In the debut Speed to Contract, Speed to Market video podcast, host Tim Templeton talks with Major General Cameron Holt (retired) about the single largest threat to our nation: The ‘Silent War’ with China. It’s not a war that’s entirely about military-on-military force. However, the need to quickly move the U.S. acquisition system into a consistent wartime mentality is greater now than ever before. Below are excerpts from the interview, edited for brevity and clarity.
Single largest threat to our nation? The Silent War with China
Where it all starts for me is the threat. As you look at our nation, it is very popular these days for many to question it and say, “Is this a great nation?” I think there's been a lot of doubt created, both internal to our own country and, frankly, by design, by the Chinese Communist Party. Either through bots or other means, they’re inserting messages into our social media that we then “take off with.” And it breaks my heart, as I said on the stage of the Government Contract Pricing Summit in 2022.
For China, it's not an ethical issue to break their own commitments. It's not an ethical issue to steal intellectual property. They truly believe that if anything was created on the planet, it's theirs by definition and that other governments in the world exist with their temporary permission. It's this paradigm that we really need to start considering. This is an adversary that is determined, patient, and also very, very sophisticated. The country has been literally at war with our way of life for decades, not just recently. I've dubbed this The Silent War, because China is not going to make the same mistake that either Japan or Al-Qaeda made—the Japanese back in 1941 or Al-Qaeda on September 11th.
China knows how to pull together the 4 instruments of national power
The Chinese Communist Party is not going to make the mistake of taking an action that's so overt and so violent that it coalesces Americans around being American—around what our founders said in the Declaration of Independence. This notion of unalienable rights both precedes and supersedes any government of the people. That is the flag in this capture-the-flag game. And the Party knows full well how to dismantle us from the inside out, using our own fractures and our own system against us. They know how to pull together all four instruments of national power: diplomacy, information, military, and economics into one force, yet without triggering some act that would coalesce us and stop the divisions that so many politicians or people in the media—or really anybody that benefits from more eyeballs and sensational stories —have been able to manage to try to divide us and divert us from being who we are as Americans.
China can win The Silent War without explosions
I will tell you that the plan they are involved in is succeeding. And if you could think about it from their perspective, they don't need to capture our territory. They don't need to destroy anything. There doesn't need to be explosions for them to achieve all of their objectives, to make sure that all of the governments of the world, the government leaders of the world, the business leaders of the world, and increasingly even individuals, are compliant, and loyal to the objectives of the Chinese Communist Party.
In fact, for years, there's been a progression of technology transfer from the United States to China. And some of that, of course, has made headlines—illegal transfers of technology and espionage and theft. Frankly, a lot of it has happened voluntarily, through our open economic system that China has taken advantage of by listing false companies on our stock exchanges and watching Americans invest their hard-earned money into fantasies.
The Chinese Communist Party has passed laws that state if you want to do business in China—which is a very attractive thing for many of our business leaders, as it has 1.5 billion people and a growing spending-power economy—you have to commit allegiance.
War is not just about military-on-military force
To be able to participate in that economy, you have to follow Chinese communist law, which states clearly that any company operating outside of China must be compelled to support the intelligence needs and the national security needs of the state, even if that means spying on their own home country. And so, as we look at how exposed we are to those kinds of things, both legal and illegal, we really need to start understanding that this war is not just about military-on-military force.
It certainly has a component of that, but far larger weapons are being used, like the Belt and Road Initiative that erodes our diplomacy in the world.
We’re glossing over China’s plan to manipulate governments
And so, these kinds of things that our own media and some politicians like to gloss over: It is the war. It is a Silent War, but the end of it could result in not just the ability for the Chinese to manipulate and coerce government—not just businesses—as a result of their gargantuan growth and economic investment. The opportunity that exists to do business inside of China keeps us silent and keeps us below the level of what most Americans would define as war. And keeps our politicians complacent.
We need to put US acquisition on a wartime footing
I do not see anywhere close to the level of urgency we as a country need, either in our DoD leaders, in our White House, or in our legislative branch of government. I do not see the kind of urgency that I would see if they really did believe that we were at war, and at an existential war at that. I, for one, believe that we need to put our acquisition system on a wartime footing.
