[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]






                                     

                         [H.A.S.C. No. 112-66]

 
                      CHALLENGES TO DOING BUSINESS
                     WITH THE DEPARTMENT OF DEFENSE

                               __________

                                HEARING

                               BEFORE THE

                      PANEL ON BUSINESS CHALLENGES

                      WITHIN THE DEFENSE INDUSTRY

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                           SEPTEMBER 20, 2011

                                     
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        PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY

                  BILL SHUSTER, Pennsylvania, Chairman
BOBBY SCHILLING, Illinois            RICK LARSEN, Washington
JON RUNYAN, New Jersey               BETTY SUTTON, Ohio
ALLEN B. WEST, Florida               COLLEEN HANABUSA, Hawaii
                Lynn Williams, Professional Staff Member
               Timothy McClees, Professional Staff Member
                  Catherine Sendak, Research Assistant


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2011

                                                                   Page

Hearing:

Tuesday, September 20, 2011, Challenges to Doing Business with 
  the Department of Defense......................................     1

Appendix:

Tuesday, September 20, 2011......................................    29
                              ----------                              

                      TUESDAY, SEPTEMBER 20, 2011
      CHALLENGES TO DOING BUSINESS WITH THE DEPARTMENT OF DEFENSE
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Larsen, Hon. Rick, a Representative from Washington, Ranking 
  Member, Panel on Business Challenges within the Defense 
  Industry.......................................................     2
Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman, 
  Panel on Business Challenges within the Defense Industry.......     1

                               WITNESSES

Hodgkins, A.R. ``Trey,'' III, Senior Vice President for National 
  Security and Procurement Policy, TechAmerica...................     4
Jacobus, Heidi, Chairman and CEO, Cybernet Systems Corporation...     9
Smith, Bradford L., Jr., President and CEO, Civil Services 
  Strategic Analysis, Inc........................................     6

                                APPENDIX

Prepared Statements:

    Hodgkins, A.R. ``Trey,'' III.................................    36
    Jacobus, Heidi...............................................    65
    Larsen, Hon. Rick............................................    35
    Shuster, Hon. Bill...........................................    33
    Smith, Bradford L., Jr.......................................    49

Documents Submitted for the Record:

    Organizational Plan of the Panel on Business Challenges 
      within the Defense Industry................................    95

Witness Responses to Questions Asked During the Hearing:

    Mr. Larsen...................................................    99

Questions Submitted by Members Post Hearing:

    Mr. Schilling................................................   103

      CHALLENGES TO DOING BUSINESS WITH THE DEPARTMENT OF DEFENSE

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
  Panel on Business Challenges within the Defense Industry,
                       Washington, DC, Tuesday, September 20, 2011.
    The panel met, pursuant to call, at 3:01 p.m. in room 2212, 
Rayburn House Office Building, Hon. Bill Shuster (chairman of 
the panel) presiding.

 OPENING STATEMENT OF HON. BILL SHUSTER, A REPRESENTATIVE FROM 
PENNSYLVANIA, CHAIRMAN, PANEL ON BUSINESS CHALLENGES WITHIN THE 
                        DEFENSE INDUSTRY

    Mr. Shuster. The hearing will come to order.
    Good afternoon. I want to take the opportunity to welcome 
our three witnesses today. Thank you very much for taking your 
valuable time and spending some of that with us here today and, 
of course, those in the audience that are interested.
    This is our first in a series of hearings this panel will 
hold examining the business challenges in the defense industry 
today. Chairman McKeon and Ranking Member Smith established 
this panel to take a deep dive into the challenges facings 
firms that already work with the Department of Defense and 
those that want to do business with the Department. I am 
honored that Chairman McKeon asked me to lead this panel, 
alongside my good friend from Washington State, Rick Larsen.
    And I might add for one of our witnesses, you may know the 
town. As you drive to your farm in Bedford County, you may pass 
through Everett. Well, that is the important Everett: 
Pennsylvania. He is from Everett, Washington. So I am going to 
keep making references every chance I get so I can elevate 
Everett, Pennsylvania, to a rank above the great city of 
Everett, Washington. But I am glad that Mr. Larsen is leading 
this panel with me.
    And rounding out our panel members are: Bobby Schilling 
from Illinois, who I don't believe is going to be making it in 
today. Bobby represents the 17th District in Illinois, which 
contains Rock Island Arsenal. Bobby is a small-business owner 
and has firsthand experience with the difficulties dealing with 
the Government at all levels.
    Betty Sutton, who represents the 13th District of Ohio. As 
the co-chair of the Congressional Task Force on Job Creation, 
Betty is dedicated to promoting good business practices and 
creating American jobs.
    Jon Runyan from New Jersey. Jon represents the Third 
District of New Jersey, which contains Fort Dix and McGuire Air 
Force Base, and has a vested interest in defense business 
practices across the board.
    Colleen Hanabusa is from the First District of Hawaii and 
has been involved in Hawaii politics since 1998. With a large 
defense presence in Hawaii, Colleen understands how important 
it is to bring efficiency and effectiveness to the defense 
industry.
    And Allen West from the 22nd District of Florida. Allen 
retired from the Army in 2004 after 22 years and brings a 
unique perspective of experience on both sides of the table, 
Government and industry.
    Again, I want to thank everybody for being here today and 
taking the time to lend your expertise to this effort.
    We have all heard in our districts and across the country 
from businesses that find it extremely difficult to 
successfully navigate the DOD [Department of Defense] 
acquisition system. This is particularly true for small 
businesses and those involved in science and technology 
efforts. While there are programs out there that assist 
businesses in transitioning innovative ideas and technologies 
to a final end product that satisfies a military requirement, 
there are many obstacles in the way.
    In these current economic times, we must make good use of 
every tax dollar we spend on defense, and we can do this by 
leveraging the heart of the American workforce: Small 
businesses. By reducing barriers to entry, we can generate 
competition, spur innovation, and stimulate the economy. So I 
look forward to working with my fellow panel members here as we 
move forward.
    And with that, I will yield to the ranking member, Mr. 
Larsen, if he has any comments.
    [The prepared statement of Mr. Shuster can be found in the 
Appendix on page 33.]

     STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE FROM 
WASHINGTON, RANKING MEMBER, PANEL ON BUSINESS CHALLENGES WITHIN 
                      THE DEFENSE INDUSTRY

    Mr. Larsen. Thank you, Mr. Chairman.
    And I want to thank Chairman McKeon and Ranking Member 
Smith, as well, for putting this panel together. In 6 months, 
we will have substantive solutions to the challenges that small 
and medium-sized businesses face when they approach the 
Department of Defense.
    The Federal budget is increasingly strained, and we have to 
ensure that the needs of our military to provide for national 
security and defense are not shortchanged. In order to 
accomplish this, DOD will need to stretch their dollar and 
maintain robust competition. Better contracting also offers a 
chance for job creation and growth for companies that often 
have the best products but find barriers in their path when 
they approach the DOD. How to make and implement improvements 
is something we will aim to discover over the next few months.
    Small and medium-sized businesses need to be part of the 
defense industrial base, and that means rethinking the current 
model. Our goal must be to break down barriers and improve 
competition for defense contracting to get better prices, 
better products, and better services for the warfighter.
    So I want to thank our witnesses for participating today to 
help us understand their issues as well as the general 
framework for the challenges that we are going to face as we 
help identify solutions.
    Last month, Bill joined me in Everett, Washington--which we 
have heard so much about already, but I will tell you the truth 
about it--which is in my district, where we held a roundtable 
with about 20 local businesses. We spoke with them about their 
successes and their failures in working with the DOD. One 
individual spoke of having to outline technical specifics to 
the DOD in order to have a proposal released, only then to have 
the competition have access to those specifics. Another spoke 
of the very simple issue of not receiving payment on time--a 
serious concern for small companies who are not flush with 
cash. We need to continue to talk and to listen to these 
businesses and to find solutions for them.
    So I want to thank all my colleagues for agreeing to serve 
on this panel. I believe this entire group of Members brings a 
diverse perspective on these issues. We are all here because we 
want to improve the chance for competition, for job growth, and 
for making certain our women and men in the military have the 
best options and capabilities available to them.
    Thanks again.
    [The prepared statement of Mr. Larsen can be found in the 
Appendix on page 35.]
    Mr. Shuster. Thank you.
    Before I turn to our witnesses, we have a piece of 
administrative work that we have to take care of. So I ask 
unanimous consent that the work plan for the panel, which has 
been distributed to all members, be entered into the record.
    And, without objection, so ordered.
    [The information referred to can be found in the Appendix 
on page 95.]
    Mr. Shuster. Again, that will be an official part of the 
record.
    And we are going to get started here. And, again, I want to 
thank our witnesses for being here today. I will introduce all 
of you now and then go to each of you for your testimony.
    First, Mr. A.R. ``Trey'' Hodgkins III, senior Vice 
President for national security and procurement policy, 
TechAmerica. Glad to have you here, and glad to know you have 
some sort of roots planted in Pennsylvania.
    Mr. Bradford L. Smith, Jr., President and CEO [Chief 
Executive Officer] of Strategic Analysis, Incorporated. And, 
again, Mr. Smith informs me that his family is from Butler 
County, Pennsylvania. So, somehow, if I can just get some kind 
of Pennsylvania--I can go back to my district and say, 
everybody who testified in front of me today were 
Pennsylvanians or had some connection.
    Ms. Heidi Jacobus is the CEO of Cybernet Systems 
Corporation. Thank you for being here.
    I again welcome you all.
    And we will turn to Mr. Hodgkins first, and you may 
proceed.

