“If you basically think about our role in the world, America’s role in the world, America’s leadership, it’s been really the by-product in part of technological leadership. At no time in modern history has that technology landscape been changing so much and the consequences of not maintaining leadership been so apparent.” – David McCormick
David McCormick, CEO of Bridgewater Associates and former Under Secretary of the Treasury, joins host Ken Harbaugh for a conversation about military innovation.
He is also a US Army veteran who served in the first Gulf War. David served as Under Secretary of the Treasury for International Affairs during the 2008 global financial crisis. He currently serves on several non-profit boards and holds a seat on the Defense Policy Board. In December, he authored an article for Fast Company titled “America’s Military Needs An Innovation Overhaul”.
ACME General: Welcome to Accelerate Defense, a podcast from ACME General Corp. I’m Ken Harbaugh, Principal at ACME, and host of this month’s episode. On Accelerate Defense, we’ll hear from political figures, military professionals, and other thought leaders about how innovation shapes our national security landscape.
My guest today is David McCormick, CEO of Bridgewater Associates, and an army vet. David served in the first Gulf War, and later as Under Secretary of the Treasury for International Affairs during the 2008 global financial crisis. He currently serves on several non-profit boards and holds a seat on the Defense Policy Board. In December, he authored an article titled “America’s Military Needs An Innovation Overhaul”, which is why we’re talking today. David McCormick, welcome to Accelerate Defense.
DM: Thanks, Ken, I’m really happy to be here, thanks for the invitation.
ACME General: You bet. For me, the most interesting aspect of that article was the cultural critique you provided of the military. In particular, the way the military has adopted this zero defect, risk aversion policy and its effect on stifling innovation. You wrote this: “The military is full of curious, educated officers who could apply the lessons of history to concrete problems today, but the services too often dissuade that way of thinking.” You began your career as an army officer. You now sit on the Defense Policy Board. I can’t think of anyone better qualified to offer this critique. But my question about it is this, is that just a reflection of the inherent nature of a large bureaucratic organization that requires that level of risk mitigation, not just because of a bottom line, but because of life and death issues? Or is it something that has changed within the military? Has the military lost its innovative edge?
DM: Well, thanks for that question. I think there’s a number of macro factors that set the stage for this discussion, which I’d be happy to go back to. But let me just start with that question head on. My assessment of that really is a by-product of my own experience in the military, but also my experience in business and looking back as a historian, and the military has always been challenged to innovate, particularly in times where it’s primacy and its leadership has been validated. That challenge exists today, I think, for particular reasons. So, you have this magnificent military that’s been at war for 20 years. It’s got enormous capability. In terms of spending, it’s got more spending relative to any other military in the world by an order of magnitude, probably six to eight to 10 times more than any other military in the world. So, the question is, given that reality, given that leadership position, is the military innovating sufficiently given the changing circumstances in the world? I think the answer is no. I think this source of innovation is more likely to be outside defense R&D than inside defense R&D to a greater degree than ever. I think the big technological breakthroughs and the notion of civilian technology versus military technology was always somewhat suspect but is more likely to be driven by commercial breakthroughs than at any time in our history. So that’s one thing.
The second thing is that you’ve got two or three generations of military officers that have grown up in a certain environment with certain military experiences, certain combat experiences that have been reinforced and validated by their experience. The kind of innovation that’s required is not something that they’ve been exposed to. So, the most obvious example of that is if you look at the pie chart of how we spend money today in the military, how much of it’s focused on emerging technologies, breakthrough technologies, breakthrough doctrinal changes. It’s a tiny sliver of that pie. Yet the likelihood of the next war and the next opponent being dramatically different than the past is much higher. So, you have this challenge of, do we have a culture in our uniformed services that are constantly questioning, asking hard questions, testing existing assumptions, testing existing reality? The answer is that we don’t have a culture that is encouraging of that or adequately encouraging of that. We have the people that are leading our armed services, who are great patriots, great combat leaders, but have grown up in a system where questioning and deviating from the standard path has been very difficult from a career perspective. So that’s the diagnosis of our cultural challenge today as I see it.
ACME General: I think that is an apt diagnosis, David. But you go beyond diagnosing in your article into providing a prescription for change. What are some of those structural changes needed to foster the kind of innovation coming out of Silicon Valley, and to compel the kind of cooperation we’ll need between government, the primes, and the non-traditionals?
