DOD acquires many different products developed by commercial companies to enable the warfighter to protect our country. For the purposes of this report, we describe the three types of products that DOD acquires as the following: 1. Products that are commercially available, such as computers and software. DOD acquires these products from a variety of suppliers. 2. Commercial products that are further developed by companies for DOD use based on those currently available in the marketplace, such as adding avionics equipment to an unmanned aerial vehicle. These products are the focus of this report because they are often produced by companies that do not work regularly with DOD (non-traditional companies). 3. Products developed exclusively for military use (military-unique), such as tanks, fighter jets, and submarines with military capabilities that do not have a commercial application. Since 2011, we found that when DOD acquires these products, it typically does so with companies such as The Boeing Company, Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company, General Dynamics Corporation, the General Electric Company, BAE Systems PLC, and Rockwell Collins, Inc. We consider these companies traditional companies because they have consistently worked with DOD to develop military-unique products. Before DOD acquires a product, it conducts market research to determine which of the three product types is most suitable for its particular need. DOD contracting officers then follow the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) to procure the product. As shown in figure 1, the degree to which the product is commercially available and the risks associated with developing or producing the product influence the type of contract used and the contract’s terms and conditions. DOD may use commercial item acquisition procedures under FAR Part 12 to procure commercially available products and negotiated contract procedures under FAR Part 15 for military-unique products. Negotiated contracts for military-unique products generally contain more government- specific terms and conditions than commercial item acquisitions, in part because of the risk DOD takes to fund the development of these products. There can be a great deal of variation in the contract type for commercial products that are further developed for DOD’s use, as well as the number of contract terms and conditions that would apply. If DOD determines that products are commercial items as part of its commercial item determination process, it must acquire the product using FAR Part 12 procedures instead of FAR Part 15 procedures. Alternatively, DOD might find the desired product is not a commercial item, but nonetheless requires a relatively low risk development effort. In that case, DOD can negotiate a fixed-price-incentive contract under FAR Part 15. Congress also provides Other Transaction Authority (OTA) that allows DOD to enter into agreements with companies to complete research and development and prototype projects. OTAs are flexible agreements that typically include very few required terms and conditions and instead allow the parties to negotiate terms and conditions specific to the project. This flexibility can help agencies attract and partner with entities that have not done business with federal agencies due to concerns about standard government requirements. However, OTAs are not procurement contracts. DOD would still follow the FAR or another express authority to procure products successfully developed through an OTA. DOD has long played a large role in influencing innovation in the United States through its research and development investments. Among other things, DOD funds basic research performed by universities, as well as applied research and development performed by companies. Several studies and agency documents highlight how DOD’s funding has led to technological advances that enable the development of military products as well as commercial products. For example, the Defense Advanced Research Projects Agency supported the development of a communications network in the 1970s to facilitate information sharing. This network is considered the foundation of the modern internet. In the 1950s, the Air Force and the Defense Advanced Research Projects Agency funded research on speech recognition and artificial intelligence that enabled the development of the Cognitive Assistant that Learns and Organizes. In the 1990s and 2000s, commercial companies started leveraging this research to develop commercial technologies like Siri, the iPhone assistant. The Army has funded research that led to the development of powerful, lightweight lithium batteries, which are used in a variety of military products, such as night vision equipment. Today, lithium batteries are widely used in consumer electronics products and electric vehicles. Based on DOD and National Science Foundation research and development data, DOD’s influence on the type of technologies developed by U.S. companies began to diminish as companies significantly increased the amount they invest in research and development. As shown in figure 2 below, DOD spent about $69 billion on research and development in 1987, while U.S. companies spent about $114 billion. In 2013, DOD spent about $75 billion, while companies spent about $341 billion. Between 1987 and 2013, companies’ investments skyrocketed by approximately 200 percent. This growth was fueled, in part, by significant investments in the