STATEMENT OF A.R. ``TREY'' HODGKINS III, SENIOR VICE PRESIDENT 
   FOR NATIONAL SECURITY AND PROCUREMENT POLICY, TECHAMERICA

    Mr. Hodgkins. Thank you, Mr. Chairman and Ranking Member 
Larsen and members of the panel.
    My name is Trey Hodgkins, and I am the senior vice 
president for national security and procurement policy at 
TechAmerica. I want to thank you for the opportunity to testify 
about business challenges within the defense industry and 
highlight tech-sector perspectives on those challenges. 
Technology is ubiquitous in the missions of the Department, and 
we believe it is a significant differentiator in the success of 
those missions.
    TechAmerica is a leading voice for the U.S. technology 
industry, representing approximately a thousand companies of 
all sizes from the public and commercial sectors of the 
economy. Our members range from traditional defense industrial 
base integrators, or DIB [defense industrial base] companies, 
to the most innovative and agile of small technology firms. 
They function as prime suppliers, subcontractors, and many are 
commercial in nature and choose to operate entirely outside of 
the Federal market.
    Most have a commercial business model, meaning they offer 
commercial items for sale around the world that are developed 
and manufactured using a global supply chain. These conditions 
impact how they view Government actions and whether or not they 
are interpreted as barriers, impediments, or incentives.
    When commercial companies choose to sell to the Department, 
they rely upon '90s-era reforms that created a preference for 
commercial items in Federal Government acquisitions. The same 
laws require those transactions be as close as possible to 
commercial transactions for the same items and not include 
Government-unique requirements. These reforms gave DOD access 
to commercial technology and innovation while driving savings 
for the taxpayer.
    Unfortunately, many of those premises have been forgotten 
or abandoned, and doing business with DOD no longer bears any 
meaningful resemblance to commercial business for the same or 
similar items. The Federal Government and DOD market share is 
also shrinking, and for many technology companies it now 
represents 5 percent or less of their total global market.
    Making the business case for accepting the conditions we 
will discuss today is increasingly difficult in a global 
company or a small business. This impacts DOD access to 
innovation, competition, and mission success. For some 
commercial companies, business with the Federal Government has 
become too burdensome or too risky, and they choose to stay 
out.
    I would like to elaborate on some of those barriers and 
will start with regulations and their burdens as an example.
    A barrier to entry for innovation technology in small 
businesses is the regulatory burden on companies that sell to 
DOD. For example, TechAmerica identified an apparent increase 
in the use of interim acquisition rules with immediate 
enforcement requirements. The chart I included in my written 
statement shows that there is a clear and pronounced upward 
trend, from 8 cases in 2008 to 38 cases last year. This means 
companies and agencies have less time to react to proposals and 
respond to become compliant. It also means that public 
participation is minimized in the process.
    Another trend is the increase in acquisition regulation 
reporting burdens. Waivers from the Paperwork Reduction Act 
have become commonplace and fail to acknowledge the significant 
cumulative and Government-unique burden these requirements 
place on businesses. In calculating the reporting burden, the 
methodology the Government uses only accounts for time to 
complete the form, not the time needed to collect the data, and 
we believe it is a gross underestimation of the burden on 
industry.
    DOD-specific regulatory trends are no better, with a marked 
increase in the use of guidance as a replacement for what 
industry feels should be promulgated regulatory actions. 
Compliance burdens associated with guidance or regulations are 
barriers to successful entry and sustainment in the DIB.
    Other barriers are just as daunting and discouraging. 
Commercial companies look at the levels of disclosure and 
conclude with relative ease that they are a sufficient 
deterrent to doing business with the Federal Government. This 
apprehension is growing as requirements for reporting and 
disclosure expanded to subcontractors and suppliers.
    Another barrier is the 3-percent withholding tax on 
Government contractors. TechAmerica commends the Armed Services 
Committee for their leadership in the effort to repeal this 
provision and encourage your continued efforts. The reduction 
in cash flow as a result of this withholding often forecloses 
considerations small businesses might have for bringing their 
innovations to Government.
    Long procurement lead times typically encountered at DOD 
are also a barrier, particularly for commercial companies. They 
are unaccustomed to such long lead times and usually operate in 
environments using agile development in incremental models for 
short cycles of 6 months to a year. The DOD's 24-or-more-month 
lead times are not conducive to attracting the innovation these 
companies could bring to bear.
    I would like to turn to challenges to bringing innovation 
to the public sector and DOD and point to Government-unique 
requirements placed on companies. I have already touched on 
some of those above. Others include the recent increases in 
efforts to change the ownership of intellectual property when 
companies sell to the Government. Governing laws in case 
decisions define specific points when ownership changes, but 
new proposals would blur those lines and make the Government a 
part owner for even relatively minor investments into an 
innovation for adoption by the Government.
    Another impediment to effective adoption of technology and 
innovation is the emphasis placed in acquisitions on ``lowest 
priced, technically acceptable.'' The practice has become the 
preference and now forces behavior that overlooks better or 
more secure products to save on the price. There now exists an 
aversion to consider for award products or services that are 
not ``lowest priced, technically acceptable,'' even if the 
offering is more innovative and is the real best value for the 
taxpayer. An example where this policy is causing harmful 
consequences is in the assurance of the supply chain for the 
Department. TechAmerica supports a change to require that 
acquisitions of information-technology hardware, software, and 
services are limited to the original equipment manufacturers or 
their authorized suppliers. But ``lowest priced, technically 
acceptable'' does not support such a need.
    I will close by touching on financial impediments to the 
innovation adoption. TechAmerica believes the panel should 
focus on how funding limitations frequently pose a far bigger 
problem for transitioning technology for DOD. Current processes 
require the identification of technology desired before 
starting the multiyear funding request process. Frequently, the 
product is several generations old before that process can be 
completed. As was recommended in our GTO-21 [Government 
Technology Opportunity in the 21st Century] report to OMB 
[Office of Management and Budget], Congress should examine the 
way it funds technology acquisition and deployment because it 
is a real barrier to the successful adoption of innovation in 
the Department.
    Again, I appreciate the opportunity to raise these issues 
for consideration with you this afternoon and look forward to 
further engagement with you on these issues.
    [The prepared statement of Mr. Hodgkins can be found in the 
Appendix on page 36.]
    Mr. Shuster. Thank you very much.
    And, Mr. Smith, please proceed.

