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Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes (2019)

Chapter: 4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications

« Previous: 3 Alternate PublicPrivate Partnership Options
Suggested Citation:"4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
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Suggested Citation:"4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
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Page 37
Suggested Citation:"4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
Page 38
Suggested Citation:"4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
Page 39
Suggested Citation:"4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
Page 40
Suggested Citation:"4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
Page 41
Suggested Citation:"4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications." National Academies of Sciences, Engineering, and Medicine. 2019. Strategic Long-Term Participation by DoD in Its Manufacturing USA Institutes. Washington, DC: The National Academies Press. doi: 10.17226/25417.
×
Page 42

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

4 DoD Long-Term Manufacturing Institutes Strategy: Business Model Options and Implications The business model options and implications that follow were developed by the study committee to span the range of alternative strategies for DoD to consider in developing its long-term engagement with existing and potential future institutes. These options and implications were developed in closed-session during the two and half days immediately following the study workshop, while the inputs from all relevant sources were fresh in the committee’s thoughts. The committee observed two distinct DoD modes of engagement with the institutes: (1) as co- investor with industry in creating an ecosystem that will lead to dual use U.S. supply chains in an emerging technology sector and (2) as a customer for DoD projects that tap capabilities in these sectors to meet defense needs. The first engagement mode, also referred to as DoD core funding, has been dominant to date. However, from the outset DoD core funding was planned to ramp down after 5-7 years. With these two modes of engagement in mind, the committee developed the following five business model options for evaluation:  Option A: Current model with planned reduction in DoD support for core activities.  Option B: Current model with improvements to processes, offerings, and value-based core funding.  Option C: Transition to DoD customer model.  Option D: Transfer core responsibilities to the National Program Office at NIST.  Option E: No core funding of institutes beyond initial investment. OPTION A: CURRENT MODEL WITH PLANNED REDUCTION IN DOD SUPPORT FOR CORE ACTIVITIES The current model was used to establish and operate the DoD institutes as public–private partnerships, with an emphasis on core activities (including funds for unencumbered industry-driven institute R&D projects) for the first 5-7 years. Core funding is provided by the OSD ManTech program office, each institute’s membership dues, state funding and in-kind cost share from members. As shown in Appendix B, 14 of the 20 generic institute offerings currently use non-project core funding (although some could transition to funding as discrete projects). The OSD ManTech budget1 for the eight institutes is projected to decline from $92 million in FY2019 to $37 million by FY2023. Although DoD adjusts budgets annually, this expected funding constraint would necessitate a reduction in core activities supported by OSD, with available funding going to the highest-priority core offerings as determined by DoD. The current model also assumes that unencumbered joint public–private partnership funding for industry-driven R&D projects as part of core will likely come to an end due to budget constraints. Executing Option A is based on renewed or extended Cooperative Agreements (CAs) or Technology Investment Agreements (TIAs) with each institute as their current agreements expire. It anticipates that OSD oversight of the DoD institutes will continue to reside in the Manufacturing Technology Office under the Office of the Under Secretary of Defense for Research and Engineering (USD(R&E)). It also 1 Julie Locker, JDMTP Chair, 2018 Defense Manufacturing Conference, presentation on December 3, 2018. PREPUBLICATION COPY – SUBJECT TO FURTHER EDITORIAL CORRECTION 4-1