DM: I think the starting point for that question is really thinking about innovation at the national level. I think at the national level we have some real challenges. If you look at R&D spending as a percent of GDP today relative to 50 years ago, it’s about half what it was. If you compare it to the amount of R&D that other key competitors around the world are spending on basic R&D, it’s wildly inadequate for what’s required. So we need to think about our national innovation strategy, which is a really critical piece of this. I think we need to have a focus on these key emergent technologies where we’re finding ways for the private sector and the public sector to collaborate in much more meaningful ways to ensure that the US maintains leadership in things like artificial intelligence, and quantum science, and 5G, because those are winner-take-all technologies that have huge geopolitical significance. So having that leadership position and not being dependent on other countries is a really critical part of our overall national power, our national strength.
Now, from a military perspective, I make really two sets of recommendations for how we might think about the innovation agenda within the military. The first is really a recognition of the point I just made about the driver being commercial technologies and the distinction between military technology and commercial technologies being much diminished. So while DARPA has been a huge driver in the past where the Defense Innovation Unit and so forth are really critical developments, they’re still a tiny part of the answer, and we need to draw those commercial technologies into our defense ecosystem in a much more meaningful way.
If you look at the providers to our defense industry, it’s largely the major defense contractors. The way the acquisition process works, it’s very, very difficult for new entrants to actually have access to the defense budget. It’s very difficult for them to operate because of the ambiguity of how that process works and the inconsistency of funding, where if you’re a big defense contractor you can deal with the ups and downs of the funding. But as a small emergent technology provider that may have a breakthrough technology, it’s very difficult to make those inroads. So we need to find ways to open up the acquisition process to new entrants and we need to find ways to give them some consistency of funding to allow them to actually be able to provide new ideas that really aren’t emanating adequately from our traditional defense contractors. So there’s a whole reform of that defense ecosystem that I think is going to be required.
But that alone won’t get us there. The other set of changes, I think, are very much around the cultural challenges that we just spoke about. In that case, I think we need to think about how we’re – it’s just like in business or any organization – how we create the right incentives to ensure people are moving out on the risk curve. What I mean by that is taking chances in their careers on things that are outside their traditional paths, that we’re investing in key leaders having the opportunity to try things and fail, because a key part of the evolution of our technologies and our doctrine is experimentation. So we have to create a culture with much more experimentation, flexibility and agility, and where we’re promoting a new generation of leaders that are more apt to think outside the box.
A final point is that that also won’t happen without the injection of new kinds of people and new thinking. So I think we need to find ways to have parallel entry points in terms of our military drawing on civilian innovators, civilian technologists, and bringing them into the force, maybe not in traditional uniform ways, but in ways that they stimulate the thinking. We need to find opportunities for our key leaders to go outside the force and spend a year or two throughout their careers in key innovative companies or key hotbeds of innovation so they can have their fundamental assumptions tested and their thinking expanded.
ACME General: A lot that I want to react to in that answer. But I’ll start with your observation about contracting and the acquisitions process needing to go beyond the traditional suppliers, which by the way, our previous two guests, Congressman Moulton and Congressman Bacon, both highlighted as well. In your recent article you wrote that, “Firms that contract with the Pentagon must navigate labyrinthine bureaucratic processes and rely on unpredictable or insufficient funding streams. The big established contractors can do so, but that complexity makes it difficult for firms outside the traditional defense ecosystem to do business with the Pentagon.” I hear that sense of frustration all the time from the non-traditionals, from the start-ups. What initiatives do you see currently underway that we might be able to scale? Or what centers of innovation with the military might we be able to highlight, like AFWERX, like AAL, that can really supercharge this innovation?
DM: Yeah, I should’ve made this point earlier. There’s lots of point locations where there’s terrific, innovative thinking underway. DARPA continues to be a real national treasure in terms of its capacity to drive innovation. The Defense Innovation Unit was a great concept and is, I think, a useful way to begin to try to draw unique tech suppliers into the defense ecosystem, but at a relatively small scale. So those kinds of initiatives need to come to scale. The Air Force efforts led by Will Roper are a great start. You see these really key points, in the Marine Corps as an example, the planning guidance was an excellent example of the kind of innovative leadership where we’re looking for in this, in the 2019 planning guidance. The problem is these are sort of innovation archipelagos where they’re isolated and independent of other parts of the defense ecosystem. I think that innovation agenda really needs to be a driving force of the next Secretary of Defense. It needs to start with the Secretary of Defense in partnership with the Congress, and just ask yourself the fundamental question. If you look at our $800 billion budget and you look at what percentage of that $800 billion is directed at new, emergent, asymmetric thinking, asymmetric ideas, asymmetric doctrinal changes, I think you would find that it’s a tiny, tiny, tiny percentage.