 STATEMENT OF BRADFORD L. SMITH, JR., PRESIDENT AND CEO, CIVIL 
               SERVICES STRATEGIC ANALYSIS, INC.

    Mr. Smith. I also want to thank you for the opportunity to 
testify.
    My name is Bradford Smith. My company, Strategic Analysis, 
Incorporated, is a small to midsized company. We have been 
providing professional services to Federal agencies. We are a 
service-disabled, veteran-owned, founded in 1986, and have 
approximately 250 employees. We have offices in Arlington, 
Virginia; Washington, D.C.; Colorado Springs; and Dayton, Ohio.
    And the types of services we provide are systems 
engineering, advisory services, intelligence support services, 
information technology, and conference planning. So it is a 
variety of services for the Departments of Defense, Energy, and 
Homeland Security. For most procurements, our 250-employee 
company is considered a large business, so we must compete full 
and open. For some, we are a small business. For SBIR [Small 
Business Innovation and Research], for research work we do, it 
is small.
    I am making these comments after working in services for 
these agencies and departments for about 38 years. And, again, 
I understand that the format is to provide some brief comments 
ahead of fielding questions, so I would like to raise a few 
issues that I outline in my paper.
    One specific concern of mine comes from the current trend 
to using ultra-large, indefinite-delivery, indefinite-quantity 
contracts for set-asides for very small businesses. The 
tendency to bundle is both prevalent in full and open 
competitions as well as in small-business set-aside. And, 
likely, with the highly constrained environment, there will be 
an increasing tendency to bundle. There are efficiencies from 
the Government side.
    I am very concerned that the very small companies that win 
such ultra-large set-asides must focus resources on strong 
proposal and program management capabilities--we have seen it 
across the spectrum of competitions we have been involved 
with--rather than on the unique skills and capabilities that 
they bring to bear. From my point of view, this is a tremendous 
deterrent to innovation in the sector of our industrial base, 
where much of our innovation starts.
    Secondly, as a midsized business owner, I am quite 
concerned about being excluded from many set-asides or any set-
aside competitions as a prime contractor. As a midsized company 
for almost all of the procurements that we go after, we compete 
full and open. I find it hard to believe that a company with 
250 employees is too big to compete for a $1 billion, 5-year 
service contract. And that is the case today, with the 
exception of the Air Force. The Air Force has set aside--has 
created NAICS [North American Industry Classification System] 
codes where larger small businesses--500, 1,000, 1,200--can 
compete for service contracts.
    For us, growth to midsize has been over a long period of 
time. We are celebrating our 25th anniversary. We have done it 
through vertical and horizontal movement to various client 
areas. Our reputation precedes us into the marketplace. We have 
not really been focused on set-asides, but we now find 
ourselves to be in a position where, because of set-asides, we 
find it more difficult to compete for the same work we have 
been doing over the period of our life.
    And, again, I have to say, many owners of companies in my 
position now are choosing or have chosen to sell their 
companies to larger firms. But I truly believe that the 
Government is losing or could lose a significant sector in 
midsized businesses. And I am a strong advocate of midsized 
businesses because they have all the charm of small businesses 
and they don't have any of the trappings and downside of larger 
businesses.
    And I commend to you a study done by David Berteau and his 
team on the services industrial sector--I will leave a copy of 
this--where it shows the trend of the sector in the middle--not 
the small, not the large, but the medium-sized companies--as 
being the one that has shrunk over the last 10 to 20 years.
    Again, I can't reemphasize enough my belief that midsized 
companies are a significant resource for the Department of 
Defense. And, again, the differentiation of size is a 
continuum: Small, medium, large. Midsized companies are as 
innovative as small, I would argue; they are agile; and they 
have significant potential to create jobs. The conventional 
wisdom is that small businesses do that. I would argue that 
midsized businesses do it better and can be a more effective 
generator of jobs.
    I want to highlight one specific regulation that makes the 
problem worse for small business. I will call it the ``51 
percent rule.'' Small businesses that win large prime contracts 
or any set-aside contract are required to, themselves, execute 
51 percent of the effort, even while they may be teamed with 
other small businesses. And I do believe midsized companies or 
other small businesses are much more effective at teaming with 
small business than larger firms.
    To get the work done, to get the small-business 
contribution counted on their team, small businesses are forced 
now to form joint ventures, which I view as a highly risky 
endeavor for a small business. So you now are seeing greater 
prevalence of joint ventures of small businesses going after 
half-a-billion-dollar service contracts as a team. So you 
create a new corporate entity.
    The 51 percent rule is very inflexibly applied, at this 
point. The Air Force, up until the GAO [Government 
Accountability Office] decision several years ago, was allowing 
the contribution of all the small businesses to be counted. And 
in recent times, based on that case, everybody is strident 
about it. Companies are disallowed unless their contributions 
are going to actually not only bid but perform. And if you 
have, I am going to notionally say, a half-a-billion-dollar 
contract, that is $100 million a year. For a small business--
and I mean ``small'' meaning $4-million-revenue companies--it 
is a huge extrapolation to perform that much work.
    So I recommend that--in fact, what is interesting about 
that is, it is frequent that such companies outgrow the ability 
to compete for follow-on work. So if you have a small business 
effectively performing a certain piece of work growing to the 
size to provide the types of service needed, at the end of that 
5-year, or 10-year potentially, contract, they are no longer a 
small business and can't compete.
    Although consideration of the definition of ``inherently 
governmental'' is not specifically on your agenda, I recommend 
you look at it. OMB recently issued a policy letter to attempt 
to clarify the definition of ``inherently governmental.'' I 
would suggest that the current FAR [Federal Acquisition 
Regulation] definition, regulations, and policies that were in 
place prior to that are quite effective.
    The new policy defines not only ``inherently governmental'' 
but functions that are closely associated with ``inherently 
governmental'' and functions that are ``critical.'' Not that 
one can't define those, but what the net effect, I believe, 
will be unnecessary insourcing and, for the Government and the 
public, not necessarily the best value solution that comes from 
competition.
    My submission has a little bit more on each of these. I 
would like to make just a few specific suggestions.
    The midsized business ``squeeze,'' as I am calling it: I 
suggest the panel explore ways of supporting midsized 
businesses through, for example, creating a new set-aside 
program; modifying the NAICS codes, the definitions--the 
various--the fairly Byzantine NAICS codes set that are in place 
today; or modifying the small-business size standard to 
encompass midsized businesses.
    I would suggest the business that we are in, which is 
supporting Government agencies in a relatively close way--many 
of our employees work on Government facilities--is a good place 
to target for midsized businesses. Often, the agencies are 
needing more capacity, a broader set of technical skills, and 
strong program management capability, which one doesn't 
typically find in a small business. You find that typically in 
a large business, but you can also find it in a small. And 
where you have strict constraints on organizational conflicts 
of interest, midsized companies can be quite effective at 
mitigating any concerns about organizational conflicts of 
interest.
    On the subject of very large, multi-award, indefinite-
delivery, indefinite-quantity contracts that are set aside for 
small, I recommend that that is a poor choice for small 
businesses and that the panel look for other types of contracts 
that more effectively capture the strength of small business: 
Their innovation, their specific unique charm, the people.
    And then, lastly, I recommend you look at the new policy 
letter on ``inherently governmental.'' And I think the best 
solution would be for something akin to the A-76 [OMB Circular 
No. A-76 on ``Performance of Commercial Activities''] process, 
where the Government can truly determine what is the best 
value. As soon as we start defining ``inherently 
governmental,'' ``close to inherently,'' ``slightly close to 
inherently governmental,'' we are into increasing the size of 
the Government staff--and not that you shouldn't. If it is the 
public trust that needs to be protected, if it is inherently 
governmental, it should be done by a Government employee. 
Anything else should be up for grabs as to whichever is the 
best value to the Government.
    Thank you.
    [The prepared statement of Mr. Smith can be found in the 
Appendix on page 49.]
    Mr. Shuster. Thank you, Mr. Smith.
    Ms. Jacobus.

