Join Matt MacGregor from the Mitre Corporation as he dives deep into the complexities of the DoD budget, revealing critical insights for businesses in the software and digital transformation space. This enlightening discussion at Prodacity covers a range of topics from budget trends to strategic investment areas in GovTech, offering valuable perspectives for both small and large businesses. Discover how the shifting financial landscape is impacting DevOps and digital capabilities within the Department of Defense, and learn about the emerging opportunities in this dynamic sector.

So I'm Matt MacGregor. I currently work at the Mitre Corporation, which is an FFRDC if you're not familiar with it. And we support a lot of different programs. So I'm at the A&S level, so we've done a lot of software policy rollout. So Max actually teed me up pretty well on that because there's a couple of things I'll talk about on that front. But my background is as a program manager of multiple different programs from space to weather to fighter jets. And so I've had some of the programmatic experience. And then before I came to Mitre, I was in the Pentagon for five years doing a lot of budgeteering, programming, whatever term of art you want to use there. So I have not given this brief before, so it's my first time rolling it out. So we'll see if this connects with what you guys are interested in.

Feel free if you have questions throughout this, I'd love for this to be a little bit interactive. The budget process is very opaque. It's hard to understand. There's so many details, so many nuances to it. You honestly have to do a few years in the building to really understand it. So if you guys have any questions that I'm not addressing, please raise your hand and we'll have that discussion. But hopefully there's some tidbits here, something you can learn and take away that will help you understand a little bit better about where the budget, how the budget is, and then where you can maybe get some insight into some areas that if you're a small business or a large business where you might learn more about where the department is going and get some insight there. All right, next slide.

Okay. So not to start out with bad news, but the DoD budget may not be surprising to you but is been going down over time as a percentage of GDP, which is the important measure. And with inflation and escalations, even the increases are very, very marginal. So it's going to be become a tougher time for DoD in the future. And this is probably not going to go back up. I think all indications are it's probably heading in that general direction. So anyway, this is where the budget is going into '24. So '24 is the next budget cycle that we're waiting for an approach bill to drop. The conference for that hasn't really happened. There's still a lot of things going on in Congress that we haven't been paying attention. But that's the '24 bill before DoD could spend any of the money in '24, they would need that to drop.

And year to year in the budget there can be significant changes. And so if you're just executing something that you already had as a program or already had contracts for, you can continue that. Generally you can get funding for that to some level, even if you're operating under a continuing resolution, which you've probably heard about. But if you're starting something new, so that's the hard thing, if you're starting something new or really ramping up trying to do something a lot more work in an area, you'll be more challenged to execute that plan until we have a probes bill. So let's hope the Congress can get going on that. So inflation, I mentioned inflation is making this picture even worse. So while the percentage to GDP is going down. This great analysis from American Institute actually shows that we would need about $31 billion across most of the services, around $30 billion across each of the services plus up just to have the same level of buying power in 2021. So that is a challenging area.

And so actually let me go back for a second though because, well, I wanted to start out with the reality. There is an opportunity space here. We're in the software, I think we're all here kind of talking about software and digital capabilities. One of the great things about this is that the reality of this puts pressure on the fact that some of the best way to get capability quick is through software, through digital capabilities. I mean, this is something the department came to the realization about when they were developing their software modernization strategy a couple years ago. And that is still being implemented and tracked various measures to kind of make the department better and take advantage of the software opportunities from the commercial sector.

Are we doing as good as we should? No, but the fact that there will be pressures on the budget is going to force us. Kind of like Winston Churchill said, "We've run out of money, now we have to think." Well, I think we're running out of money and now we have to turn more and more to software and digital capabilities because we're not going to be able to build huge hardware systems, especially in the timeframes that we need things. Software will be really key.

Yeah, so when you think about the budget or when you look at the budget, if you deep dive it, you will quickly, if you don't already have this recognition, you'll quickly notice that there's a lot of big programs that dominate and these are the ones you hear about in the news most of the time, F-35 and submarine programs and nuke programs. And it is true if you look through this list, these are a lot of the capabilities that if someone's going to do a video about being a military warrior, these are the things that are going to fly over or things are going to pop out of the water. So very critical systems and they do dominate about 30% of the budget. So there's a lot locked into these big programs. A lot of the budget immediately goes there on the investment side, immediately goes to these big ones.