I still do believe that the military instrument of national power is important because it underwrites the other instruments of national power. And I frankly believe that if we can move faster than China could ever keep up with in moving one generation of technology after the other, of military technology and capability as fast as American ingenuity would allow us, if we could drop the barriers to entry, and the institutions that protect people politically in a peacetime environment, but are not suitable for wartime, if we could drop that and really move at a wartime pace, I am convinced that that increase in capability would have enormous deterrent value against the activities of China, both militarily and otherwise.
Our system keeps management from making good choices
We have to look at our process and say, “Considering how fast commercial tech moves on the planet today, do we really have time to think about putting a budget in three years prior to when it would be executed? Does anybody really even know what the best technologies are that far back to be able to justify putting money into the budget process for them?”
As we move towards the execution year, few people understand that almost every bit of investment dollars, and what I mean by that is RDT&E (research, development, test, and evaluation) or production money— all of that money has the program name on it from statute all the way down.
Even within a program, a Program Executive Officer or a manager cannot move money between the phases of the program.
Accountability with no measure of effectiveness
The way that Congress measures spend accountability in an execution year? The incentive is to spend all the money as fast as you can in the narrow stove pipes that the appropriators said to spend it in. There is no measure of effectiveness. There is no incentive to optimize the spend. In fact, it's illegal to optimize the spend within a portfolio in the execution year without prior notification of Congress.
Authority delegation—instead of micromanagement—produces results
For most of the large capabilities that we might buy, we're in a process called DoD 5000, the Department of Defense’s Acquisition Regulation for large systems. And that has been expanded to include information technology, not just major defense acquisition programs.
That process, by its very nature, pulls all authority out of the field and organizes the acquisition into long arching timeframes that are marked by milestone decisions. For many of the capabilities we need, if we were really on a wartime footing, we could move so much faster.
If we just delegated the authority to move through that process, we really wouldn't have to reduce one iota of rigor in our systems engineering processes. If we were more interested in the effects and the outcomes than in the processes, we could move really quickly.
A system that supports IP vendor lock
IP vendor lock has become the sole means for many companies to sustain profitability and competitive advantage. Juxtapose that against what's happened in the commercial tech industry. Intellectual property is replaced by speed to market as the number one means to sustain the profitability and valuation of a company.
Right now, Apple and Samsung are locked in a battle to see who can get more capability out quicker. Every car company is doing the same, especially in the EV market. In the commercial marketplace, it's about speed in generations.
You see it again and again. The commercial marketplace abandoned old technologies they sold years ago in favor of investing their dollars in research and development—dollars the taxpayer does not pay them back if ventures fail. Which is not true of the defense marketplace.
They favor speed to market. So, in defense, ironically, that's exactly what we need. That's exactly what we need to move faster than China can move. But on the backend, right now, because of suppliers losing money early on, the DoD must pursue IP vendor lock. When it comes to lobbying Congress, our appropriators and our authorizers are both lobbied really hard by defense trade organizations against divesting old weapon systems.
Change the business model to level the playing field
When you look at the financials of a company, it's all about return on invested capital. The number on the bottom of that equation goes down and down over time. And return stays the same or goes up. In many cases, the return on invested capital numbers skyrockets.
And that's where the sweet spot of business needs to be, particularly after you've lost money intentionally when the dollars are most valuable. I, however, believe that if we can prevent buying-in behavior up front by getting really serious about it and saying that in a source selection for a new capability, you will be thrown out of the competition for planning to lose upfront. Same if you try to bring your own money to the table. In any facilities that are necessary that you've already bought, they have to be included and amortized in the contract and paid back by the government.
Everybody's got to be on a level playing field. I also think in the areas of development and production, the government side needs to rethink what we thought about in the 80s. And that is, we thought cost-plus contracts in development and production should only earn a very small amount of profit. In fact, there are statutory limits on cost-plus contracts for how much profit you can authorize. However, you can still do award fees outside of the contract. And what I would say is we need to restore the profitability of development and production. And in fact, start to think about it like the commercial marketplace, where the profitability to Apple or Samsung could be enormous for getting speed to market and getting that new capability out there. I think, in many ways, we've got to do the same on the defense side.
