Reliable, fast, working, and user-friendly software is the basis of our everyday lives — something we all take for granted. The military can’t always say the same thing. A new memo endeavors to address that by announcing a huge, structural shift in procurement policy.
The Commercial Solutions Opening, pioneered by the Defense Innovation Unit, has been named by Secretary of Defense Pete Hegseth as the default contracting approach for software acquisition pathway programs and projects. This expansion from a niche contracting approach to a default process marks a decisive move away from the Defense Department’s traditional procurement mode and more fully embraces commercial leading practices.
But why is this memo needed in the first place?
It’s important to look back at the origin of the Defense Innovation Unit and why the Commercial Solutions Opening was created: to change the way the Department of Defense does business and open up a new commercial and dual-use technology industrial base that complements (not replaces) the traditional defense industrial base. As former Secretary of Defense Ash Carter put it in his Drell Lecture almost 10 years ago, “[W]e must renew the bonds of trust and rebuild the bridge between the Pentagon and Silicon Valley.”
For the Department of Defense to achieve the outcomes it desires from this new memo, it may want to consider key lessons learned from the Defense Innovation Unit’s experience developing and scaling the Commercial Solution Opening. Our perspective comes from our collective experience: in addition to pioneering this original methodology at the Defense Innovation Unit, both of us now work for organizations (Deloitte Consulting LLP and Shield Capital) who sell to or invest in companies that sell commercial, dual-use, and defense capabilities to the Department of Defense.
To that end, we offer a summary of the Defense Innovation Unit’s “special sauce” that allowed the Commercial Solutions Opening to be uniquely successful in opening up this new industrial base. To scale this approach, the Department should inculcate a culture that emphasizes speed, flexibility, and collaboration. If done effectively, the Department of Defense should be able to align procurement practices with commercial market incentives, encourage acquisition leaders to take appropriate risk, center the user experience throughout the development process, and leverage established relationships to accelerate innovation and leading technology for the warfighter.
Why Did It Work So Well?
The Defense Innovation Unit’s mission was seemingly simple: connect venture-backed, commercial start-ups — what the Defense Department calls “nontraditional companies” — with Defense customers to leverage top technology. Historically, relationships with these nontraditional companies have been challenging due to acquisition culture. The department had, for many decades, effectively been a monopsonist: a single buyer of things like tanks, missiles, and aircraft carriers in the defense industrial base market. As such, its buying approach, culture, and infrastructure were designed from this perspective, engaging its industrial base as the primary buyer and wielding that market power to the best of its ability. This approach worked in the past. In 1960, 36 percent of all global research and development was driven by the Defense Department. Today, it makes up less than 3 percent, with the commercial sector driving advancements in technology. This means that not only is the Department of Defense not the single buyer, but it is often not considered an important buyer.
Most start-ups can’t afford to take 12 to 18 months to negotiate a contract under the traditional contracting rules governed by the Federal Acquisition Regulation. As recent as 2016, most venture investors would actively discourage start-ups from working with the government based on inefficient outcomes.
We led the creation of a new construct — the Commercial Solutions Opening — to enable the Defense Innovation Unit to be faster, more flexible, and collaborative. However, just using this new approach alone wouldn’t guarantee that the department would become a more attractive customer. Several elements enabled this unique approach to realize the outcomes it sought.
The first was true collaboration. We designed the process to build a better understanding between the government and the vendor of what constituted success, and what might get in the way of it. We put the warfighters in the same room with the technologists to collaboratively design the project with the best possible outcomes for both sides.
The second factor was leadership support of appropriate risk. Without leadership support to do things differently — all the way to the secretary of defense — this would not have happened.
Third, by demonstrating that we could deploy capital quickly and reliably to true nontraditional defense contractors, we signaled to the commercial venture community that the Department of Defense could indeed be a valuable customer.
This resulted in not only an expansion of this dual-use tech industrial base (more companies competing), but also more investors encouraging their portfolio companies to work with the department. In 2016, when the Defense Innovation Unit launched the Commercial Solutions Opening, there was ~$8 billion in venture capital investment focused on defense technology. In 2024, that number was up to ~$43 billion, a 525% increase in just eight years. Still, investment in software as a service technology in 2024 alone accounted for $130 billion in venture capital investment, just under the entirety of the defense budget’s fiscal year 2024 funding line for research, development, testing, and evaluation.