And then there's a lot of hundreds, hundreds of smaller programs that you will not hear as much about that also have some locked in effects because of the acquisition system. Max did a great intro to a program of record. When you have a program of record that actually gives you continuity of funding because it means you're in the program, you're already in the system, people are expecting to fund you year to year. So all the people in the Pentagon who decide where money goes, they first look at the things that are already programs and it's a lot easier to get money for those. And so I say all that to say is one of the things that if you are trying to understand where the budget, where the money is going is look at the big programs and what opportunities you might have in those.

Some of them might be quite hard, some of them might be dominated by primes. I think I have a slide on that. Oh, I'll go back, I think I mentioned that later. But some of these might be dominated by big primes. So maybe there's not an entry point for there if you don't have agreements with them or you're not able to contribute in the way that you would like, that would be compliant with your business structure. So maybe not there. But there probably are, and I'll talk more about this later, probably are in the smaller programs in the ACATs, there probably are opportunities and then there is other money that we'll talk about. So one of the positive things is that while we've locked a lot of these programs, they get an estimate, the programs I just talked about, they have an estimate and typically they fund a year to year to that estimate and it's updated.

And so there is that locked in effect. But one of the things with the software pathway that is really, really helpful, DoD 87 is how Max referred to it, if it is that it's less locked in. So the money is not locked in as a hardcore hard program of record. It does still helps you if you're a software pathway program to get money, but it also gives flex because you don't necessarily have to meet a baseline. And that's kind of the core thing with the traditional pathways is you had a baseline that you had to meet. But now software pathway, you have some flexibility on the funding side because you can flex maybe one year you're able to fund at the level you want with all the teams and all the infrastructure, everything you could possibly want to make your program successful. But then you take a 20% cut, that doesn't mean you have to end the program. On some hardware programs that might force you to almost restructure the entire program as a software pathway. The acquisition processes are set up in a way that gives you a little bit more flexibility.

Yeah, so just to give you the budget breakdown, the way that the two major categories of investment, and I'm sorry, I apologize if this is very basic information, never quite know the audience, but research and development and procurement are some of the key things that actually provide the core capabilities of the department. And in that, you'll see there are different categories across the RD phase. And I highlight the two in each because I think these are areas where you could really focus your attention maybe because in the S&T space and the applied and the active development are going to be areas where those are active opportunities and they're probably more open and flexible to new ideas, to new commercial solutions. And so in the RD space, that's going to be more of that area. And then for procurement, it depends. Some of these aircraft ships and weapons, some of these have become big, big platforms.

These are the things I had on the other chart. So there may be less opportunities in those, but in some of the other procurement and then especially in the DoD space, there's a lot of prototyping programs, a lot of programs that are being executed through the SCO and different agencies that you can actually get. You can actually put your solution forward on one of their CSOs and one of their BAAs and they're going to be a lot more amenable than maybe the F-35 program would be for you to be able to have an entry point into that. Yes, Bill.

Audience:
Can you talk a little bit more about the software pilot 552 billion? Is that?

Oh no, that is not accurate. I apologize. I got on the Bs there. No, that's million. There's eight programs in that and that was a pilot that was stood up a few years ago. We had no success in getting the appropriate to expand that. So for now it's going to be eight programs. Sadly. Yeah, there is some good PB commission recommendations for some alternatives to BA 8. It might not be called BA 8, but it'll give more flexibility to software programs. We'll see if those are implemented. But, yeah.

Audience:
Thank you.

So yeah, so I really bring this up just to give you a sense of where your entry points might be in the budget process. So just so you have some better understanding of it. So this is a decoder, I've had this question before that people see these BAS budget activities. This is a simple way of understanding it. So if you see something that's in the BA 5 space, that's probably going to be an actual program of record, they're probably in development, they probably have a formal estimate, they probably have requirements. And so that's going to be a little bit more established. In the three and four space, that's actually areas where the commercial sector can really come in and start to give DoD ideas and hopefully influence requirements. So that's not done as much as it should be, but that is the place for that to happen because that's where prototyping happens.