Put profit in the right place to incentivize the right behaviors
If we expect speed to market to replace IP vendor lock and this lethargy that affects all of our business decision-makers on the defense side, well…they're not fast, they're slow, and they're slow because of their fiduciary responsibility to the taxpayer. Frankly, they are getting a lot of money in the current business model. But if we change it so that we prevent buying-in behavior, increase the profitability of development and production, and insist upon a competitive marketplace, even for upgrades in the aftermarket after a weapon system's fielded, then I think you will see our interests aligned with the defense industry, national defense, speed to market, and financial success on the business side.
If we can do that, American ingenuity will outpace anything the Chinese can do in speed. We can outthink them, we can out-innovate them, we can outproduce them, but the incentives have to be there. That's the great power and strength of capitalism that the Chinese system does not understand and cannot take advantage of.
Micromanaging leaders waste enormous resources by not delegating
It's ironic to me that in the military, we might entrust a young staff sergeant with a life-or-death decision on whether to use lethal force in the moment or not, on the battlefield. Yet, we will not trust that same individual with making a decision on the acquisition side or the business side where nobody will get killed or injured as a result of even the worst of mistakes.
So we've got to start to figure out these military concepts of mission command. What does that really mean in the acquisition business? Frankly, senior leaders should stop micromanaging and stop relying on everything having to come to their level.
We’ve got to push enormous amounts of authority down and trust the kids out there to do the right thing. People should be held accountable, but in such a way that you don't change the rules so that it could never happen again. And you continue to trust as the leader: The vast majority of the people that serve are going to try to do the right thing. They will make mistakes, but that's where senior leaders need to be a blast shield and take the impact of that themselves.
Changing the culture can change everything
Changing the whole culture is really important. From that comes an explosion of innovations in contracting, like Pitch Days. During these, literally, if you can write on a clean sheet of paper your idea, you too can participate in Air Force acquisition. Imagine that.
When I was involved, we satisfied all of the rules, and we had to work doubly hard to do it, to make it look so easy at the end. But, to the private sector, those we're trying to attract that are non-traditional players in defense, but great technologists—that's a worthwhile endeavor. Commercial Solutions Opening is a pilot authority that Congress gave us.
Knowing the system well greatly helps speed to contract & market
I told them, “You didn't give us a single authority in Commercial-Solutions Opening that we didn't already have in the FAR. And so if you take away that authority beyond the pilot, we'll just do a combined solicitations synopsis under Part 5, which we can do today, and we'll follow that up with a Part 12 contract, which is a commercial contract, which we can do today.” So everything that a commercial solution is, we can do, and call it something different. And that's what people need to be willing to do— to exercise that Part 1 guidance in the FAR that says, “If it's not specifically prohibited, it is by definition allowed subject to good business judgment.”
That gives rise to all the innovation you'll ever need, even inside of the Federal Acquisition Regulation.
The biggest demand signal for reform that will have an outsized effect on our ability to move faster than China could ever hope to move, is to change the micromanagement of appropriations. It is to hold appropriators accountable, to hold our elected officials accountable, and modernize our oversight of national security spend within the PPBE process.
Giving a PEO authority to move money in the execution year does not need to mean necessarily that Congress has given up its rights to oversight, as is their constitutional responsibility.
I believe that that can be modernized. I would argue that the free cash flow model and capital reinvestment in publicly traded corporations is a fantastic model to use.
It's proven, and frankly, Wall Street analysts have enormous oversight and power over publicly traded corporations. But they don't restrict the movement of money within the corporation beforehand. And so, I think if we adopted that kind of model where we got a quarterly update from those program executive officers based on “How are you optimizing the spend across your portfolio?”, not “How are you just spending all the money as fast as you can in the narrow accounts we gave it to you in?” we’d be much better off.
But doing that requires a lot of courage on behalf of those elected officials because they will get a call from that one constituent company that is really upset that in their sole-source negotiation, money was pulled from it because they wouldn't provide cost data. But frankly, I think that if we can continue to discuss the urgency of us moving faster than China and really get some courageous appropriators and authorizers together around those solutions, I really believe we can make change in a very short amount of time.
What success looks like
On the day that we open the hangar doors on the next-generation air dominance fighter and wheel it out for all to see for the very first time—as the cameras are clicking and the videos are rolling—if we fly a prototype of its replacement right over the crowd, that's when we will know we've got it right. That's when we will know that American ingenuity has now accelerated the game beyond the adversaries of freedom. And that's where we need to be.
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Sources
1. Speed to Contract. Speed to Market: Video Podcast featuring Cameron Holt