assumes that contracting and government program management via Contracting Officer’s Technical Representatives (COTRs) would continue to be provided by the current Army, Air Force and Navy contracting offices. Under Option A, institutes will need to find other sources of funding to maintain core activities and cover overhead and administrative expenses. Long-term funding for customer-defined project offerings could come from DoD, other federal stakeholders, industry, and foreign sources, but few or none are expected to provide core funding beyond their current membership dues. Financial anorexia will slowly make it more difficult for institutes to decline alluring international offers of funding. Foreign interest in the DoD institutes exists now and will steadily increase as they mature their respective technologies. A summary of the implications for DoD goals is provided in Table 4.1. TABLE 4.1 Impact of Option A: Current Model with Planned Reduction in DoD Support for Core Activities DoD Goal Implications 1. Impactful R&D  Both core activities and industry-driven core projects in TRL/MRL 4 to 7 will be difficult to fund and narrow in impact.  Impact on the U.S. industrial base may be adversely affected if institutes are driven to accept foreign funds. 2. Viable business plans  With reduced core funding, institutes will focus on revenue generating offerings and become less mission-driven.  Unfunded core offerings that don’t generate revenue will be cut back or dropped. 3. Maximize value delivery  Reduced DoD support of core activities will reduce influence on the ecosystem and its dual use value to DoD.  If industry does not make up the difference in funding, important ecosystems elements will lag. 4. Stakeholder understanding  Retains a role for DoD to collaborate with all stakeholders on core activities, but reduces DoD input to industry-led R&D projects if they no longer fit within funding constraints. 5. Capable workforce  Assumes DoD will continue to give priority to co-investment in broad EWD programs as part of the reduced core funding.  Increases dependence on customer funded projects to do targeted EWD projects, which have been scarce to date. OPTION B: CURRENT MODEL WITH IMPROVEMENTS TO PROCESSES, OFFERINGS, AND VALUE-BASED CORE FUNDING This option is structured to build on Option A, applying the potential improvements obtained as inputs from the stakeholder groups to the maximum extent possible within budget constraints. Option B assumes DoD will formally review the performance of each institute as part of the decision to extend or renew agreements, and will fund continued support of core activities at a level commensurate with the value to DoD (which may or may not be higher than Option A depending on results of the reviews). Appendices C and D contain summaries of the potential improvements, listing key activities that DoD and the institutes would consider “keep doing,” “start doing,” and “stop doing.” Many of these improvements will require no or low additional cost to implement, yet will improve outcomes and also save time and money. Option B assumes DoD will work with the institutes to prioritize improvements that yield the best value, starting with those that improve the high value offerings discussed in Chapter 2. PREPUBLICATION COPY – SUBJECT TO FURTHER EDITORIAL CORRECTION 4-2

Given the dual-use nature of the technologies involved, and the importance to commercial industry of the core activities, Option B also assumes continued core cost share from non-DoD sources. The improved core processes and communication mechanisms of Option B will give DoD a better basis for assessing the long-term value of a continued public–private partnership for co-investment, and for defending the DoD core budget accordingly. Appendix D identifies several potential communication mechanism improvements to be considered for DoD Strategic Goal 4, “Maximize Stakeholder Understanding of the Institutes.” The budget level will be set by DoD, but even if it remains at the level expected by Option A, the implementation of improvements and continuation of core funding for high- priority offerings will be more beneficial to DoD goals than Option A. A summary of the implications for DoD goals is provided in Table 4.2. TABLE 4.2 Impact of Option B: Current Model with Improvements to Processes, Offerings, and Value- Based Core Funding DoD Goal Implications 1. Impactful R&D  Same as Option A, but mitigated by improvements that reduce the R&D contracting time and promote a stronger focus on DoD needs. 2. Viable business plans  Like Option A, retains DoD role as a co-investor at some level, but risks reduction in the scope of core activities despite more efficient use of resources.  Puts viability of some institutes at risk. 3. Maximize value delivery  If core funding stays at projected Option A level, reduces influence on the ecosystem and its dual-use value to DoD.  Benefits from formal reviews of both short-term and long-term value at renewal points. 4. Stakeholder understanding  Includes several communication improvements that increase the breadth and depth of stakeholder understanding and engagement. 5. Capable workforce  Same as A, plus improvements in cross institute coordination and adoption of best practices to enhance workforce education and training. OPTION C: TRANSITION TO DOD CUSTOMER MODEL Option C transitions from the current focus on core activities to a new focus on projects driven by DoD needs and sponsored by DoD customers outside the OSD ManTech office. The committee believes there is a clear opportunity to better connect the Manufacturing USA institutes to the Service ManTech programs, the broader S&T community, and the DoD Acquisition and Sustainment communities in order to expand the impact of the Manufacturing USA institutes for DoD. The vision for Option C is that the Manufacturing USA institutes move beyond the initial start-up phase to assume a prominent role in advanced manufacturing technology maturation for DoD. Table 4.3 shows how Option C differs from options A and B in the actions needed by DoD and the institutes to connect with technology development activities at the front end of the TRL/MRL 4-7 window, and with technology implementation activities at the back end of the window. Under this option, the institutes would grow their program portfolios to provide customer-relevant offerings of expertise and (where applicable) equipment and facilities as a technology resource to the broad DoD community. Institutes would also offer relevant EWD project support to meet DoD needs, such as those identified in a recent GAO report2 to maintain depot workforce skills. Institutes that succeed in offering solutions and capturing 2 U.S. Government Accountability Office, 2018, DOD Depot Workforce: Services Need to Assess the Effectiveness of Their Initiatives to Maintain Critical Skills, GAO-19-51, December, Washington, DC. PREPUBLICATION COPY – SUBJECT TO FURTHER EDITORIAL CORRECTION 4-3