That's where experimentation campaigns like CDAO, if you're tracking their guide, their global information dominance events, that's where they're trying to bring in different tools, different solutions, and the services have done that too with ABMS and project convergence. But bringing in different commercial tools, let the operators play with them and say, "Is this helpful to you? Is this something that you could find useful in your operations?" So that's a prime space on the RDT&E side for entry point to at least get awareness of your solution and potentially get some advocacy, which I'll talk a little bit about later. But it's not just RDT&E. And yeah, once again, Max did a great job of talking about this in terms of there is programs of record, which are typically going to be in that RDT&E space, but there's a lot of money. And you can see here from this report that came out was issued by Cape this year, O&M, it's a huge spike there and there's a lot of software development that's going on in that space.

The COCOMs are doing more and more to leverage the commercial software. They're buying a lot more licenses, they're trying to take advantage of any solutions that can solve some of their problems because some of these big programs are just not coming online in the timeframes they want it. So they're hungry and they're looking and they are having increasing access to O&M and actually being able to advocate for some of the investment dollars as well. But just to note there that more and more software development is happening in that operation space. And Max is right, it's not necessarily stable. So you might have a period of time where one of these operational organizations and across the military, there's different operational organizations that are taking advantage of some of this commercial technology but small scale. And so it is true, one year they may get 10 million bucks and be able to do a lot of stuff and next year because of fuel prices or something, they'll be scaled back. So it is less stable, but there is some opportunities in the O&M space.

Yeah. So I bring this up, the digital needs of the combatant commanders, and if you pay attention to the news, you've probably heard INDOPACOM say again and again that they are not very confident about their ability to execute some of their operations in that theater. And so they're looking for capability. And these are some of the areas, not sure what everyone's company provides here, but these are some of the spaces that you can definitely play in. Battlespace awareness type tools, things that can do analytics, AI/ML or how that can be applied in different ways. Networks, modeling and sim, all these things, they are ripe, those types of organizations, those combatant commander organizations to take advantage of. And INDOPACOM actually stood up a joint mission accelerator directorate DIUs integrated with there.

And so that's going to be a unique organization to monitor and see how they're able to field some of the tools that they have in their pipeline and some of the capabilities that they want to get out to their theater because they're acting more in an acquisition role than most COCOMs typically have in the past. They're operating more like SOCOM and CENTCOM is doing the same thing. They're a lot more engaged. So keep an eye out on these type of combatant commander needs because if you're trying to figure out where your organization should go, this is the demand signal. This is the most rapidly blinking demand signal that we have. So yeah, so overall IT spend, right? So overall, if you put it under the category of IT, about 7% of the DoD budget is in that bucket. And you can see there's a pretty good breakout here from the services is defense and goes around Navy Army's Air Force Space Force is tucked into the Air Force and Marines and the Navy.

And so you can kind of see here that cyberspace is a dominant player. So if you're a cyberspace or a cybersecurity provider, you're in that space, then there is a lot of investment going into that. That's really critical right now. And then there's also a lot of application development. So you can see war fighting systems and business systems, just a ton of money going into that space and it's not likely to go down. A lot of these programs are just scaling up. They have more and more work to do. The demand signal from the user community is higher and higher. But yeah, just to give you a sense of where that stands, and you can see they're fairly even across the services. So you'll notice that on the whole. The army's a little bit lower, but that'll probably change as they stand at more programs.

So the ecosystem, where do you enter if you're a small business, and we get this question a lot. You see DoD, you see these budget breakouts and you're kind of like, well, where does my system fit? Where can I play? What's the space I can play in? This is the system that you're going to operate in. And so you have different ways of being supported is kind of how I think about it. You can take advantage of some of the accelerator programs, they will help you if you're not already familiar with the DoD system, if you're not familiar with that, the horse blanket, the max that up there and you want to understand a little bit more about how DoD operates, how can you play, what do you have to do to your product to sell it, to make it more marketable? So those accelerators can really provide some help there to have you understand that. They have some training courses and they can help guide you through that. They do classes, my organization, we actually support some of those classes to kind of help.

What is an ATO? If you haven't gone through the ATO process or if you haven't had to do a Clinger-Cohen certification, just understanding some of those things that you're going to have to face if you haven't had to do any kind of cost reporting, those types of things. They will help you understand a little bit about the DoD processes.