STATEMENT OF HEIDI JACOBUS, CHAIRMAN AND CEO, CYBERNET SYSTEMS 
                          CORPORATION

    Ms. Jacobus. Mr. Chairman, Ranking Member Larsen, other 
members of the panel, thank you for the opportunity to speak to 
you today.
    I have submitted my written statement for the record. That 
may----
    Mr. Shuster. It is going to be in the record, your full 
statement. But I would ask you to summarize it, keep it to 
within 5 minutes or so.
    Ms. Jacobus. Thank you.
    Mr. Shuster. Thank you.
    Ms. Jacobus. I am Heidi Jacobus. I am the founder, CEO, and 
majority stockholder of Cybernet Systems, a small business in 
Ann Arbor, Michigan.
    Twenty years ago, I started Cybernet on the basis of a 
single Department of Defense SBIR contract. That is the Small 
Business Innovation Research program. And during the question 
period, please ask me any questions about the structure of 
SBIR, because I have 20 years of experience and know a lot 
about it.
    I am an unlikely entrepreneur. I am an unlikely Department 
of Defense contractor. I was born to parents who didn't have 
any high school education. My mother was an immigrant from 
Germany and couldn't speak English when I was born. My father 
was a first-generation American. He dropped out of high school, 
joined the CCC [Civilian Conservation Corps], then the Army, 
and worked in factories.
    They valued education, and I complied. I was very fortunate 
to have obtained a very good education by scholarships, work-
study programs, and my parents' sacrifices, of course. I went 
to graduate school at the University of Illinois, Champaign-
Urbana, where I studied computer science. I got my master's 
degree and worked for 3 more years towards my Ph.D.
    Then I got married, moved to Texas, worked at Texas 
Instruments in the research lab, and had children, dropped out 
of my research for a while, and a few years later picked up my 
research again.
    When I was at the university engineering library, I opened 
up a book, and the book was an RFP [request for proposal] from 
the Department of Defense, and there was my research topic in 
the SBIR book. DARPA [Defense Advanced Research Projects 
Agency] was asking for a proposal on something I had been 
working on for the last 9 months. So I was pretty excited, 
because I had a 40-page working paper on the topic. I shaved it 
down to 25 pages, submitted it as an SBIR. And a few months 
later, I got a phone call from a DARPA colonel who said it was 
the best proposal he had ever read.
    So, I was up and running. I went in, I quit the university, 
I hung up a shingle, I moved my daughter into her brother's 
bedroom, and the first Cybernet was there.
    Now, we had to deal with regulations, and, having a German 
mother, I had to deal with the rules of the contract. And so 
when I got a contract that said ``FAR clause so-and-so, jewel 
ball bearing,'' I had to drive to a Federal library to find out 
what that meant, because I wasn't going to sign the contract 
asserting something about jewel ball bearings that I couldn't 
feasibly understand without the reference.
    I didn't know what the word ``overhead'' meant. I was a 
technology person, I was an engineer--9 years of college, 5 
years in computer science. I didn't know about business or 
business structure. So I figured it out. And SBIR is a 
beautiful program where small businesses can slowly take their 
technology and create a business structure. The guidelines are 
very clear. The initial contracts, the Phase I's, are very 
small. And the forms are easy to fill out. So, for overhead, we 
measured the square footage of my daughter's bedroom, divided 
it by our house square footage, and there was my overhead rate. 
So I learned by doing.
    And now, 20 years later, I have 60 employees. We have 35 
patents issued. We have SBIR equipment that comes, actually, 
from a Picatinny Arsenal SBIR and is now in Kuwait. It has been 
there 6 years, and it is still very productive, saves the Army 
hundreds of millions of dollars. A four-star general who has 
visited the project many times--he is now retired--said at an 
AUSA [Association of the United States Army] conference that 
our machine saved the Army $27 million in its first 4 months of 
operation. Six years later, you can multiply. That is an 
extremely good investment for the Army to have made in that 
Picatinny Arsenal SBIR that, over some years, turned into this 
wonderful piece of equipment in the field called ATACS 
[Automated Tactical Ammunition Classification System], which is 
an ammunition sorter.
    I am nearly out of time, so I would like to stop.
    Mr. Shuster. We will have plenty of time to ask you some 
questions.
    Ms. Jacobus. Thank you.
    [The prepared statement of Ms. Jacobus can be found in the 
Appendix on page 65.]
    Mr. Shuster. Very interesting, the founding of your 
business.
    One question I have: Isn't Cybernet--isn't that the company 
on ``Terminator''?
    Ms. Jacobus. No. It is----
    Mr. Shuster. Just want to clarify that----
    Ms. Jacobus. I was actually on ``Squawk Box'' last year in 
August before Mark Haines passed away, unfortunately, and Mark 
Haines asked me the same question. And I said, ``Mr. Haines, we 
are ahead of `Terminator.' Cybernet was formed a year before 
the `Terminator' movie came out.''
    And, actually, at the time, Cybernet had a Humvee, borrowed 
from the Marine Corps Arsenal in Detroit, that we were 
retrofitting with robotic controls.
    Mr. Shuster. Really?
    Ms. Jacobus. So I think we were a little bit ahead of the 
curve.
    Mr. Shuster. I hope you got some money since they stole the 
name of your company and put it in the movie. But, anyway, 
thank you again for your testimony.
    Ms. Jacobus. Thank you.
    Mr. Shuster. We are going to go through questions. I am 
going to start with a couple of questions.
    First, Mr. Hodgkins, you talked about the burdens and you 
said ``risk.'' I don't know if you really touched on the 
``risk'' part, of why it is risky. Can you go through some of 
the things you see out there that are risky dealing with the 
Department of Defense, specifics of why you consider it risk? 
Because a lot of people would consider doing business with the 
Federal Government not very risky. Very burdensome, but----
    Mr. Hodgkins. Sure. I touched on a few that businesses do 
see as risks. For example, the potential loss or partial loss 
of intellectual property because they do business with the 
Government. Many companies will walk away from the business on 
that basis alone. And the changes that are being proposed 
simply blur the lines. If you have a small business, as Ms. 
Jacobus described, some of those things can be impenetrable or 
very difficult to determine. And the idea that you would 
potentially forfeit your intellectual property by doing 
business with the Government makes many companies see that as 
an insurmountable risk.
    Another example would be in the disclosures that I talked 
about. Many of the things that the Government asks companies to 
disclose, either as part of the ordinary acquisition regulation 
reporting burden or as some of the contractor databases that we 
have built, things like that, some companies see that data as 
propriety, or certainly bordering on it. And the disclosure of 
what they team to be the secret sauce of the success of their 
company on a public Web site or in some form of a database that 
their competitors may see it, they see that as a risk that is 
just too big to overcome. And so they choose not to face those 
challenges, and face the commercial market instead.
    Mr. Shuster. Intellectual property rights, is that 
something you are talking about?
    Mr. Hodgkins. Yes. Correct. I mean, you wouldn't want to 
develop a great software program but when the Government wants 
to buy it, they want me to modify it, using their money, to 
include some encryption capability, for example.
    Mr. Shuster. Right.
    Mr. Hodgkins. It is our interpretation of the proposals 
that are on the table that the Government would own part or 
more, a significant part, of that software and the intellectual 
property involved in it. And companies look at those reasonable 
conclusions and say, it is just too risky; I don't want to give 
up my intellectual property and the products that I have 
developed.
    Mr. Shuster. Right. And your association, you represent 
small companies, medium-sized, and large?
    Mr. Hodgkins. Absolutely.
    Mr. Shuster. And do you find--some of these things are 
across the board, they affect. But focus on those small and 
medium-sized. Do you find it a much greater problem for your 
members that are smaller members, like Mr. Smith or Ms. 
Jacobus?
    Mr. Hodgkins. Absolutely. The small or midsized companies, 
usually, you know, they have a collection of patents, as was 
noted, that to lose their rights in those patents would mean 
the company is gone.
    The larger companies face similar challenges and certainly 
don't want to lose the intellectual property they have 
developed, but their business with the Government is more 
diverse. It covers more of the sectors of the defense market 
and the industrial base, and so they are better able to deal 
with those challenges. They also have more sophisticated 
administrative capabilities and legal staffs that can address 
and, you know, interpret those things for them.