project-based direct support from DoD customer communities would both serve the business interests of their members and increase the number of projects that can absorb a share of the infrastructure costs of the institutes. In Option C, DoD customer-focused projects would tailor cost share requirements (mandatory or optional) based on project objectives. For example, projects with high commercial potential might mandate industry cost share, while those unique to military applications might not. As noted in Chapter 2, during the workshop breakout II “Keep Doing, Stop Doing, Start Doing” exercise some members of the DoD stakeholders group proposed “eliminate cost share requirement.” Option C entails a shift from the DoD sponsor model in the start-up phase of the Manufacturing USA institutes to a DoD customer model in the long-term engagement phase. The committee recognizes that this shift requires effort to build the connections necessary to generate customer project funding. A 3-year transition period is recommended by the study committee for this option. In this period, OSD ManTech can ascertain the most effective approach to retain important core functions, such as Education and Workforce Development and Technology Roadmapping. Option C gives the OSD ManTech office a greatly expanded role to facilitate institute connections to DoD customers, understanding of needs, and program development. This option assumes OSD will arrange assistance with S&T and ManTech organizations and build interfaces with OSD and Service Acquisition and Sustainment organizations to facilitate the necessary customer connections. To meet DoD customer needs for speed of prototyping and smooth transition to production, this option also assumes that DoD will establish an Other Transaction Agreement (OTA) interface with the institutes, either individually or through some networked mechanism Finally, Option C expects that an institute’s portfolio of core activities and projects will continue to include non-DoD sponsored activities supported by other federal or state organizations as well as commercial industry, to contribute to the original dual-use mission of the Manufacturing USA institutes. TABLE 4.3 Option C as a Pathway to DoD Customer Communities Option Addressable DoD Markets DoD Actions Institute Actions A. Current OSD ManTech Support fewer core activities Become more self- sustaining Plan B. Improve OSD ManTech Same as A, with improvements Same as A, with improvements in Core in core processes and network core processes and network C. Shift Focus Service ManTech Facilitate through JDMTP Understand ManTech needs to Customer S&T Facilitate connections Compete for S&T projects Projects – Uses BAAs, sometimes – S&T COIs, R&E Top Ten – Dev/Market relevant OTAs leaders capabilities – Front end of TRL/MRL – Roadmap matching – Use OTA business methods 4-7 Facilitate connections Engage with PEOs Acquisition R&D – Create OTA interface – Leverage OEM members, – Increasing use of OTAs – Broker transition understand needs – Back end of TRL/MRL agreements – Be a competitive business, 4-7 Facilitate connections go fast O&M and Depots – Create rapid contracting Engage with depots – Workforce interface – Understand needs development, – Depots sponsor projects – Competitive pricing modernization needs – Fast, convenient contracting Option C represents a substantial shift in engagement model and focus compared to Options A and B. Its primary focus is on increasing DoD customer-driven projects that deliver impactful R&D, implementation and associated workforce development to meet DoD needs. Given the dual use nature of the institutes’ technology areas, many of these projects will spin in commercial technologies or spin out commercial benefits, so Option C engagement with the institute membership and capabilities will PREPUBLICATION COPY – SUBJECT TO FURTHER EDITORIAL CORRECTION 4-4

