The Pentagon has spent years making many overt outreach efforts to Silicon Valley, a place where it has direct ties going back decades. (U.S. Air Force photo by 1st Lt. Scarlett Trujillo)

WASHINGTON — A new report released today gives the United States a “D” in defense modernization, the result of the Defense Department showing little improvement in transitioning the innovative gear  from fledgling defense tech firms into mass-produced equipment available for battlefield use.

The Ronald Reagan Presidential Foundation and Institute today released its second annual National Security Innovation Base report card, which assigns grades to key metrics tied to the Pentagon’s ability to leverage the work of the defense companies, start ups and research laboratories it depends on to develop leap-ahead technologies.

Top Pentagon acquisition officials have upped engagement with Silicon Valley and championed investments in small defense startups in recent years, as the department looks to bring the speed and innovation seen in Big Tech into the defense industry.

However, six of the 10 areas evaluated in the Reagan scorecard showed no progress or decreased performance compared to last year — a sign that “green shoots” of positive activity have not necessarily translated yet into the forward momentum, said Rachel Hoff, Reagan Institute’s policy director and one of the authors of the report.

“We’re still looking for the ability to translate and transition those innovation priorities into capabilities, into programs of record, into budget priorities,” Hoff told reporters in a briefing ahead of the rollout of the scorecard.

Most visibly, the grade for defense modernization dropped from a C to a D, with the report criticizing the Pentagon for its “failure to act on innovation priorities and pull through technologies at scale,” putting it at risk of falling behind near peer competitors like China.

The US government also scored a D in “customer clarity,” a measure of how well the government signals its funding priorities and plans to the private sector. While that score remained the same from 2023, one key metric that qualifies the ability of the US government to provide predictable funding dropped from an F to an F minus — the lowest grade in the report, and a reflection of budgetary chaos caused by Congress, which has yet to pass a 2024 budget six months into the fiscal year.

“The goal with this grade was really to say look, Congress is moving in the wrong direction, particularly as it comes to providing stable, on-time appropriations,” Hoff said.

The grade for the talent base slipped from a D+ to a D, reflecting continued difficulties the defense sector faces in recruiting and retaining a skilled workforce. The report cites an upcoming retirement bubble, with about 31% of the defense engineering and manufacturing workforce in or nearing the retirement eligible window compared to 24 percent overall, as well as a shrinking talent pool in states responsible for major defense work.

In dozens of interviews with the report’s authors, startups and nontraditional defense companies highlighted nonfinancial bottlenecks such as lack of access to classified spaces and testing resources such as windtunnels, or the long time periods it takes for employees to obtain security clearances, said Dale Swartz, a partner at McKinsey and Company, which teamed with Reagan on the report.

Another issue is that while “there’s plenty of capital flowing around of the system, it’s just not always getting deployed at the right life stages of a company,” he said.

Meanwhile, more established nontraditional defense firms that are now ready to ramp up production of technologies have found themselves running into the same problems plaguing the legacy defense primes, such as employee retention and managing supply chain challenges for materials such as energetics, microelectronics, he said.

The Reagan report recommended several measures meant to help defense innovation take root more firmly, including full funding of the Pentagon’s Replicator drone development initiative and making reforms to software intellectual property rights policy.

But it remains unclear whether the Defense Department’s fiscal 2025 budget request, released last week, will move the ball forward, said Roger Zakheim, the Reagan Institute’s Washington director.

“The administration came out with a top line, roughly, of $850 billion,” he said in an interview with Breaking Defense. “But what they do under the hood is not a foregone conclusion. So under the top line, how are they allocating and spreading it to different priorities?”