Is there room for the little guy in defense contracting?

Some of the country’s largest defense contractors – Northrop Grumman, General Dynamics, SAIC, General Atomics, BAE Systems, L-3 Communications and others – have headquarters or major operations in San Diego.

But the city also is home to thousands of small defense tech contractors, entrepreneurial companies that do business with the big firms or contract directly with military, security and law enforcement agencies.

Innovation is essential to many of these firms as they try to meet the military’s demand for improved equipment and technologies.

Achates Power already had some commercial customers for its redesigned and more efficient opposed-piston engine, but it still pursued and landed a $4.9 million contract from the Army to design and test an engine for tanks and other combat vehicles.

The nine-year-old firm with 50 employees beat out much larger companies for the work.

“Fundamentally, the size of the company is unrelated to the value of the technology, right?” said CEO David Johnson. “One guy with a great idea can beat thousands of guys without a good idea. I’m not saying the big companies don’t have good ideas, but small companies are the engines of innovation in many cases.”

The military and defense contracting have been a huge part of San Diego’s economy since World War II. San Diego has a greater military presence than any other U.S. city of its size. There are seven military bases in the region and the city is home to the Navy’s Pacific Fleet and its Space and Naval Warfare Systems Command (SPAWAR).

A recent study by the San Diego Military Advisory Council estimated $20.6 billion in direct spending related to the military in San Diego County in FY 2012. The same study found that the military was directly or indirectly responsible for 311,000 – or one quarter – of the jobs in the county.

The military is an attractive partner for tech firms because it has money to spend and it does not take equity in new technology, some of which can be adapted for commercial use. For many small contractors, the path to that partnership is through the Small Business Innovation Research (SBIR) program, which requires federal agencies with large extramural research budgets to spend a small percentage of it on businesses with no more than 500 employees.

Even with SBIR incentives, small firms looking to do business with the military must deal with overwhelming reams of paperwork and thickets of regulations. That’s where the San Diego Advanced Defense Technology Cluster (SDADT) comes in. Funded by the Small Business Administration and run out of San Diego State University, the group helps small firms get military work.

“They have to convince us they have some kind of innovation or we will not take them in,” said Program Director Lou Kelly. “They’re all people that have what they strongly believe is a very innovative solution to some problem and they need help bringing it to market.”

San Diego also has developed a service industry of lawyers, accountants and consultants to help contractors navigate the maze of red tape.

Many of the smaller firms are started by people who left bigger contractors, people like Jim Winso, a former General Atomics and SAIC employee who launched Spectral Labs in 2009 to develop a number of military and security-related applications. With only 12 employees, Spectral is very different than the SAIC division Winso used to manage.

“The biggest difference is that we’ve got to do everything ourselves,” he said. “We don’t have Payroll, we don’t have HR, we don’t have Contracts, we don’t have a Purchasing Department.”

Accord Solutions has been around since 1994, but it has shifted its focus several times. CEO Carl Murphy is careful when describing what it does now, but it has to do with hardware that protects software chips from intellectual property theft. Like Winso, Murphy used to work for a large contractor, but prefers his situation now.

“I wanted to be more independent,” he said.

Though the contractors do not have to worry about the military going out of business, its spending can fluctuate. Historically, cutbacks in military spending have sent the San Diego economy into a slump, though increased economic diversification has provided more cushion against that sort of recession.


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