    Mr. Shuster. Thank you.
    And, Ms. Jacobus, you said you had a lot of experience with 
the SBIR program.
    Ms. Jacobus. Yes, indeed.
    Mr. Shuster. Can you tell us some of the hurdles you face 
and some of the things you see, as a small-business owner, that 
we could look at improving the program to make it easier for 
smaller companies?
    Ms. Jacobus. Right. Well, stemming off of Mr. Hodgkins' 
statement about the intellectual property, SBIR is an extremely 
good balance to the intellectual property program. Under SBIR, 
we have data rights. And it is balanced by the fact that we, as 
technology companies doing very special things for the Defense 
Department, we are overkill for the commercial market. So the 
machines we build would not be attractive to some factory 
automation, because factory automation is really easy compared 
to what we do in the field in Kuwait.
    So we have to have a good relationship with our Government 
customer. And I think, under SBIR, the intellectual property 
system has worked very well for 30 years now, and----
    Mr. Shuster. Good.
    Ms. Jacobus [continuing]. I hope it continues.
    But one of the biggest challenges for SBIR companies is 
that the technology we develop is new technology. And so, in 
the military, there is a metric called technology readiness 
level, TRL, and it defines what a technology readiness level 
is. If something is on a piece of paper, it is 1. And if 
something is, you know, shrink-wrapped, off-the-shelf, tested, 
it is 10.
    The SBIR Phase I's and Phase II's, because what we are 
doing is new, the only reason we got an SBIR is that product or 
system could not have been purchased commercially. Everything 
innovative is new. And that is why SBIR companies get so many 
patents. We are automatically doing something new.
    SBIR funding takes us to Phase IV, TRL level IV. So we are 
not over the hump yet. What is needed for V, VI, and VII is 
testing and evaluation. And in the case of a Navy product we 
have developed, we had to take the product out to sea trial, 
which involves sending two engineers on a ship with Marines and 
using it out at sea. It is expensive. We had to drop it in 
saltwater, shake it. And you can imagine the rigor that has to 
be gone through for a military product compared to something 
that is a disposable, something at a big-box store.
    So the conundrum for small businesses is that there is 
literally no funding source anyplace for the test and 
evaluation.
    Now, there is something new on the horizon, the RIF 
program, the Rapid Innovation Fund. And that has promised that 
it can serve as a competitive way to try to get some test and 
evaluation money so that you can bridge TRL levels V, VI, VII, 
and then get to the end, where you can literally field it and 
sell it to the military. That is a good goal. But the RIF 
program is very small, it is not yet activated, it is only 
partially announced, and it is really uncertain how many 
projects it will be able to fund.
    Mr. Shuster. Right. And I am not even familiar with the RIF 
program
    Mr. Shuster. We will get into that. I am going to--my time 
has expired. We are going to stay on the 5-minute clock, but we 
can do a couple rounds of questions because I think we have 
plenty of time.
    So, with that, I will yield to Mr. Larsen for a question.
    Mr. Larsen. Thanks.
    Mr. Hodgkins, with regards to your testimony, on page 6 I 
think it is, you said, ``TechAmerica members are on record 
supporting a change in policy to require that sourcing for 
acquisitions of information-technology hardware, software, and 
services are limited to original manufacturers or suppliers who 
are authorized by those manufacturers.''
    Can you go into a little more detail on why that is and why 
that would be helpful?
    Mr. Hodgkins. Well, we believe it is a policy challenge the 
Government faces where it potentially conflicts with small-
business incentive programs that you have, particularly when 
you look at things like the GSA [General Services 
Administration] schedules and acquiring products those people 
may be reselling.
    The problem the Government is faced with--and, certainly, 
as members of this committee, you have probably had briefings 
that I don't have access to regarding the challenges with 
counterfeits and other malicious products that are successfully 
or unsuccessfully inserted in the DOD supply chain. There are a 
number of legislative and regulatory initiatives that are 
attempting to address that. And this committee has generated a 
couple of those.
    The problem we see is that the Government--and when you 
couple it with the ``lowest price, technically acceptable'' 
preference I discussed, the acquisition community's behavior is 
to go out and find ``what can I get at the lowest price'' 
versus ``what can I get that I know actually came from that 
vendor, and I have some degree of assurance that there is not a 
counterfeit chip in it or some malicious code in the firmware 
that would give access to someone else.''
    So we have supported the concept that, for purposes--
certainly, for critical systems like we might find at DOD, the 
Government should look at a policy that says, we are only going 
to buy from trusted sources like the original equipment 
manufacturer, people they have authorized to resell their 
products. And there are a few other programs where vendors can 
go through and be certified as a trusted source.
    Mr. Larsen. Okay.
    Can you explain, in your testimony, on page 2--or, maybe 
not explain--provide an opinion about why, in TechAmerica's 
view, we drifted away from the Clinger-Cohen reforms, focusing 
on off-the-shelf, commercial technologies, into what you are 
describing today?
    Mr. Hodgkins. I think there are a lot of reasons.
    Some of the issues that I also discussed drive us--
reporting requirements, for example. In a commercial 
transaction, I wouldn't have the kind of reporting requirements 
I would have if I wanted to do business with the Government. 
Much of that is understandable; the Government has a different 
set of shareholders, if you will, and so there are different 
things we have to disclose if we are doing business with the 
Government.
    But the idea that I am buying generally commodity items, 
now, even, we have to make disclosures about what is my price, 
how did I arrive at that price. That is a perfect example. 
Generally speaking, when I have a commercial item acquisition, 
if I go out and buy something that is offered out in the market 
and I buy it for whatever the price it is offered for in the 
market, then it is automatically presumed I got a fair price, 
because the market has set that price.
    We have seen a drive at DOD and other agencies to, even 
though it is a commercial item, we want you to now share with 
me information about how you built that price. What are your 
personnel rates? What are you are compensation package 
components? What are the other things that you are including in 
that price? Which gets us away from the tenet of the Clinger-
Cohen era, was that if I buy a commercial product from the 
commercial marketplace, I am assumed to have achieved a fair 
and reasonable price.
    Mr. Larsen. How would you address that, say, in a situation 
like with Ms. Jacobus, where the technology of the product 
maybe doesn't have the commercial application as clearly as 
another product?
    Mr. Hodgkins. Well, I think her example was a good one. I 
would point to, actually, the reverse as a good model. And we 
see this a lot, whether we are dealing with innovative research 
all the way up to the largest integrations of weapons systems, 
where you have a lot of commercial products are now--the 
preference for many of the functionalities and capabilities in 
the weapons systems or in the research that we may be 
deploying.
    So you look at data capabilities for deployed soldiers. We 
are looking at commercially available handheld devices and how 
do we get the data to them on an iPhone or an Android phone. 
When you look at a weapons platform on aircraft, you are 
probably assimilating commercially available guidance systems 
or radar systems, communications systems. Even some of the 
sensor systems are now commercially available. And so you have 
an amalgamation of those.
    And it is the practices and policies around the Government-
unique elements of a weapons system that are now bleeding over 
into incorporating those commercial things. And the benefit 
those commercial things brings is that the private sector paid 
for all that innovation and research and you are getting the 
benefit of commercially available products at a price that is 
set by the commercial market, not a price--if you had to build 
those radar systems or com systems or guidance systems from 
scratch based on Government specs, it would be far more costly 
than the same systems you could get at a commercial variant.
    Mr. Larsen. Uh-huh.
    Mr. Smith, can you explain a little bit more, on page 1 of 
your testimony, the last couple of lines of the second-to-last 
paragraph there, the concern that the small companies that win 
the ultra-large set-asides must focus their resources on strong 
proposal and program management capabilities rather than their 
unique skill sets and people? Could you explain to me why that 
is a problem?
    Mr. Smith. Over the last several years, as we have grown 