continue to help meet DoD goals. Under Option C, continued DoD support for core activities is possible where they add value, but secondary. A summary of the Option C impact on DoD Goals is provided in Table 4.4. TABLE 4.4 Impact of Option C: Transition to DoD Customer Model DoD Goal Implications 1. Impactful R&D  Enhances the direct impact of institute R&D on DoD needs through customer projects. However, the gradual de-emphasis (not abandonment) of core activities reduces DoD’s impact on the ecosystem it will rely on in the future.  There is also a risk that project sponsors will favor early or late TRL/MRL projects, leaving a gap in the “valley of death.” 2. Viable business plans  Higher risk than options A or B, in that agency-directed projects must be generated to provide the funding currently received as core funding used to fund unencumbered institute projects at the institutes. The risk is reduced through the proposed 3-year transition period. 3. Maximize value delivery  Improves integration of the institutes with DoD needs and enhances value delivery by increasing impact of institute R&D.  By adding an OTA contracting mechanism, the development and delivery of solutions for DoD will be further accelerated.  Potential negative impact on multiple current core functions of value to DoD based on available Option C core funding. 4. Stakeholder understanding  Assign a major new role to OSD ManTech to facilitate direct institute connections to a wider set of DoD organizations, thereby increasing mutual understanding. 5. Capable workforce  Embraces and supports project-funded workforce education and training in projects that transition to dual-use supply chains and DoD’s depot workforce. OPTION D: TRANSFER CORE RESPONSIBILITIES TO THE NATIONAL PROGRAM OFFICE AT NIST This option would phase out DoD core funding for the institutes after 5-7 years (as originally planned), and transfer responsibility to the NIST Advanced Manufacturing National Program Office (AMNPO) for all functions except DoD sponsorship of mission-related R&D projects. The rationale is that continued support of development of an ecosystem to benefit economic growth and global competitiveness is not a primary Defense mission once the startup phase is completed. Under the Revitalize American Manufacturing Innovation (industrial) Act of 2014,3 Congress specified eight purposes for the NNMI program, all related to economic growth and competitiveness. The RAMI act established the AMNPO at NIST to act as a convener of the network of Manufacturing USA institutes and oversee planning, management and coordination of the program. Option D would depend on congressional action to authorize and appropriate funds for the NPO to support the federal share of core activities at the Manufacturing USA institutes (including former DoD Manufacturing USA institutes) and to replace current DoD cooperative agreements with new contractual agreements for this purpose. DoD sponsorship of R&D projects would be contracted directly with the Manufacturing USA institutes, using OTAs or other appropriate contracting mechanisms. Since the federal interface would shift from DoD to 3 Title VII of Division B of Public Law 113-235. PREPUBLICATION COPY – SUBJECT TO FURTHER EDITORIAL CORRECTION 4-5