Challenges, there are different challenges out there. I wish they were used more. They're kind of still on the lower end, but that's always worth exploring and seeing what challenges because that may give you an entry point but also give you some awareness, bring awareness to your product. And that's super, super key Connectors or different connectors and some of these are also funders and incubators. AFWERX and some of these other WERX that have been stood up. NavalX is getting more active, the RCTTO from the Army is getting more active. So take a look at those organizations and see how you can play. So they have, I'll show one CSO that AFWERX has out there. And there are different websites that you can go to if you're not already familiar. But take advantage of these organizations because they are a great entry point to at least get more awareness of where your solutions may fit to and be matched to a DoD problem. And also help you figure out some of the things you might have to do to make yourself more marketable.

And you can see, yeah, there's some other ones here, government contracting authorities. That website is, we broke this down for a broader audience so you can go there and check this out and each of those has some more details. But there's a lot out there, a lot of organizations out there that can help you get started is the key takeaway here. SBIR is still the logical entry point. If you haven't already been a SBIR or if you're considering it, that is a good way to go. It's $2.5 billion a year that is essentially unobligated money or unallocated money to a particular program. So things could be done through open calls or they could be more targeted for specific service needs. But the fact is that that money is available for the services to engage the small business community. And so it's a great entry rate. Success rate, 15%. I think it depends on what you're coming to the table with. But yeah, that is something to think of and get some information on and see if it's something you want to pursue. But it is still one of the best entry points for smaller businesses to get into DoD.

And there are some dashboards. So I put this up here just in case you weren't aware of it. I thought this is what I actually use just to see what's out there. And you can see there's an Air Force SBIR CSO that's about to close this month. And so that's a great opportunity if that is something that you're providing, your company is providing, I would encourage you to put your name in the hat there. And then yeah, STRATFI and TACFI is something that AFWERX stood up to do better matching between VCs. So if you have an opportunity for VC funding, this is something where the department of the Air Force, and this is growing, the Army and Navy are looking at this too and trying to use the same kind of model.

And you're seeing this more with strategic capital that the office of Strategic capital is being stood up, is matching VC funds with government funds to maximize the investment. So this is something that you definitely want to pay attention to, especially if you are able to get some VC funding that will help you at least within the Air Force right now to be able to get matching funds and hopefully grow your product into something that can be transitioned to a program of record. That's the key. And they have Ask Us Anythings all the time. So if you go on their website, that's a great resource and they can give you more information.

So just in terms of you understand the budget, you understand generally where some of the money is going, how it's broken out. Now you want to understand, what are the priorities, what does the future look like, what kind of things should I invest in? The COCOM is a great demand signal, that is definitely where you want to go. But I would encourage you also to look at some of the strategic guidance that the service leaders are putting out because I really do think they are road mapping in a much better way. Some of the things they know they have to get after. And so if you read those modernization plans, you read some of the details from Secretary Kendall on the operational imperatives, you can clearly see these are things the Air Force is going to be struggling with for the next decade or decades.

The Navy, same kind of thing, they're completely changing their operations, so they need help in some of these spaces and you can see some of their key systems. So it gives you a sense of where some of the big money is going on operational systems that they're scaling. And this is just a small fragment of it, but these are the ones getting a lot of attention right now. And so if you have something that you can contribute to that, especially as those contracts come out or as those primes are having to scale up maybe beyond the initial scope of some of these efforts, maybe that's an opportunity for you to get in there as an entry point. Because I will tell you, all of these programs are tapping into the small business. They are having to because they need that expertise and they need that. Yes.

Audience:
Give me thoughts or comments about project convergence Overmatch and ABMS as related to working together.

So there are some light touch points across their project. Overmatch is a little bit in their own space, so they do talk with the Air Force a little bit, ABMS and the Army are talking a little bit more. Project Convergence is more of an experimentation campaign and the army's operating a little differently. It's not as consolidated as ABMS or Project Overmatch. So yeah, there are touch points. It's not as coherent as you might think. It's still pretty much in their own stove pipes. Yeah, so JADC2, some of the JADC2 efforts is trying to bring some cohesion to that. Joint fires network has something underway that's trying to bring some cohesion to that for Paycom. But yeah, these are still individual programs, mostly service requirements driven. So yeah, if you see something there that if there's a contract there, it'll probably be going after these types of things on the whole.