out of the ability to compete for contracts that have been set 
aside, we have necessarily joined teams of other companies, 
many of whom are small businesses who are primes.
    We have seen very innovative companies. Again, we are 
service providers; we are not creating intellectual property 
except associated with the delivery of service. We have seen 
these companies have to hire program managers, people from 
larger firms. And, frequently, as contracts are set aside for 
small, the incumbent larger firms are offering mentorship and 
assistance and personnel to come in to help them manage what 
will be large contracts for them.
    And the larger service contracts do have a fairly large 
regulatory burden associated with them. You would have a 
fiduciary responsibility to make sure that the service provided 
is actually provided and is of the quality that you are 
expecting out of your own company. And when you build larger 
teams, as opposed to nurture a particular small business, the 
skill set is different.
    I think it is bad because you are losing the up-close 
innovation, the agility of smaller firms. You are turning 
smaller firms, who don't have even the strengths of larger 
firms, into management organizations rather than innovative 
organizations.
    Mr. Larsen. Thank you.
    Mr. Shuster. Mr. Runyan.
    Mr. Runyan. Thank you, Chairman.
    And thank all of you for being here.
    It is kind of a general question for all of you, if you 
want to. I think we are kind of touching on it. But, as a 
Federal Government, do you feel we have a coherent industrial 
policy to actually, look at our national security?
    Ms. Jacobus. No.
    Mr. Runyan. No?
    Ms. Jacobus. No. And I think there are lots of studies that 
have been done that say that we don't value our defense 
industrial base like other countries do.
    For example, there was a procurement for the newest, 
greatest ground vehicle, called the Ground Combat Vehicle. The 
solicitation came out 2 years ago. I was at the meeting of AUSA 
in Fort Lauderdale when it came out, 11 o'clock on a Thursday, 
and everybody in the room jumped up, went out and got their 
cell phones, downloaded the proposal. It was so eagerly 
anticipated. Nine months later, the Government pulled the 
contract, the RFP. It just vaporized. It was gone. So, for 9 
months, the defense industry of this country had been spending 
enormous amounts of their brain power working on this proposal 
to design and build the next class of ground vehicles.
    Well, that wasn't the end of it. We had teamed with a large 
company on that proposal. So the large company was spending, I 
would guess, tens of millions of dollars. We were spending 
hundreds of thousands of dollars. Two months later, the next 
new GCV [Ground Combat Vehicle] instantiation comes out, the 
new proposal. And it is not that different than the first one, 
but it is different enough that we work for another 9 months, 
everyone spending lots of money, lots of time.
    One prime contractor at a conference in Warren, Michigan, 
said that 30 percent of their engineering time had been spent 
addressing, writing to this RFP. Now, we have a limited amount 
of scientists and engineers in this country. If a massive 
number are writing to RFPs that get pulled and get turned into 
nothing or, as GCV worked out, the three selections that were 
on the board turned into two, there is a lot of work that went 
into designing and doing something.
    And that is more and more for the large companies. Before 
you do something new, you have to build it and show it and then 
sell it. It is not really a design contract. So we are losing 
the competition and innovation for new systems. And I think 
that is a policy issue.
    Mr. Runyan. Thank you.
    Mr. Smith. I would say the principal dysfunction is the 
adversarial relationship that is evolving between companies who 
do business for the Government and the Government. I think 
there is a fiduciary responsibility that the Government 
employees have to live up to. All of the disclosures associated 
with doing business with the Government, for us, are associated 
with the fact that there is a lack of trust.
    Ms. Jacobus. Uh-huh.
    Mr. Smith. And there has to be a better environment, 
where--you know, some baseline information needs to be 
disclosed. Service providers for Government, we are probably 
the most highly regulated industry in the country. And there is 
not one fact about me, my finances, the company's finances that 
isn't known and soon won't be disclosed publicly. And I think 
that is all based on a lack of trust between the companies and 
the Government.
    Mr. Runyan. Thank you.
    Mr. Smith, just talking about growing from small, medium, 
to a large company, have you or anyone you know ever thought 
twice about getting into a contract, with fear of climbing that 
ladder too fast?
    Mr. Smith. That thought never crossed my mind. I know there 
are people with whom we do business that are small, a company 
that is 50 people, about the size of Cybernet, that because of 
the regulatory environment, there is some 50-person threshold, 
they won't hire more than 50 people.
    But I think, typically, company owners don't think that 
way. They just grow into whatever they grow into. And then, all 
of a sudden, you look back and you can't do what you did 
before.
    Mr. Runyan. And it looks like once you take on the big 
contract, like you said, 5, 10 years down the road, I am not at 
a place to where I can get any of the small business, but I am 
not big enough to compete at that higher level.
    Mr. Smith. Right. The midsized companies are a very 
interesting and dicey place to be. We just happen to be there 
now at a time when the budgets are constrained, and, you know, 
the environment is not exactly conducive to where we are right 
now. But I am really positive. I actually believe small and 
midsized companies have a lot to contribute to this Nation. And 
I encourage you to think about not only small but midsized 
companies.
    Mr. Runyan. Chairman, my time has expired. I yield back.
    Mr. Shuster. Thank you.
    Just to clarify, you are considered a small business, not 
because of the number, because 500 is one of the metrics. How 
much money and what is the dollar figure that puts you over the 
top?
    Mr. Smith. In many procurements, surprisingly, it is either 
$4.5 million or $7 million.
    Mr. Smith. So we are far over it.
    Mr. Shuster. Right. And 250 employees.
    Mr. Smith. By definition, if you have technical people--our 
staff is technical, our staff is administrative. But, by 
definition, if you have that many people, you are operating 
revenues, unless you are losing money, that are more than the 
$7 million.
    The service-disabled, veteran-owned program that the 
Veterans Department has just begun a certification process for 
is $7 million. So even though we are a service-disabled, 
veteran-owned company, we are not small by the VA's [U.S. 
Department of Veterans Affairs] definition.
    Mr. Shuster. Right. Okay, thank you.
    Ms. Hanabusa.
    Ms. Hanabusa. Thank you, Mr. Chair.
    Let me begin with Mr. Hodgkins. I am curious about your 
description throughout your testimony about your members. And, 
also, in your disclosure, you don't seem to have any contracts. 
So can you tell me who your members are and how you come to be 
able to testify about the problems you are facing with military 
contracts?
    Mr. Hodgkins. Sure. My members are manufacturers and then 
distributors and resellers and integrators of information 
technology hardware, software, and then the services necessary 
to put those things together, build those things, and then 
operate those things. They also include companies that are 
working around those others.
    They range from the largest integrators selling the largest 
IT [information technology] systems to the Federal Government 
down to one-, two-, three-man shops in Silicon Valley writing 
software--very unique, very specific analytic software that 
might be used in the intelligence community, or they may be 
selling commercial products like laptops or software that run 
those laptops.
    Ms. Hanabusa. So what I am trying to understand is, as you 
come here and you testify and you submit testimony to us, I 
want to know, what is it that you do for your members that 
gives you the insight to come here and to tell us about the 
shortfalls of the system?
    Mr. Hodgkins. Sure. Well, we are a trade association, so we 
represent the corporations. Those corporations, hundreds of the 
members of our total member base, are Government contractors. 
And we have centers of focus within the trade association that 
look at the issues they raise with us of being of concern, and 
they range from regulatory, legislative, and administrative 
initiatives.
    Ms. Hanabusa. So this is really something that you are 
garnering from what they have told you as their representative, 
and----
    Mr. Hodgkins. Yes.
    Ms. Hanabusa [continuing]. That is what you are relaying to 
us?
    Mr. Hodgkins. And then my interactions on their behalf in 
those arenas.
    Ms. Hanabusa. But you, personally, do not have any 
experience in terms of actually submitting a proposal like Ms. 
Jacobus?
    Mr. Hodgkins. No. I work for a trade association, and we 
don't--we are not Government contractors.
