substantial effort, similar to that undertaken by the Navy, with regard to the role of acquisition program managers. There are few reasons to believe that such a shift would occur in the absence of renewed focus and incentives at both the DoD and service/agency level.

21

Carol Van Wyk, Navy, presentation to PMA-209, May 25, 2005.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

5.5
PHASE III INITIATIVES

DoD has long been aware that change will be needed if the full potential of the SBIR program is to be unleashed. This potential has been recognized and thus been the object of numerous initiatives over the years, at both the DoD and the agency level.

Given the wide range of challenges that intersect at the Phase III transition, many DoD initiatives bear on the problem, even if they have not been exclusively and explicitly focused on Phase III itself. Thus the Technology Transition Program is focused on technology transfer from DoD S&T programs into acquisitions—the specific policy challenge of Phase III—but it is not limited to SBIR firms, and is not focused specifically on small business.

Considerable further analysis concerning which of these programs is having a substantial impact on SBIR Phase III transition is needed; the data to support such an analysis do not currently appear to exist, but such data should be generated.

These initiatives include:

  • The Technology Transition Initiative (TTI), Defense Acquisition Challenge Program (DACP) and Quick Reaction Fund (QRF) ($64 million in combined funding for FY2005).22,23

  • DoD improvements:24

    • Company Commercialization Report (1993), (Standard Report Form (1997)). The CCR was the first effort at any SBIR agency to develop a way of systematically tracking post-SBIR Phase II outcomes. It was enhanced by development of the standard reporting form in 1997.

    • Fast Track (1995). The Fast Track program was an effort to reward firms for finding third-party funding, which both leveraged the original Phase II investment and also added additional validation of the quality of the research.

    • Solicitation Pre-release (1996). Among the most important initia-

22

GAO notes a limited number of successful outcomes: U.S. Government Accountability Office, Defense Technology Development: 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.

23

GAO says that the purpose of TTI is to “Facilitate the rapid transition of new technologies from DoD science and technology programs into acquisition programs;” DACP is to “Identify and introduce innovative and cost-saving technology or products from within DoD’s science and technology community as well as externally into existing DoD acquisition programs;” and QRF is to “Identify and rapidly field-test promising new technologies within DoD’s budget execution years.” U.S. Government Accountability Office, Defense Technology Development: Management Process Can Be Strengthened for New Technology Transition Programs, GAO-05-480, op. cit., Table 1, p. 6.

24

Unless otherwise footnoted, these topics were mentioned by Michael Caccuitto, DoD SBIR/STTR Program Administrator, in his presentation at the National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005. Descriptions provided by NRC.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

tives at DoD, the pre-release provides a period during which interested small businesses can directly contact topic authors, to determine both the feasibility of a possible proposal, and also to define in more detail the precise nature of the customer’s needs. Although there are no data to measure the results of this initiative, interviews suggest overwhelmingly that small businesses see this is a tremendous time- and resource-saver, and agency staff see pre-release as an important way of ensuring high quality proposals.

  • DoD SBIR/STTR Help Desk (1996). The Help Desk is another important initiative. Now entirely manned by civilian contactors, the Help Desk provides a one-stop shop where small businesses can address many of the nontechnical, but nonetheless daunting, aspects of DoD proposals and contracting. This initiative effectively transfers many “hand-holding” functions from topic authors and SBIR management to professional support staff.

  • Uniform DoD-wide Topic Review Process (1997). The uniform review process has strengths and weaknesses. While undoubtedly eliminating a number of poor quality topics, the added layer of review inevitably means further delays in the final publication of a topic, which can reduce its saliency.

  • DoD SBIR Web Site (1997). Under more or less constant redevelopment since 1997, creation of a very high quality Web-based information delivery system has been a key to bridging the information gap between DoD and small business—and especially small businesses that have never done business with DoD before. It is telling that since 1997, approximately one-third of the companies winning SBIR awards are first-time recipients of SBIR contracts. High-quality/low-cost information is the first step toward encouraging new firms to enter the SBIR competition.

  • DoD SBIR/STTR Desk Reference (1999). The Desk Reference is a comprehensive manual and help documentation, available over the Web. It too provides low-cost high-quality information for applicants.

  • Endorsement and/or Sponsorship of Acquisition Program Topics (1999). Starting in 1999, these acquisition community offices currently sponsor or endorse more than half of all DoD topics. Across DoD, 60 percent or more of topics are now either sponsored or endorsed by program managers or Program Executive Officers.25 At Navy, the acquisition-driven model of topic development has been expanded further. Dr. McGrath, Navy Deputy Assistant Secretary for RDT&E, noted that 84 percent of Navy topics came from the acquisition community, and that Program Executive Officers in the Navy systems commands participated in selecting proposals and managing

25

Presentation by Charles J. Holland, Department of Defense, at National Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005.

Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

    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 evidence (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-effect 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.

    Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
    ×

      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 process. 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 between 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 mentoring to new Phase I winners located in California.

        Key elements of all the plans include an effort to develop better metrics and tracking 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, Washington, DC, September 27, 2006.

        Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
        ×
        FIGURE 5-6 Share of topics attracting Phase III funding.

        FIGURE 5-6 Share of topics attracting Phase III funding.

        SOURCE: Adapted from presentation by Carol Van Wyk, Navy, at Navy Opportunity Forum, 2005.

          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 commercialization, 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.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×

          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 evaluating 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

          29

          Available at <http://www.onpoint.us/>.

          30

          David Bailey, Advanced Technology Review Board, Process Overview Brief for ONR Partnership Conference, August 5, 2004.

          31

          Available at <http://www.jsf.mil/>.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×
          • Modifying the Company Commercialization Report to identify manufacturing 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 proposals 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 Research Council Symposium on SBIR: The Phase III Challenge, June 14, 2005.

          33

          See <https://cto.acqcenter.com> for more information on these initiatives.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×
          • 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 programs. 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 approach encourages strategic planning, is seen as cost-effective, and reduces staff workload.

          • Contracting improvements. NAVAIR pioneered IDIQ (Indefinite delivery/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 practices 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 appears 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 Development: 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.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×
          FIGURE 5-7 Phase III Universal contract.

          FIGURE 5-7 Phase III Universal contract.

          SOURCE: Carol Van Wyk, NavAir.

          • Incentives. Better incentives may be needed in several areas. Acquisitions 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 inclusion 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 involvement 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.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×
          • 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 technologies 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 Executive 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 opportunity 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.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×
          • Roadmaps are a key to successful coordination of small business activities with the primes: “To make successful transitions to Phase III, SBIR technologies 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 generate 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 constitute a best practice model. It would therefore be appropriate to provide the funding 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.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×
          • 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 subcontracting 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 commercialization 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 acquisition program managers see the value of the program.38

          5.7.6
          Training

          • Acquisitions officers. Improved understanding of SBIR among acquisitions officers is probably a necessary condition for overall increase in Phase III success rates. Several possible options here include:

            • Requiring 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.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
          ×

          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 Guidelines. 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 participating 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 address 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 output 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.

          Suggested Citation:"5 Phase III Challenges and Opportunities." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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          The SBIR program allocates 2.5 percent of 11 federal agencies' extramural R&D budgets to fund R&D projects by small businesses, providing approximately $2 billion annually in competitive awards. At the request of Congress, the National Academies conducted a comprehensive study of how the SBIR program has stimulated technological innovation and used small businesses to meet federal research and development needs. Drawing substantially on new data collection, this book examines the SBIR program at the Department of Defense and makes recommendations for improvements. Separate reports will assess the SBIR program at NSF, NIH, DOE, and NASA, respectively, along with a comprehensive report on the entire program.

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