But yeah, encourage you to read those documents and just kind of stay in touch with the news because this will, I think these are the demand signals. In the past, the department demand signal was starting a program. There's going to be a lot more programs that are started. There's going to be a lot more different efforts that are stood up that are operational prototypes for really long periods of time. This is all my take, but there's going to be a lot more opportunities to go after some of the problem areas because the demand signal is not being met with what's currently out there and what's currently being fielded. The demand signal is much higher. So yeah, just encourage you to take a look at some of those. And then here's where you can start to get deeper dive, understand the strategic picture, understand maybe the high level needs but encourage you to get into the budget docs.

This is public information and it varies depending on the organization that maybe sometimes gets super, super detailed and the airport sometimes says pretty high level. But you go into these documents on the OSD website and click through, focus on the ones that I kind of mentioned, the RTDE, the 34BA and just see what is being funded. There are very few, so you sometimes will hear there are pots of money out there, bridge funds and all these pots of money that are just waiting to be spent. And sometimes I think they get too much attention because most of those are already allocated for. Yes, they are not programs, they're going to non-programs. But if you read those budget docs, most of them are already allocated against a particular budget line and so it's already sort of locked down. The appropriators have been pretty hard up about making sure there's not a lot of free floating money that's just unallocated with no plan against it.

They want to see a plan, but what that does for you is it gives you a little bit more insight in if you're in those three and four budget activity three and four docs, you're going to get a sense of some of the big capabilities that they're trying to go after in there. And those are not yet programs. So that's a perfect space to start to play in. So I encourage you to encourage you to go in there and take a look at that. They're not always easy to read. If you have a particular capability that your company provides, you might do some word search. That's what I do, do that old PDF control+F. So yeah, this is something though. So when you get to the point, or this is more centered around hardware, but there's going to be more opportunities for other digital capabilities, is this is probably the only real free floating pot of money. And it's really focused on scaling.

And so this is something that has a lot of support in the hill and I think we'll continue on in perpetuity unless something goes really awry. But this is money that in the $100 to $200 million range that will be able to take something new and if you are ready to be fielded, they will be able to fund you and they're actually moving pretty quick so that if funds, you get to procurement funds to get it out to the field and from there you'll probably have at least a fighting chance of becoming a longer term program of record. So this is something take a look at. If you're talking to your sponsors and they're not aware of this, bring their attention to it. There is a process to send up a request through R&E. They're a research and engineering organization and OSD, they manage it. But it is something that so far seems to be working very well.

Mentor Protégé Program. So I just bringing this up, maybe you're already aware of it. I think if you're a small business, there's a lot of heartburn maybe with trying to work with the prime. The relationships are not always the best and I think there's been some bad experiences out there. But the Mentor Protégé Program is something that is getting more attention and the department is looking at scaling it more and it is an opportunity for you to have the government as little bit of a go-between or a little bit as a partner with a prime. And the prime gets some credit for participating in this and then you also get the benefit of their experience, depending on the arrangement and all that stuff that has worked out. But it gives you an opportunity to get, primes have an incredible amount of experience on how to field things.

They know how to work through the processes and so they can help you with a lot of learning. And so it's an education opportunity. And also there's some potential for some funding. I'm not sure how often that is taken advantage of. But at least gives you an opportunity to talk to a prime about potentially they do have VCs and stuff too. So maybe it's an opportunity to get some VC funding from one of the big primes. But that is out there. So one of the things right now most of your program offices, if you're working with a program office, they don't really have a lot of flexibility when it comes to funding. So whatever was in the A perps bill, they're generally fairly constrained to that. They can do above threshold reprograms, which is moves money from one completely different thing to completely different thing.

But in general they have to stay within the boundaries of what's in their budget doc. And that's why it is really good to become familiar with them because you'll see if you're supporting that program, go into their budget doc and see what they're saying they're going to do. That will give you a lot of insight and you can sort of see the boundaries that have been established for them in there for the type of work they can do. But there is a PPBE commission, they're about to come out their final report here soon and they have proposed a number of things that will really change the game if implemented. It's going to take some time to socialize these and to get support on the hill for all of them, but over time program offices will get more flexibility and there's a couple pilots going on right now for portfolio funding that will allow for more movement of funds across lines.