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Source: PitchBook
Source: PitchBookFinally, relationships with this nontraditional industrial base were key. The Defense Innovation Unit leveraged commercial executives — former venture capitalists and technology executives who had the relationships and credibility across various innovation hubs. Through these relationships, they built bridges and connective tissue to entrepreneurs and investors. Without this approach, the Commercial Solutions Opening would not have engaged the companies and solutions it did.
From Memo to Better Outcomes
How can the new memo enable the desired outcomes of faster software development with commercial best-of-breed companies? Drawing on our lessons learned from building and scaling the first Commercial Solutions Opening at the Defense Innovation Unit, there are six key tenets to enable the memo’s desired objectives.
Be a More Attractive Customer to the Nontraditional Defense Market
First, acquisition professionals should recognize how the Defense Department’s value proposition differs between the traditional defense market and the emerging nontraditional defense market. Each market views the business proposition of the department differently, and each segment responds to different incentives. Rather than just engaging its traditional suppliers, who will follow the complex rules for doing business with the department, acquisition professionals need to realize how dual-use and commercial tech markets are fundamentally different. In these ecosystems, the Department of Defense is often a smaller customer, lacking the market power to drive long procurement timelines, complex and one-sided terms and conditions, and detailed cost and pricing insights and direction. Imagine a software firm with hundreds or even thousands of commercial customers who are easy to work with and can buy their products quickly. A defense acquisition officer asking for dozens of unique contract terms with only the potential promise of a sale at the end of a long timeframe is not something many of these firms are equipped for or willing to accommodate. The Department of Defense should comprehend this market’s incentives, structure projects to align to those incentives, and understand necessary changes to effectively engage this market.
Incentivize Critical Thinking and Embrace Flexibility
Leaders should incentivize and reward appropriate risk taking and consideration of opportunity cost to utilize the fast and flexible nature of this tool. Without a top-down approach encouraging a different way of thinking, the use of Commercial Solutions Opening Other Transaction Agreements is at risk of becoming even slower than traditional contracts. Unfamiliarity with this approach is often compensated for by additional process and reviews: more time and more reviewers are often seen as a mechanism to de-risk procurements. However, understanding that risk and opportunity cost are two sides of the same coin, leadership should encourage acquisition professionals to look at both — consider what won’t happen if we don’t move faster or do business differently.
For example, if a contracting officer must sign off that they are willing to accept an opportunity cost of a six-month delay in initiating a new software procurement for a user’s needs, they may be more likely to accept the risk associated with starting it earlier — and getting it into the hands of the user sooner. At the end of the day, behavior and culture are driven from the top down. If leadership incentivizes a different culture and approach to acquisition and contracting, rewards risk-taking, and accepts failure as a necessary and integral part of doing business differently, the Department of Defense can leverage the full power of these innovative approaches and expand its software industrial base.
Put the User at the Center
User feedback is a cornerstone of commercial software development. To get the effective, warfighter-centered outcomes that the Department of Defense desires, end users and their feedback should be central throughout the process. This can be done in multiple ways. First, end user feedback can drive the development of initial solicitation statements to ensure the root problem faced by users is effectively captured. Second, users can be part of the collaborative design of the project. Their expertise in what needs to be prototyped can help design more effective projects. Finally, user feedback should be included as part of the project to ensure that actual feedback informs whether a prototype is successful. To best align with commercial software development, user needs should be at the forefront of every project, every prototype — even every sprint — to effectively deliver capabilities to the department.