If you go to the business analogy, you say, we have a core business that is really excellent in many ways, but it has all sorts of challenges in the world that it’s facing. We want to create, in parallel, a new business opportunity that will grow and create the kinds of capabilities we need. You’d ask yourself what kind of investment is required to do that. We’re not investing in those, we’re not finding institutionalized significant top-down strategic ways to make those investments. So I think it’s a matter of scale, and grossly inadequate scale. I think it’s a matter of a lack of top-down orchestration and strategic direction, and even with that direction there’s going to have to be some underlying changes to the engineering of how we incent people and how we reward people, because the top-down guidance without the change in incentives won’t do much.
ACME General: Does part of the onus lie not just on government when you speak of top-down, but on the primes? On the big defense contractors to recognize the potential of the non-traditionals, to reach out on their own and identify innovation and talent where it exists, and bring that into the defense industrial base and not always wait for government to build that bridge?
DM: Ideally, yes. But I’m not optimistic, to be honest with you, that without structural changes, without the right incentive structure, that’s likely to happen. I was, I guess, 25, 1997 till 2005, I ran a technology company, a publicly traded technology company. We had a government business, and that government business was a real source of opportunity, but ultimately, we decided to redirect our focus and our resources and our energy on clients or customers outside the government and outside DOD because of the uncertainty that was created from a funding perspective and the inability to even understand how decisions were being made. In that particular case we reached out to a number of the primes and talked to them about our technology and our ideas. That was almost equally difficult to navigate from a labyrinth perspective, and ultimately created a dynamic where it was more likely than not that the more we collaborated with them, the more our technologies were going to be put at risk of being replicated by them and ultimately sold. So their incentive structure is not aligned. It’s not aligned to bring new entrants in, unless there’s a demand signal on the DOD side. So I think that’s likely to be what’s required. Right now, as you’ve seen among the primes, there’s been consolidation. So it’s very difficult for new market entrants to break into that. I think we’re going to have to make some structural changes to change that dynamic.
ACME General: So the hand of government is going to be required in one form or another. Accepting that reality, what are the things that government can do best? Are there specific legislative tweaks that might be or might not be included in this latest NDAA that you’re hopeful about? Where should government apply its pressure?
DM: Well, a couple of different thoughts. At the national level, and I say this as a good card-carrying Republican, so I want to say this with great care, but I think the government needs to get much more involved in the funding and the structure of the investments in these key emergent technologies that have such a geopolitical significance. As I said, AI, quantum science, 5G, there are others. How to get the government involved in a way which doesn’t become overtly political is really, really a challenge. I think we need to find ways to do that that adhere to basic market principles in terms of not picking winners and losers, but basically supporting the structure of an industry or ensuring that R&D dollars flow in a particular way. One way we might do that is something that we’ve seen the Chinese do, which is quite interesting, which is they have invested side-by-side with venture capitalists, the government, the Chinese government with venture capitalists, in the artificial intelligence area. Then the way the government investment is structured, they’ve created a first loss where the government takes the first loss and they’ve capped their return at 15%. So what you’ve essentially done is you’ve facilitated an incentive the incremental flow of private capital to an area that you believe has out-sized strategic importance. I think that kind of thinking, which some people call industrial policy, some people call innovation policy, but that kind of thinking with the appropriate constraints and the appropriate free market principles is the direction we should be taking these things.
In terms of the role that the government can play from a DOD perspective, or the Congress can even play, it’s essentially dictating a set of processes and funding streams that ensure that these new suppliers are drawn into the defense ecosystem. It’s going to require more consistent funding from DOD. They’re not going to be able to have small companies that are trying to establish themselves be able to bet on the income indefinitely. So they’re going to have to create insured funding streams, and they’re going to have to ensure that the access to the opportunities is made more transparent. The pipeline of opportunities is made more transparent than it currently is today, and essentially eliminate the labyrinth that I was referring to.
ACME General: You just expressed some reservations about government picking winners and losers, but this has become, if not a point of contention, at least a point of conversation in this area with folks like Steve Blank and Trey Stevens saying, “No, we’ve got to get back to government picking the winners, like skunkworks, like those initiatives that have proven they can deliver results quickly.” Do you think there is a conflict between that kind of idealism government not picking winners and losers and the zero defect mentality that so infects the cultural thinking of the military?