And so if you come in with something new, you have a product that is just game changing or just substantially better than anything out there, they will potentially have more flexibility to be able to go after that in the year of execution using funds that are in-house and be able to reallocate them to go after that. There's a lot of things that still be worked out, but I think this is a really encouraging thing for the small business community and I think the advocacy needs to stay strong over the next number of years as these things will be slowly implemented, hopefully. Well, it'd be great if they were implemented right away. But it's going to take time. So I think the small business community, if need to advocate for these things, this will really help you when it comes to a program office that wants to move out but is constrained by funding because right now they can only move.

I did this analysis on the 23 budget within, even with the flexibility they have a potential of 9.4 billion to be able to move around. But they really can only move about 5.6 just by how tight the budget lines are controlled. And even within there, they only use a fraction of that because you still have a lot of restrictions on it. So if you can expand this, if you can get this to be better by increasing below threshold reprogramming limits, which allows you to move some money around in the year of execution, if you can get some budget lines consolidated, get more towards portfolio funding. And there's a bunch of other recommendations around new starts and different things that are also a constraint. That will really provide more opportunities for the small business community to be able to entering into execution versus waiting for three years.

One of the things that's out there too from the hack D, it's not getting the warmest reception from the other side, but this is at least the fact that this is on paper in an official appropriation committee report. It should be heartening to all of us, and this is where I think this is where I put my positive hat on is the fact that this was proposed is pretty amazing in and of itself. So it would give up to about $1 billion to do some hedge fund capabilities or hedge capabilities that are not in the current system, not in the current programs record. But something that would help give the department an offset.

I think this will result in some additional flexibilities for the department even if they don't get it quite to the level that the hack D is proposing. But anyway, the focus is on non-traditional companies. So you are seeing this more and more in the appropriation bills and the NDAs, the National Defense Authorization acts that non-traditional innovation is becoming increasingly important. And so Congress gets it. A lot of the department leaders get it and it's flowing down. It's taking more time than it should. But budget flexibility will help a lot with that.

All right, so this is my last slide and then we can have a conversation if you want. But when you think about the Valley of Death, and there's a lot of articles, really great, I love all the material out there about how to solve the Valley of Death. But ultimately what it comes down to is you do have to have good tech. If you're a company and you're trying to sell the department, you have to have good tech. The other thing is you have to have good timing. So if there's not a need, you're selling something that's either too futuristic for the department, you have an AI, a large language model that's going to do everyone's performance reports and solve 20 different problems at once, it's probably going to be hard for the department to accept that. But if you have something that is clearly, like we just talked about one of the needs that's coming up, one of the demand signals that already is there and you have timing, then you're in good shape.

Then you need advocacy. And this is really critical. This is why if you do use the server process or you do use one of these entry points, really take advantage of it. Try to push that your government sponsor for as much access to users as possible so you can get feedback. That will just serve you so well. So that advocacy and what that will hopefully result in is that somebody likes your product, you've given them feedback, maybe you've done a couple iterations on it as part of a SBIR phase two and they like it. They will maybe be your advocate. They will maybe be the one that talks to the general and says, "Hey sir, this thing is really great, this solves XX problems." And then that rolls up into the programming process and somebody says, "Hey, there's this great tool out there. Can I get this?"

Maybe you start out with some O&M money, maybe it starts out as something that COCOM funds and it's so good that it becomes enough of a demand signal that the department puts RDTE against it and allows you to actually do a formal development. And then it becomes a program of record. So this can happen. I think that is the new model for DoD, is that things are going to start out as prototypes and get that advocacy, get that initial operational, and then that's where the scaling is going to happen. It's going to be less about starting big monster IT programs. I just think that's inevitable. There will be some things that operate that way, but more and more I think we're going to be having to take advantage of the commercial sector innovation in that experimentation, prototyping, and then scaling approach and you're seeing more of that.

And then planning. So you do need the program office. So if you're engaged in the program office, you do need them to do the planning, need them to help the system understand what it would take to take your product or to integrate your product into something existing or start something new. So however you can assist them with that, whether it's understanding some of the technical challenges, technical details, or if it's helping them with, well, what would it take to scale? If I had this many users, what would the architecture need to look like? What would it cost? What's the cloud? So helping them understand as much as you can the full picture if they're going to go forward and actually be an advocate for your program.

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