    Ms. Hanabusa. I just wanted to be clear as to what your 
format was.
    Mr. Hodgkins. Sure.
    Ms. Hanabusa. And, Mr. Smith, one of the things that you 
said that was very interesting is you made a distinction that 
you are a service provider and you are not, like, a creator. So 
I believe Ms. Jacobus is sort of in a different category from 
the two of you.
    So when you say you are a service provider, and you were 
complaining about the 51 percent rule in particular, what 
exactly do you mean when you say you are a service provider and 
not an intellectual property creator?
    Mr. Smith. We do generate, create intellectual property 
associated with services.
    And, again, if we are--I will take systems engineering as a 
service. I am an electronic engineer. I also went to school in 
Pennsylvania; I am a Carnegie Tech grad. But we provide advice 
on an hourly, time-and-materials basis, often, to agencies that 
do R&D [Research and Development] management: DARPA, the Office 
of Naval Research, organizations in other departments, as well, 
that do research. They seek support in making sure they are up 
on the right technologies. They seek support in evaluating the 
progress of an R&D endeavor. They seek support for judging 
whether a particular R&D provider has satisfactorily met the 
terms and conditions of a contract from a technical point of 
view.
    So we have engineers and scientists in specific disciplines 
that change over time because the areas of interests of 
different agencies change over time.
    Ms. Hanabusa. Can you tell me what kind of contract you 
would be bidding for with the Government?
    Mr. Smith. Well, the term of art--the two terms of art that 
we use are ``SETA'' and ``A&AS.''
    ``SETA'' is systems engineering and technical assistance 
contracts. Many acquisition organizations in the services or in 
OSD [Office of the Secretary of Defense] or defense agencies 
have competitions to seek companies to provide systems 
engineering. So we will help them from a technical point of 
view or--again, we run meetings. We actually have a very strong 
capability in conference coordination. So we help bring 
together and facilitate meetings of technical folks, with the 
end objective of the particular meeting to bring diverse 
technologies together and come up with a common vision for how 
to proceed forward or a common approach to a particular 
problem. So, SETA is one nature of a contract we go after.
    A&AS is the other, advisory and assistance services 
contracts. And these can range from studies; what is the 
balance of the requirements versus technological capabilities 
in a particular area of emphasis by an agency of the Department 
of Defense? What are the trends? We often look at worldwide 
technology trends. What other countries are doing research in a 
particular area of interest to the Department of Defense, and 
how does our research stack up against their research?
    Program managers--DARPA is a somewhat unique agency in that 
they bring in program managers for a relatively short period of 
time, 4 to 6 years. So we help program managers in the process 
of learning about acquisitions, we help program managers in the 
process of creating programs that are good and executing and 
monitoring programs that are good.
    Ms. Hanabusa. Thank you.
    Thank you, Mr. Chair.
    Mr. Shuster. Thank you.
    I am going to next turn to Mr. West, but before I do, since 
I have a core of the committee here, we are looking at having a 
field hearing--I should have said this in the beginning--
October the 7th, if we get five Members. Votes are on a 
Thursday night, and then Friday morning flying out to Quad 
Cities, Rock Island. We will get mil air and be back the same 
day. So I just wanted to alert everybody to that if your 
schedule so fits. I know that Mr. West has a very important 
speaking engagement in Pennsylvania on Thursday the 6th.
    Mr. West. At your request.
    Mr. Shuster. But, with that--again, I just wanted to bring 
it to Members' attention so you heard it firsthand.
    And, with that, I will turn to Mr. West.
    Mr. West. Thank you, Mr. Chairman and also Mr. Ranking 
Member.
    I want to look at this from a different perspective 
because, as you said, I spent 22 years in the military. So, you 
know, I remember going out as a battalion commander in 2003 in 
Iraq and a lot of things that we did not have and wish we did 
have.
    My question is, you know, as we start to look at rapid 
force initiatives and off-the-shelf type of technologies and 
innovations, there are a lot of documents that get produced, 
you know, lessons learned, things of that nature. Do you feel 
that you have a good relationship with the military as far as 
getting a lot of those lessons-learned documents being tied in 
with the rapid force initiatives that we have I know definitely 
in the Army and maybe in the Marine Corps?
    And then, also, do you have a time with the combatant 
command so that--you know, I was there at Fort Lauderdale when 
that happened. You know, you get these blasts on the email, you 
kind of get an understanding of, you know, some of the needs 
and trends that are happening. Instead of that long procurement 
system, maybe we can look at some off-the-shelf type of 
technologies that can be rapidly developed. Is that type of 
relationship out there?
    Ms. Jacobus. It is not easy for a small business that has 
one or two locations to be at every military base so that we 
know when people come out, you know, the door and go to the 
coffee shop that we can talk to them about what their problems 
are. It is even harder for us to get on a base and talk to a 
group of operators.
    And, really, the whole issue with SBIR is that we create 
magnificent technology at the request of the Army. They have 
put those RFPs.
    Mr. West. Yeah, I understand.
    Ms. Jacobus. They put the requests in because they need 
something, and we have technology that can address their need. 
But they don't know the whole range of technologies that can be 
applied, and we don't know what is the issue in the field.
    Mr. West. The demand versus the supply.
    Ms. Jacobus. Right. So having a good relationship with a 
customer--and in the SBIR case that we had from Picatinny 
Arsenal, we had good relationships at Picatinny. We were in the 
labs, we were picking up mortars, we were using them for test 
objects. And then when we went to design the ATACS machine--and 
we designed it in 90 days. That is essentially off-the-shelf.
    Mr. West. Uh-huh.
    Ms. Jacobus [continuing]. Even though it is brand-new 
technology, because it takes 90 days to do an NDA [non-
disclosure agreement] at a large company.
    So the rapid response capabilities of the agile small 
businesses really should not be overlooked. So when soldiers 
have a problem, we should know about it and brainstorm about it 
and try to help.
    I gave a talk at the Army War College on small-business 
acquisition. I used the same example of the machine. And after 
my talk, the group of 300 06s, typically, came up to me and 
said, I have never heard of a contractor who was good; you 
know, our feelings about contractors is that they are all bad 
people who don't give us, you know, water bottles or whatever. 
They were shocked that here was something that worked the way 
it was supposed to work.
    Now, the SBIR that turned into the ATACS was a fluke. It 
wasn't planned. We had no idea the problem existed in the 
field. But because we had a little blurb that the SBIR puts on 
the Web--and we don't mind having those abstracts public--they 
found us. And we got this phone call from a sergeant who said, 
we have a problem; can you solve it? And we did. So if there 
was more of looking at what the small-business capabilities are 
and for us to be able to understand and bridge, it would be 
great.
    But we have no money for the transition. We have R&D, and 
then somehow it is procured with procurement funds. Big 
companies have gigantic budgets in their cost structure. I 
talked about overhead. But they have something called IR&D, 
internal research and development. So if they make a $3 billion 
thing, they get a percentage that is audited for the dollar 
amount that says they can use so much of their cost structure 
for internal research and development. They can do anything 
they want with it, including ruggedizing equipment, getting it 
ready to be purchased.
    We small businesses have none of that. Historically, it is 
just a fact, many of those transitions have been handled by 
congressional interest money, because we had customers who were 
military who needed something and had no budget for it. When 
something is new technology, it outpaces the financial 
structure, the POM [Program Objective Memorandum], the 
description of what pays for what.
    And I will give you a really poignant example of what 
happened with the ammunition machine. So we got it done, we 
wanted to make more, and it turned out that there was no budget 
for it. But what we were replacing was a hundred people sitting 
in a warehouse doing, very expensively, the task. But the money 
was a different color. It was Operation and Maintenance Army 
money, OMA dollars. And there was no way heaven and earth could 
move that money to be able to purchase a machine for us that 
would do it in, you know, whatever percentage of the time and 
money--couldn't be done. It took 2 extra years before we were 