DM: Yeah, I’m glad you asked that question, because I want to tease that out a bit. I want to differentiate between taking more risk in a risk culture from picking winners and losers from a government funding perspective and what that means. So essentially what I’m describing is the need to ensure adequate funding to key sectors and private sector partnerships with the public sector that allows for disproportionate focus on things that we think are going to have significant geopolitical advantage. So that’s one point. A second point is opening up the ecosystem that allows these new entrants to have access to opportunities. Now, within that context then there’s going to be a process by which the appropriate new entrants are selected, this one over that one. The very act of contracting and making a choice is picking a winner over a loser. So I’m not inside the traditional acquisition process. Yes, I’m agreeing that should be the case. In selecting those winners versus losers, we should certainly take on more risk. By that, I mean you’re going to have to be able to experiment with new technologies, new companies, with the added expectation that you’re going to have a higher failure rate, and the design needs to allow for that and encourage that and expect that upfront. But those choices should be made very much around the criteria of where we think that technology and that company is going to best serve the government’s needs. When I’m saying pick winners and losers where the risk becomes evident is through the parochial political efforts of Congress or the selection process where choice has become far more political than merit driven. That’s the thing I think we need to seek to avoid.
ACME General: How unhelpful is our political situation right now to the changes you are promoting? That’s probably a nice way of putting it, considering the events of the past few weeks. But is there something fundamentally misaligned within our political system with long-term thinking and a fidelity to the national interest that rises above partisanship, the kind that is required to do what you’re proposing?
DM: Yeah, I think there most certainly is. I mean, I think it’s inherent in our political system to some degree, and it poses real challenges, and there’s two challenges. One is the size of the pie. Then the second is how the pie gets divided. Of course, the smaller the pie gets, the more contentious it becomes around how the pie gets divided. But I do think that political interests and congressional interests have a lot to do, particularly with protecting our existing posture and our existing structure. Because we have that embedded structure and those embedded commitments and those embedded platforms, that in and of itself takes the large proportion of the defense budget right off the table. Then the piece that’s left is relatively small. Then there’s all sorts of competing interests for that. Our opponents have the advantage of being much further behind us in some ways. So they’re building from scratch. So they can invest in these asymmetric capabilities, which really will challenge our primacy, despite those enormous platforms we have. So it’s a real strategic conundrum. I think the uniform military reinforces it for some of the reasons we’ve said, and then they obviously play their own role in lobbying on Capitol Hill and feeding that dynamic. So the system isn’t geared towards making fundamental resource reallocations in light of a changing strategic landscape, and yet that’s our reality. So I think it’s a real problem. I think part of the answer will have to come, and this won’t be completely adequate, part of it will have to come from the Sec Def down. That’s the point I made in the article, which is these kinds of changes won’t come without a clear point of leadership making the case on what’s required. That’s a starting point. That alone won’t be adequate, but it’s a critical starting point for painting the picture of what’s required.
ACME General: Well, I think this also speaks to one of those areas that, really, only government can lead on, and even Trey Stevens and Steve Blank would agree on this, that coordinating efforts across disparate industries, disparate agencies requires the hand of government. They write a bit about this. You write about, I believe, a national innovation policy. There has to be a national strategy for this kind of thing that brings all of the players to the table, not just the primes, but the non-traditionals, the military, and critically the war fighters themselves. I love some of what is going on these innovation archipelagos with getting immediate feedback from the front lines, but it’s going to require government action to compel that systematically, right?
DM: I really think so. While the military innovation pieces is a critical starting point for that discussion, it’s really a level even above that, which is, if you basically think about our role in the world, America’s role in the world, America’s leadership, it’s been really the by-product and part of technological leadership. At no time in modern history has that technology landscape been changing so much, and the consequences of not maintaining leadership been so apparent. If you look at one of our primary competitors or opponents in this changing landscape, it’s of course, China. Say what you will about China, but China has a plan. China has an explicit plan for how to ensure it has indigenous leadership in these critical technologies that have such enormous significance. If you look internally at us and say, what’s our plan, we don’t really have an integrated top-down national plan, a national plan for a modernization and innovation program, a plan for how the funding should support that, a plan for how the private sector and the public sector should come together, a plan for how that partnership between the private sector and public sector should manifest itself within DOD. There is not a national plan. I think therein lies part of the challenge. There’s no doubt that there’ll be lots of controversy about choices, but I welcome the moment when we’re actually having that conversation at a national level about what those trade-offs are, because we’ll know then that we’re actually focused on the right problem. Right now, the problem is diffusely understood, being dealt with in very pocketed ways, and isn’t a top of nation kind of discussion, which I think it needs to be.
ACME General: I want to go back to the primes briefly to bring back the business side of this conversation. You talked about asymmetric capabilities and DOD needing to anticipate those. But I would think that given the winner-take-all nature of some of these emergent technologies, that’s your term, that primes who are not accounting for that, who don’t have people on the tip of the spear or at least thinking about the leading edge of innovation are at risk of, if not extinction, at least a real threat to their fundamental business. Is that fair, given the nature of AI and quantum 5G and the disruption they pose?
