Overview
The US defense industrial base’s problems are well-known: the bidding process rewards oligopolistic behavior, overemphasizes high-end modernization systems that will not be ready for years, creates bottlenecks during testing and development, and discourages commercial players most capable of scaling disruptive technologies from breaking into defense. In response, the Pentagon is initiating a paradigm shift in the acquisition system to create additional flexibility across portfolios, create space for commercial players, and reward a program’s cost and schedule performance. This shake-up will open space for new players but will not solve all issues, particularly related to supply chains or existing system monopolies.
What the Memo Seeks to Accomplish
On November 7, 2025, the Trump administration released the anticipated Acquisition Transformation Strategy outlining an overhaul of the defense acquisitions process. To understand its reforms, some context is needed. The current process prioritizes the quality of high-end and lucrative systems, like next-generation fighter jets or nuclear-powered submarines, at the expense of conventional equipment like ammunition or scalability. However, with strategic rivals like China rapidly increasing their military arsenals, the US wants to pivot priorities to include “speed and flexibility,” exploiting economies of scale to rapidly surge production and support a “high-low mix” of capabilities in the US arsenal.
The Strategy seeks to address three problems in the US defense industrial base (DIB) that reinforce oligopolies. First, the current procurement system rewards lucrative winner-takes-all contracts to the most efficient bidders. This incentive structure has induced consolidation in the US DIB since the Cold War, where 51 defense “primes” have been merged into just five that have cornered the experience and know-how to win and keep contracts. To maximize efficiency and win bids, primes often outsource specific components to a complex network of subcontractors, undermining the ability of supply chains to respond to new demand signals. Moreover, the primes are incentivized to focus on the most lucrative contracts, focusing on innovating high-end systems but then producing only a low volume. The Pentagon reinforces this imbalance of innovation over scale: funds for research, development, testing, and evaluation (RDTE) costs have increased steadily over time, from 7.78% of the defense budget in 1970 to an expected 18.63% in 2026, about the same proportion that goes to procurement (18-21%).
Second, most procurement contracts often have rigid specifications, requiring several stages of testing, evaluation, and approval. When standards are not up to par, the aforementioned supply chain complexities can augment cost overruns and stretch lead times. From 2014-2024, DOD recorded 24 breaches, or cost overruns, requiring Congressional notification: 12 significant (a program with cost overruns at least 15% above current estimates or 30% above original estimates) and 12 critical (a program at least 25% above current estimates or 50% above original estimates). Major systems are the archetypal example of this problem: for example, the F-47 next-generation fighter jet first received funding 10 years ago and will likely not be operational for another five. The Columbia-class nuclear-powered submarine and the Sentinel intercontinental ballistic missile—two modernization projects central to the nuclear triad—are also delayed and over budget.
Third, the procurement system has several stages of government oversight, which scrambles decision-making. With so many stages of approval, systems can take years from experimentation, production, and delivery into the Joint Force. The bureaucratic costs of entry discourage new entrants and non-traditional contractors, especially in the commercial sector, from breaking into the defense sector. Moreover, this rigorous system of oversight and approvals—built for ensuring quality—does not translate effectively to disruptive technologies, like AI, that are constantly updated and tinkered with.
The Strategy’s Envisioned Acquisition Shake-Up
The Strategy seeks to shake up the DIB’s oligopolistic structure by making space for commercial players, increasing investment across all stages in the DIB, and loosening bureaucratic red tape in the acquisition process. Secretary of War Pete Hegseth summed up in a speech on November 7 that the Pentagon must “increase acquisition risk to decrease operational risk,” or in other words, trade off perfection to improve speed. He stated that the Pentagon “will be open to buying the 85% solution and iterate together over time to achieve the 100% solution.”
First and most major, the Pentagon will orient acquisition oversight around portfolios of system groups—headed by Portfolio Acquisition Executives (PAEs)—adding an additional layer of responsibility above Program Executive Offices that currently manage each disparate program. The PAE role intends to increase oversight over programs, streamline decision-making, and allow for cash transfer between programs based on performance or schedule needs. PAEs will serve for at least four years to see programs through and will be compensated based on delivering systems on time. The Pentagon will interlink incentives based on “portfolio scorecards” that grade a portfolio’s performance on schedule, costs, or integrating non-traditional defense players. Portfolios with good scorecards can unlock additional investments and risk-sharing incentives from the Pentagon.