Connecting Capital to Accelerate Impact
Program offices should harness the power of existing relationships built by the Defense Innovation Unit and the Office of Strategic Capital with private capital and start-ups to effectively engage nontraditional companies and accelerate innovation across the broader Department of Defense. Outreach to this different commercial industrial base is key. The Department of Defense shouldn’t expect these nontraditional companies (or their investors) to immediately start responding to deals simply because a Commercial Solutions Opening is being used. They’re also not likely using SAM.gov, the federal government’s solicitation website, to search for contract opportunities, or attending industry days hosted at government sites. Instead, program offices leveraging the Commercial Solutions Opening should collaborate with organizations like the Defense Innovation Unit to leverage their existing networks of private capital providers and nontraditional companies who are best positioned to respond to a solicitation. Finally, these relationships are built on trust and an expectation of an addressable market. Once the broader Department of Defense awards more software projects to these nontraditional vendors, we expect more of these companies and their investors will respond to future solicitations, thus growing this dual-use industrial base.
Commercial Practices Show the Way
The software-as-a-service marketplace is highly competitive, and most providers have published licensing models based on customer-derived value. To effectively work with commercial software providers, procurement professionals should move away from labor driven cost-reimbursable contracts to firm-fixed price contract models — including buying capacity or outcomes, rather than hours. Instead of spending time estimating labor hours to create a bespoke piece of software, the Department of Defense can leverage commercially developed software with mission applications that can be applied across the enterprise or multiple customers at speed. This would require a different approach to requirements. Today, the Defense Department often attempts to forecast all the capabilities a piece of software should accomplish. Such an approach leads to a belief that the acquisition community can award a contract for an ideal solution absent ongoing customer feedback. This approach inevitably leads to long timelines before the warfighter can see it in action. However, without iterative customer feedback, the requirements process may likely miss key features and/or workflows necessary for evolving warfighter needs. Instead of looking for the 100 percent solution, the acquisition community should identify commercially developed software that meets 80 percent of the needs but is immediately available for deployment. Over time, with commercial leading practices and regular user feedback, the Department of Defense can evolve the software based on practical, quick-hitting needs.
The Pentagon Can Leverage More Than Just Money
Other Transaction Agreements enable the Department of Defense to create more flexible business arrangements. Imagine an innovative company building flying cars which has plenty of private funding and doesn’t need any new money from the government. However, access to a Department of Defense test range exempt from Federal Aviation Administration regulations can provide valuable non-monetary contributions to their overall path to market. Additionally, putting these early prototypes in the hands of servicemembers — who will use them in more extreme environments and situations than commercial customers — also provides invaluable user feedback. These are compelling, unique, and innovative options that the Department of Defense brings to the negotiating table. The key is understanding how and when to apply these negotiating levers to achieve the desired outcomes.
Conclusion
Secretary Hegseth’s new memo is a significant step toward broadening the dual-use industrial base. This step was emphasized in the recent executive order that reinforces the “general preference” for acquisition officials to leverage Other Transactions Authority. However, the success of these initiatives will depend on steps beyond simply using the Commercial Solutions Opening or Other Transactions. Fundamental culture and business changes are required to open up a new commercial industrial base — ultimately, it comes down to people and their incentives. Venture capitalists, seeing the promise and potential of the Department of Defense market seeded by the Defense Innovation Unit and other innovators over the last 10 years, invested nearly $43 billion this past year in dual-use technology companies. To harness the power of this private capital, the department will need to change how it views the industrial base, accept more risk with nontraditional vendors, and transform itself into a more attractive customer. In the face of global competition and the department’s technological disadvantage, the time has come for the procurement system to be transformed.
Lauren Dailey led the creation of the Commercial Solutions Opening at the Defense Innovation Unit and served as its first acquisition lead from 2015 to 2018. She previously served as an Army civilian in the Pentagon and as the chief operating officer of Second Front Systems. She is now a leader in the defense acquisition and innovation practice at Deloitte Consulting LLP, helping Department of Defense clients leverage commercial technology for defense missions.
David Rothzeid is a former active-duty Air Force acquisition officer. He served at the Defense Innovation Unit from 2016 to 2018 as a member of the original Commercial Solutions Opening creation team and scaled it as the acquisition lead from 2018-2019. He is now a principal investor at Shield Capital, an early-stage venture capital firm investing at the intersection of national security and commercial innovation. David still serves in the Air Force as a reservist at the Pentagon.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of any entities they represent.
Image: Trevor Cokley via U.S. Department of Defense
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