information, pharmaceuticals, and computer and electronics sectors. In its 2016 Annual Industrial Capabilities Report to Congress, DOD acknowledged that the department benefits when there is an influx of new companies with new technologies competing for business opportunities. The report further stated that DOD must take advantage of the rapid evolution of emerging commercial technologies that, when integrated with military systems and novel concepts of operations, could be a source of battlefield advantage. In order to take greater advantage of newly developed technologies coming out of the commercial sector, the report acknowledged that the department should leverage innovation created by non-traditional companies. However, available industry data, as well as DOD studies, indicate that it may be difficult for the department to attract non-traditional companies to sell or further develop their products for DOD’s own use. As shown in table 1, one reason for this is that DOD is not a significant customer for top innovative companies. In 2016, for example, Apple earned $216 billion in sales, of which about $70,000 came from contracts directly with DOD. Amazon earned $136 billion in sales, with about $275,000 coming from contracts directly with DOD. Google and Facebook did not earn any revenue through direct sales to DOD. According to company representatives that we spoke to, DOD’s acquisition environment presents unique challenges to non-traditional companies that they otherwise do not experience in the private industry. The acquisition environment is driven by laws that provide transparency and fairness, regulations that promote specific socio-economic goals, and DOD’s approach for implementing those laws and regulations. For the most part, the selected 12 companies we spoke with expressed frustration with the complexity of DOD’s acquisition process; the time, cost, and risk associated with competing for and executing a contract; and interacting with DOD’s contracting workforce. Table 2 highlights six key areas of DOD’s acquisition environment that create challenges for non-traditional companies, according to these companies. Together, these challenges create an environment wherein the selected non-traditional companies told us that their resources might be better spent pursuing commercial business where the cost to compete is lower and selection decisions are faster. Two of the 12 non-traditional companies in our review are currently not pursuing business with DOD as a result of these challenges. The non-traditional companies we spoke with identified several challenges related to the complexity of DOD’s acquisition process that made it difficult for them to do business with the department. One particular challenge is the difficulty companies had in identifying the right avenue to develop on-going or longer-term business arrangements with DOD. Several non-traditional company officials said that DOD acquisition program managers wanted to obtain their product but could not do so because DOD did not have a validated requirement for it. As a result, these non-traditional companies had to find alternative paths to sell their products to DOD. Some companies spent several years demonstrating their products to other organizations within DOD before establishing a viable business arrangement with one of these organizations. In some cases, multiple DOD decision-makers throughout the department weighed in, some of whom had no purchasing authority. This slowed down the process even more. Company officials said that in the commercial market they are used to communicating directly with people who have the authority to (1) discuss their needs, (2) gauge whether the company’s product could satisfy those needs, and (3) award a contract within months. Non-traditional companies we spoke to also raised concerns about the lengthy process for obtaining security clearances. Some company officials told us that DOD required their company representatives to obtain security clearances prior to DOD discussions on technology needs. Company officials also noted that the process for attaining personnel security clearances, which is shared between DOD and the Office of Personnel Management, can take over a year to complete. One company even said it took 5 years to obtain a facility clearance from DOD. Software companies identified the time and cost associated with obtaining multiple software certifications, which they said are required by DOD prior to competing for business, as an additional challenge they face when entering the defense market. This includes providing documentation to obtain the Federal Risk and Authorization Management Program (FedRAMP) certification, which is managed by the General Services Administration, and the FedRAMP Plus certification, which is managed by the Defense Information Systems Agency. These certifications provide a government-wide and DOD-specific standardized approach for cloud products and services, respectively. Officials from one large non- traditional software company said it has spent at least $40 million so far to obtain FedRAMP certifications for 50 products and it has taken on average 18 months to obtain the certifications. The company has also been working for almost 2 years to obtain DOD’s FedRAMP Plus certification for these products. A company official stated that DOD continues to add more requirements that sometimes conflict with the FedRAMP requirements or, at a minimum, add additional controls and create ambiguity.