U.S. Government pursuit of emerging technologies may attract non-traditional companies

Bloomberg Government regularly publishes insights, opinions and best practices from our community of senior leaders and decision-makers. This column is written by Jenner & Block Partner Marc Van Allen and Jenner & Block Summer Associate Umer Chaudhry. 

The “innovation deficit” is forcing agencies to divert additional federal government funds towards emerging technologies.  Non-traditional contenders may reap the benefits of the government’s recent increased risk appetite as agencies experiment with alternative acquisition methods to provide flexibility when contracting with non-traditional companies.  In addition, government-wide deregulation efforts are also creating a more receptive environment for new entrants.

Background  

Procuring emerging technologies has been a longstanding issue for the U.S. government.  In a 1995 report, the Office of Technology Assessment (OTA) noted that “[t]he growing capabilities of competitors in Europe, Asia, and elsewhere around the world increasingly challenge the ability of U.S. firms to convert the nation’s science and technology base into a competitive advantage.”  The same report concluded that “federal procurement can jump start” industries by “provid[ing] potential developers of new technology with sufficient assurances of a market” to encourage innovation.  The OTA recommended that the government act as “launch customer” for innovative companies and provide funding, experience, and user feedback to facilitate early adoption of emerging technologies by the public sector.

In 2015, the government established the Defense Innovation Unit Experimental (DIUx), tasked with facilitating the relationship between non-traditional companies and the Department of Defense (DoD).  While DIUx has shown promising results, its funding is limited.  So far, DIUx has awarded “$71 million in contracts for 37 pilot projects in the key areas of autonomy, artificial intelligence, human systems, information technology, and space.”  A more aggressive and well-funded effort is required to keep pace with international competition.

Agency Budgets and Investments in Emerging Technologies

In August 2017, the Director of the Office of Management and Budget (OMB) issued a memorandum identifying the administration’s top priorities for fiscal year 2019 budget submissions.  The memorandum explicitly identified machine learning, autonomous systems, and quantum computing as emerging technologies needing federal investment.  The memorandum instructs agencies to set aside funding because such technologies “may have the highest potential to drive the economy and create entirely new industries.”  Agencies are also mandated to prioritize funding for basic and early-stage applied research that “can result in the development of transformative commercial products and services.”

The majority of businesses that are capable of responding to and fulfilling the government’s top priorities are non-traditional companies whose innovation portfolios outpace the service offerings of traditional government contractors.  Yet, these new entrants have little familiarity with the government contracts market and require considerable support to develop a meaningful relationship with the government.

Use of Other Transactions

Congress has authorized 11 federal agencies to use other transactions agreements (OTs).  Federal procurement laws and regulations do not apply to OTs.  Agencies can leverage OTs for research, development, and demonstration (RD&D) projects and activities that help advance new technologies or processes.  Agencies may also use OTs for developing and reviewing “prototypes,” or physical or virtual models.  Section 815 of the National Defense Authorization Act (NDAA) for FY 2016 made permanent the DoD’s authority to carry out prototype projects using OTs.

Deregulatory Climate

According to a recent Bloomberg BNA report, the pace of regulatory activity dipped to new lows in the first six months of the Trump administration.  The Office of Information and Regulatory Affairs, which reviews all significant federal regulations, processed 67 regulatory actions in the first six months of the current administration, compared with 216 actions at the same point in the Obama administration.  In accordance with President Trump’s executive orders, agencies have created “regulatory reform task forces” that must “make recommendations to the agency head regarding [regulatory] repeal, replacement, or modification” of existing regulation.  These task forces are also looking at ways to “streamline commercial procurement.”  This climate offers new entrants ample opportunity to pursue their first federal procurement in a less burdensome regulatory environment.

Conclusion

Doing business with the U.S. government is commonly associated with complexity and regulations – barriers to entry that few companies are able to overcome.  However, many new entrants will encounter tremendous business opportunities if they are willing and ready to embrace the federal procurement market.  At minimum, the federal procurement market may be a viable “adjacent” market for companies traditionally focused on selling to commercial buyers.