Funding of emerging-technology areas pursued by nontraditional companies

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The US Department of Defense (DoD) has committed to investing in new defense technologies.1 In recent years, it has done so in part by significantly ramping up use of Other Transaction Authorities (OTAs). These agreements, which are designed to streamline the acquisition process,2 can be directed to either traditional or nontraditional defense contractors. This acquisition method has been in place for decades, but has increased in popularity in recent years, fueled at least in part by the passage of the 2015 and 2016 National Defense Authorization Acts, which encouraged greater use of OTAs to pursue new capabilities.3

Many OTAs are being used to fund nontraditional companies that are developing innovative solutions in key technology areas on which the DoD is focusing. These range from space technologies to quantum computing to artificial intelligence and autonomy.4 We analyzed OTA awards to nontraditional companies over the past three fiscal years to see which technologies are being funded and at what levels.

OTA trends

Our analysis showed that OTA obligations totaled less than $1 billion in fiscal year 2015 but more than $15 billion by fiscal year 2021.5 COVID-19-related awards are responsible for some of the increase, yet there is material growth even after accounting for them. We also identified the following patterns:

  • Over the three-year period from fiscal year 2019 to fiscal year 2021, at least one-third of non-COVID-19-related OTA obligations were directed to emerging technologies being developed by nontraditional companies.
  • About two-thirds of OTA dollars flow through consortia (defined as organizations with multiple members), so it can be challenging to identify the ultimate recipients and objectives of such awards.6
  • OTA awards have been directed to a large number of unique recipients. Nearly 1,000 nontraditional companies received emerging-tech awards over the three-year period of our study.

Two factors in particular have encouraged the use of OTAs. First, in a changing threat environment, adversaries are advancing technologies faster than ever before, so the US government seeks to acquire defense technologies more quickly. Second, budgetary limits encourage the DoD to give companies incentives to adopt a wider range of commercial models via co-investment.

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OTA breakdown

Below we present a decomposition of OTA awards to nontraditional companies. It is based on available data for fiscal year 2019 to fiscal year 2021. As we have noted, a significant portion of OTA dollars flow through consortia, which then further disburse them. It is therefore challenging to gain, outside-in, more insight into a slice of the OTA pie. (Consortia have the ability to direct funds to both traditional companies and institutions as well as nontraditional businesses.) For those OTAs to nontraditional companies where the funding objective was available, investment flowed to a wide variety of priority technologies (Exhibit 1).

Where data are available, we see a wide dispersion in OTA funding, reflecting a spread of dollars across a variety of priority areas.

The value of the average award is in the single-digit millions, so funding is spread across a variety of companies. The exhibit below shows the breadth of the number of companies being funded via OTAs by technology area (Exhibit 2).

Numerous companies in each priority area are funded through OTAs.

As nontraditional companies gain traction with emerging technologies, traditional defense contractors are experimenting with business models—M&A, separate subsidiaries, partnerships, investments in internal R&D, and more. We think that a sizable portion of the OTA awards to traditional defense contractors is thus also for emerging technologies.

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It is important to note that a full view of funding for nontraditional companies would involve pairing the DoD funding analysis with a look at private investment. The latter also includes funding for a host of emerging technologies. Our follow-on work could include an analysis of OTAs awarded to traditional companies that are developing new solutions for defense technology.

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