NIST, connection to DoD project sponsors would receive less help than Options A or B, and much less than Option C. Option D may seem attractive to some in DoD as a way to free up defense resources, but it is far riskier for DoD goals than Options A, B, or C. If Congress does not support NIST taking on the role of core funding, the viability of the institutes is doubtful. If core funding is provided through NIST, DoD influence on the core agenda will no longer exist and the connection to DoD needs will be unworkably distant. A summary of the Option D impact on DoD Goals is provided in Table 4.5. TABLE 4.5 Impact of Option D: Transfer Core Responsibilities to the National Program Office at NIST DoD Goal Implications 1. Impactful R&D  Loss of DoD influence on institute agendas. Shift in emphasis from dual use to commercial impact. DoD projects less likely. 2. Viable business plans  Unsustainable if Congress does not fund. Consequence would be loss of sources for DoD projects and reduced likelihood of dual use U.S. supply chains in areas of DoD interest. 3. Maximize value delivery  Optimized for commercial impact, not DoD (except projects). 4. Stakeholder understanding  Serious loss of connection with DoD customers. 5. Capable workforce  Focused on commercial workforce, not defense industry or depots. OPTION E: NO CORE FUNDING OF INSTITUTES BEYOND INITIAL INVESTMENT This option would eliminate DoD core funding for the institutes after 5-7 years (as originally planned), but unlike Options A and B, would ramp it down to zero. This is consistent with the original plan. It is anticipated that not all institutes, if any, will survive this model. The rationale is that those institutes that provide dual use value to DoD would also have commercial value on a scale large enough to keep the institute afloat. The option assumes that to meet the core funding needs of the institutes, commercial investments would replace the DoD investment. DoD could continue to sponsor projects and take advantage of the commercial investment in institute facilities and expertise, but customers would have to contract with individual institutes or directly with their members. Since Option E would no longer have OSD ManTech as a network manager and DoD interface facilitator, a likely result would be incoherence in DoD understanding of institute capabilities and institute understanding of DoD needs. Where institutes manage on their own to connect with DoD customers, engagement would entail multiple contractual vehicles and engagement interfaces. The risks associated with this model include a breakdown of the institute network; potential foreign engagement and influence of the institute; lack of participation and outreach to SMEs; and loss of some critical, if not all, of the institutes. Like Option D, Option E might seem attractive to those in DoD who want to free up resources, but it is the highest risk option in terms of impact on DoD goals. Option E is essentially abandoning the federal role in the public–private partnership at a time when development of the ecosystem for dual use supply chains is far from complete, despite initial optimism that 5-7 years of DoD investing would be sufficient. A summary of the Option E impact on DoD Goals is provided in Table 4.6. TABLE 4.6 Impact of Option E: No Core Funding of Institutes Beyond Initial Investment on DoD Goals DoD Goal Implications 1. Impactful R&D   R&D will no longer be focused on DoD requirements.    Loss of DoD influence on Manufacturing USA institute agendas.    DoD impact only where projects fit.   PREPUBLICATION COPY – SUBJECT TO FURTHER EDITORIAL CORRECTION 4-6

 Transition path of technology not clear.  2. Viable business plans   DoD no longer strategic partner in business plan.    Loss of sources for DoD R&D projects and long term risk to availability of U.S. supply chains.    Few institutes will have a viable business plan without federal core funding.  3. Maximize value delivery   Agenda no longer focused on DoD requirements.    Institutes would have no assistance in connecting with DoD customers to maximizing value.  4. Stakeholder understanding   DoD understanding of institutes’ capabilities and innovations would occur only where institutes succeed on their own in making connections. Institutes will have no DoD partner to assist with understanding of DoD needs.   5. Capable workforce   If workforce development survives at all, it may not be suitable for DoD needs.  Let the experiment reach its conclusion per the preliminary design. It’s time for the government to be a customer of the institutes, not an investor. —DoD stakeholder interview PREPUBLICATION COPY – SUBJECT TO FURTHER EDITORIAL CORRECTION 4-7

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To effectively mature and transition DoD manufacturing science and technology advances into production, DoD must have access to a robust and responsive U.S. industrial base which is often driven by advanced manufacturing technologies. The Manufacturing USA institutes are considered crucial and game-changing catalysts that are bringing together innovative ecosystems in various technology and market sectors critical to DoD and the nation.

Since 2012, DoD has invested $600 million directly in its Manufacturing USA institutes with the understanding that the initial federal investment included (1) core funding and (2) one-time, start-up funding to establish the institutes within a period of 5 to 7 years. As the institutes now begin to reach year five, DoD is evaluating the effectiveness of the institutes in fulfilling their goals and the best on-going roles for the federal government, including on-going funding options, to ensure optimal benefit to U.S. competitiveness. This report reviews the role of DoD’s investment to date in establishing its eight institutes as public–private partnerships and its engagement with each institute after it has matured beyond the start-up period.

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