Second, the Pentagon aims to increase the presence of commercial players in the defense acquisition system. Commercial firms currently lead in 11 of the Pentagon’s 14 identified critical technology areas, such as AI, space launch and satellites, biotechnology, quantum science, and advanced materials; therefore, the integration of dual-use commercial solutions into the defense sector will be a key disruptive enabler for the DIB’s innovative and competitive potential. The Strategy largely embraces the Pentagon’s gradual pivot to “commercial first contracting,” which kicked off in March 2025 when Secretary Hegseth issued a separate memo prioritizing alternative contracting options, such as Other Transaction authority, for software-enabled tech. By classifying the acquisition of software as a non-procurement—since it must be iteratively developed and updated, unlike traditional defense systems—software-enabled systems can circumvent the years-long bidding process that favors the primes.
Third, the Pentagon aims to increase flexibility in systems maintenance. On software-enabled systems, PAEs will enact a Modular Open System Architecture—essentially extending the government’s purpose and data rights over critical software to avoid reliance on one vendor to manage and update the software. On hardware, the Pentagon wants to maintain at least two qualified sources for a system’s content, allowing for competitive maintenance.
Fourth, the Pentagon will increase long-term procurement contracts for “low-end” systems, like munitions, to improve predictable market signals to defense firms. Through larger and longer deals, production lines will remain online and improve the surge capacity of the broader DIB. Beyond low-end systems, the Pentagon hopes to crowd-in private investment throughout the broader DIB, including among subcontractors, through engaging venture capital firms, creating an Industrial Base Consortium to liaise between the defense and commercial industrial firms, and expanding the Office of Strategic Capital.
The Pentagon is Moving Toward Speed: Opportunities and Risks
The Pentagon’s acquisition memo seeks to resolve a major geopolitical risk: the US DIB’s current bottlenecks and overemphasis on high-end modern systems undermine deterrence in an environment of heightened geostrategic competition. The paradigm shift towards acquisition speed and flexibility, as opposed to perfection, has largely been bipartisan to avoid a grand strategic dilemma: without upscaling the availability of defense equipment, the US will not be able to field a warfighting posture in two theatres at once, forced to choose its most important objectives, either at the expense of other regions or partners. China aims to be prepared for an amphibious invasion of Taiwan by 2027, before the US’ high-end next-generation systems are deployed. Intelligence from NATO allies suggests that Russia, already in a wartime economy, is reconstituting its land-based legacy systems and may be capable of sustaining an attack on NATO territory within five years. While the US maintains a sizable qualitative edge, it is stretched too thin with little surge capacity, and ambitious supply-side transformations of the DIB may still require years.
If the paradigm shift is realized, then Congress may be amenable to additional legislative changes to support a DIB shake-up. However, one political risk is uncertainty around Congress backing the agenda with cash. Bureaucratic flexibility in the form of PAEs, who theoretically can transfer cash between similar programs, needs to be supported by reserve funds, and the Pentagon’s envisaged long-term contracts to incentivize investments in production lines will also cost resources. Essentially, Congress must be convinced of the value of a “high-end” mix as well. One promising sign is that Congress is backing increased procurement flexibility: the Senate draft of the National Defense Authorization Act for FY2026 adds a new Other Transaction authority (Sec. 827) to allow the government to quickly acquire items to fill “high priority” needs, such as low-end items (like munitions) crucial to deterrence.
The Pentagon’s acquisition paradigm shift is hardly finished, as bureaucratic flexibility—the core of the envisioned reforms—is not a silver bullet. Moreover, the measures are not without risks themselves: PAEs could reinforce oligopolistic behaviors, even among “emerging” primes like Palantir; heightened commercial competition to increase production of low-end systems or integrate disruptive technologies, mixed with time-indexed incentives, could push bidders to forego quality; and increased competition will not necessarily end monopolies in the high-end modernization priorities or simplify overly-complex supply chains overnight. This is to say that the Pentagon will be tracking these reforms, consider updates, and likely issue new policies that reaffirm a paradigm shift toward speed.
The Pentagon’s acquisition reforms will benefit smaller defense firms and commercial firms, especially those in the tech sector. The Pentagon is eager to quickly integrate and scale disruptive technologies, like AI-enabled drones, even bypassing traditional defense primes to do so. However, the DIB’s broader pathologies could continue to present downside risks: complex supply chains, fragmented decision-making, an overemphasis on high-end systems, and potentially unclear demand signals from the Pentagon on acquisition priorities.