DM: Yeah, absolutely. I think the most significant challenge is our military is at the risk of being wildly inadequate if it relies solely on the traditional platforms and the traditional path within our defense contracting ecosystem. Then a derivative of that, of course, is that the current model is increasingly anachronistic in terms of being able to fulfill the needs of our military at a moment when the boundaries between commercial technology and military technology are increasingly blurry, and where the amount of R&D investment and the amount of breakthroughs that are happening is orders of magnitude larger in the civilian sector than in the traditional defense contractors. So they, in their current form, are simply inadequate in filling what the need is. So there needs to be an evolution within our defense contracting arena, and the defense contractors need to be an important part of that, there’s no doubt. But the point I was making earlier is I’m not counting on them to do that on their own. I think it’s going to require some fairly significant shifts in incentives and resource allocations to change the behavior.
ACME General: I want to finish with a discussion about leadership and people, because I think you have a perspective on this born of experience, which is rare, if not unique. I loved the headline in the Financial Times, when you took over at Bridgewater. The lead was your military history. It said, “David McCormick, the ex-army ranger, set to take full command at Bridgewater.” How did you bring to bear your military experience in the leadership role you took and hold at Bridgewater?
DM: Well, probably like you, Ken, I mean, my military experience defined, it set a foundation for everything that’s followed. I’m so grateful for those lessons, big and small, that I learned from that time. It’s nothing cosmic, honestly. It’s very much around thinking about people, focused on leading by example, focused on giving clarity of communication, focused on learning, and being agile enough to learn from your mistakes, being transparent about your mistakes. It’s from seeing the potential in others and seeing it as a leadership responsibility to help others grow. Those lessons that I learned from the army, and I didn’t always learn them perfectly, and I’ve forgotten some of them and learned them the hard way a couple of times over the years. But those basic lessons, we are so fortunate, both of us, to have learned those as young men, because they carried forward in everything we’ve done since then. The benefit of having those experiences early is that you carry them with you always. I think you also carry with you a sense of fallibility, and a recognition it’s really not about you. It’s about others and helping them be as successful as they can possibly be. So, I remember going into the military and thinking, “Boy, if I ever want to have a civilian life, these military experiences, I’m sort of setting myself back from all my colleagues,” and it’s the exact opposite. Those military experiences helped frame who I am and who I’ve been and who I aspire to be. So I am forever grateful.
ACME General: You’ve applied the lessons you learned in the military to your prescriptions for revamping the whole personnel makeup of the military. When I read what you’ve proposed around workforce restructuring and the need to bring in people at lateral levels, you don’t just limit this to your leadership role at Bridgewater. You think the military can benefit from it today, right?
DM: Yeah, I do. The concept I’ve been – which is sort of related to the point you’re making – the concept that I’ve been thinking a lot about and I’ve written about recently a couple of times as it relates to workforce, is really the notion of national service. That experience that you and I had in the military, it taught us all those leadership lessons. But more than that, I think it helped us feel like true participants in our society with a common purpose. That common purpose in my experience, and I suspect in yours, it transcended race, and socioeconomic status, and urban versus rural. That experience helped me feel like I was part of something special in being an American and a patriot. It made me feel closer to all those people and better understanding of all those people that I served with. We lack that today in our country where we have increasing the divisiveness and polarization. The recent election and recent events highlight that and what’s most notable is how very different people see our country at significant ways, at scale. So I think the idea of finding ways to have people serve together in national service, it doesn’t have to be military service, is a way to both create that commonality, that mutual understanding, but also as a way to ensure basic skills training, and a leg up in entering the workforce. That, I think is an idea whose time has come. It’s not an easy idea to implement. It’s got huge implications, but it’s something I hope our leaders will consider.
ACME General: Well, David, I couldn’t have said it better myself. This is a show about defense innovation, but I cannot think of a better time for that kind of social innovation that shared service would mean for everyone who gets the chance to do it. Thanks so much for joining us today.
DM: My pleasure. Thank you guys.
ACME General: Thanks again to David for joining us on this month’s episode of Accelerate Defense. Next month, we’ll kick off a series of interviews with CEOs. We’re focusing on leaders of start-ups and other non-traditionals who’ve chosen to work with the DoD. We’re going to be talking about the challenges and the opportunities that come with making that leap.
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Accelerate Defense is a monthly podcast from ACME General Corp. Our producer is Isabel Robertson. Audio engineer is Sean Rule-Hoffman. Special thanks to the team at ACME. I’m Ken Harbaugh, and this is Accelerate Defense. Thanks for listening.
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