Frank Kendall, the Pentagon’s top acquisition official, outlined the major principles of ‘Better Buying Power 3.0,’ the department’s new program aimed at preserving America’s technological edge. (J. Lawler Duggan/For Capital Business)

Concerned that America is losing its technological edge as defense budgets shrink, the Pentagon is launching a new initiative to encourage industry innovation.

The Defense Department plans to make greater use of prototypes in future research and development efforts, develop technology incrementally and encourage companies to experiment more.

In addition, it plans to structure contracts in a way that creates incentives to reward companies that bring fresh approaches to meet program goals.

The nation’s investment in new technology has slowed in recent years because of constraints put on government spending in the wake of the Great Recession. At the same time, foreign adversaries such as Russia and China are making impressive leaps in their technological capabilities, according to Pentagon officials.

The new program is a fresh iteration of the Defense Department’s four year-old “better buying power” initiative, which focuses on reducing costs by increasing competition for defense programs.

Frank Kendall, the Pentagon’s top acquisition official, outlined the major principles of ‘Better Buying Power 3.0’ — as the latest program is known — at a think tank event Friday morning.

What sets 3.0 apart from previous versions is its emphasis on targeted research and development, greater use of commercial technology and more incentives for companies to innovate while keeping costs low, Kendall said.

Under the new program, the Defense Department plans to act more like a private sector buyer, pushing companies to assume the risks of research and development for potential greater rewards, Kendall said. The initiative will try to remove barriers that prevent the Pentagon from using commercial technology, for example.

The new program also emphasizes incentive-type contracts, which reward contractors for meeting cost or schedule requirements or penalize them when they do not. That’s a shift from the department’s past practice of awarding contracts to the lowest bidder, a trend that contractors say discourages innovation.

Kendall noted that the department will look for whichever contract best suits a project, regardless of cost or incentive.

Industry groups had mixed reactions to the new inititiave.

The program outlines some of the common concerns that government and contractors have, but it doesn’t include any of the ideas to drive innovation or improve the skills of the workforce that companies have shared with the Pentagon, said Stan Soloway, president and chief executive of the Professional Services Council, which represents technology contractors, many of which are based in the Washington area.

“What’s not in there is a really bold vision of how we’re going to transform the system to address the department’s needs,” he said.

The National Defense Industrial Association took a more favorable view of the program.

“Everybody gets caught up in the specifics, but if you step back and look at it, there’s a rare alignment of all the stakeholders in this area,” Arnold Punaro, chairman of the association’s board said, referring to the Pentagon, Congress and industry members.

The chief motivation behind Better Buying Power 3.0 is the threat of advanced capabilities from Russia and China. Both Kendall and Defense Secretary Chuck Hagel have touched on that concern in public comments.

Russia and China are investing in anti-ship and anti-air technology as well as electronic warfare systems, all of which could pose a threat to U.S. military capability, Kendall said at a recent industry conference. That fact, combined with the country’s shrinking defense budget and cuts to research and development are equivalent to “delaying modernization,” he said.

Hagel has urged American companies to innovate in order to keep pace with the rest of the world.

Better Buying Power 3.0 carries forward most of the principles contained in parts one and two, such as reducing bureaucracy, promoting competition and improving the professionalism of the Pentagon’s acquisition workforce.

But despite its good intentions, the effectiveness of the program has been hard to measure, Kendall acknowledged at a media roundtable earlier this week.

“We have struggled, frankly, to figure out how to measure the performance of our [research and development] activities, but we need to do it,” he said.

The department has released reports on the financial and schedule performance of its acquisition system in the past. For version 3.0, Kendall said a potential metric to measure success could be the number of patents that result from innovation.

The new program will collect comments from industry members and other stakeholders for the next three months. The final version is expected to roll out in January.