able to get language in the POM cycle where our machine is now 
recognized.
    So the small advanced businesses are absolutely in a lurch 
when we have something new that hasn't been described, there is 
no funding for it. Now we have no congressional interest 
funding to help us, because it is very transparent. We have 
done something, competed it, won contracts, built something. We 
have an Army customer who needs something who will answer the 
phone and say, ``Yes, indeed, I have seen the prototype. We 
really need it.'' And that is gone. That is gone. And so, I 
really fear for all that technology that has been developed and 
may be on the shelf.
    Mr. West. My time is up, Mr. Chairman. I yield back.
    Mr. Shuster. Thank you.
    And just so I am clear on that, you have a new technology 
which would have replaced a hundred people working?
    Ms. Jacobus. Yes.
    Mr. Shuster. And your technology would have done it by--
automated it, and it couldn't get the money?
    Ms. Jacobus. Absolutely not.
    Mr. Shuster. Okay. Thank you.
    With that, Ms. Sutton.
    Ms. Sutton. Thank you very much, Mr. Chairman.
    Mr. Shuster. Your mic.
    Ms. Sutton. Thank you very much.
    And thank you to the witnesses.
    Just a point of clarification. Ms. Jacobus, when you talk 
about congressional interest money, are you talking about 
earmarks?
    Ms. Jacobus. I am talking--we call them plus-ups.
    Mr. Shuster. We call them earmarks.
    Ms. Sutton. We call plus-ups, earmarks.
    Ms. Jacobus [continuing]. It is not the money that was 
budgeted someplace for something.
    Mr. Shuster. We have to get a new name.
    Ms. Sutton. All right.
    Ms. Jacobus. That is the name.
    Ms. Sutton. I understand. I just want to make sure I am----
    Ms. Jacobus. But it has been a critical part of small 
businesses' being able to put things in the field. I mean, it 
is just not realistic for us to do all that test and evaluation 
ourselves.
    Ms. Sutton. I understand. I appreciate that.
    Okay. If we could just go back for a moment to another 
example I think that you speak of on page 3, because I think it 
really laid out the case pretty well. I am going to just sort 
of paraphrase here, and you tell me if this is right.
    Your testimony reads, ``The large companies that desire the 
forward-looking work can apply massive internal research and 
development funds (IR&D or `IRAD') which are for the most part 
also repurposed federally funds (allocated to the prime by 
overhead allowable funds that come with their large program 
work like the F-22 or Ground Combat Vehicle).
    And you also speak of the fact that they have marketing 
people everywhere and inevitably are connected, right? They are 
connected and know more about the project than you can ever 
know from openly published information sources. ``Even in the 
case of a small `starter' contract of several hundred thousand 
dollars, a larger prime can apply `loss-leader' funds and 
`special knowledge pertaining to the bid' to its bid-and-
proposal-funded effort. The result is the smaller businesses 
won't win, even when they are lower in cost and may have a 
technical edge.''
    And at the end of that page, you say, ``As I understand it, 
what is done with that IR&D pool is not required to be 
delivered as part of a contract. Effectively, the Government 
provides pure investment money without strings to primes.''
    Ms. Jacobus. That is what it seems.
    Ms. Sutton. Okay.
    Would you all agree with that?
    Mr. Smith. We actually have, as a service provider, have an 
IR&D program. So, actually, it is a budgeting issue. Bid-and-
proposal money and IR&D are classified in a similar way in our 
accounting system and the way you account for costs. And if 
there is not a huge flurry of proposals that you have to do 
that particular year, you can take time to do innovation.
    And I think it scales totally with the amount of money that 
is coming in. If you are a huge company, you have a larger pool 
to draw from. It is discretionary. It is their rules. In the 
FAR associated with IR&D, it has to be relevant to the mission 
of the agencies for whom you are working. So it is not without 
regulation, but it is possible to do some as part of your 
indirect cost structure in the course of normal business.
    Ms. Sutton. And, Ms. Jacobus, it gives the big guys more 
opportunity to do flashy presentations?
    Ms. Jacobus. Right. When it says ``full and open 
competition,'' we sometimes gathered up resources and put 
together these plain paper proposals, only to be faced with 
somebody who has made a movie with Hollywood actors in it 
showing the product in use. That is a true example. So you can 
only imagine.
    We compete in SBIR with companies 500 or under. So that is 
a pretty big range, 1 to 500. And we compete very fiercely for 
this. But the reason SBIR was put into place was that someone, 
30 years ago, smartly and bravely recognized that we would 
never have a chance to get these big R&D contracts. And the 
data showed close to 50 percent of scientists and engineers 
worked for small businesses. Small businesses, as a total, get 
4 percent of R&D. That means there is a lot of people who are 
trained scientists, trained university graduates who are not 
using their brains to support the problems of the military.
    Ms. Sutton. And, Ms. Jacobus, somewhere in your testimony I 
believe I read something that led me to believe that, in some 
cases, those who are actually winning these contracts are 
developing technology that actually already exists out there, 
but they do it this way because then they can own it. Is that 
correct?
    Ms. Jacobus. We believe that. We believe that is true.
    Ms. Sutton. Okay. Thank you.
    Mr. Shuster. We are going to go to a second round of 
questions, and I would like to just shorten them to 3 minutes. 
And if anybody--we will keep going as long as anybody wants.
    First, I just want to know if all of you agree, the sense 
that Mr. Smith brought out there, the trust. There doesn't seem 
to be--the Department of Defense is looking at you like, ``You 
guys are going to get us, but we are not going to let you get 
us.'' And it seems to me, as being a small-business owner 
myself in my past, my suppliers were my partners. I mean, I 
needed them to be. And I trusted them until they gave me reason 
not to trust them.
    So, do all of you agree, do you get that sense that your 
association, your members are coming in there saying, they are 
looking at us like we are committing a crime before we even 
committed--do you all agree with that? Is there an agreement?
    Ms. Jacobus, yeah.
    Ms. Jacobus. Sometimes we have to sign disclosures that are 
very complicated pieces of paper.
    Mr. Shuster. Right.
    Ms. Jacobus. For example, an unfunded requirement that we 
have as an SBIR company is that, 10 years later, we are 
supposed to report the commercialization and impact of that 
technology. And that means we have to go to the open literature 
and see what other public companies--who don't, of course, 
disclose the details, and we have to make a best estimate of 
what the impact of our early innovation was. That form sets 
criminal penalties if you get it wrong.
    Mr. Shuster. Right. I have seen those.
    And, Mr. Smith, being in a midsized company, there are some 
out there that argue that we need to change the sizes and 
things like that to maybe smaller business or bigger. I mean, 
these things are based on numbers from probably 20 years ago 
when they first laid them out. And there is the other 
alternative, is, as you go from a small business to a midsized 
business, maybe you reduce the protections, you reduce the set-
asides, so that small business can grow.
    Which of those would you think is a better route to go?
    Mr. Smith. I totally understand your question. I actually 
would argue that you should relook at the NAICS codes and the 
relatively Byzantine way that we categorize small businesses. 
And I know the Small Business Administration does that 
routinely.
    Mr. Shuster. Right. That is not this committee's 
jurisdiction.
    Mr. Smith. Right. Right.
    Mr. Shuster. But I just wanted your input.
    Mr. Smith. So I think, somehow, set-asides that are 
designed from where the Government thinks or you think that 
midsized businesses contribute. If midsized businesses--we 
necessarily now are going to compete for larger contracts.
    Mr. Shuster. So your preference would be to look at and 
say, let's resize----
    Mr. Smith. Yes.
    Mr. Shuster [continuing]. Our metrics----
    Mr. Smith. Correct. Correct.
    Mr. Shuster [continuing]. And, you know, if it is 600 jobs 
or $17 million. Okay. All right.
    Mr. Smith. And one of the other interesting things we found 
with contracting offices, not just Department of Defense but 
others, is there is a tendency to pick the size standard that 
is the smallest that the contracting office believes will 
satisfy. And that has led, for me, to situations where we can't 
compete.
    Again, I come back to a $5 billion procurement set-aside 
for $4 million companies. The numbers don't compute, in my 
mind.
    Mr. Shuster. Thank you very much.
    With that, Mr. Larsen.
    Mr. Larsen. Thank you.
    Mr. Hodgkins, a couple of solutions, if you can help us 
out. You mentioned some of the problems. One is the forfeit of 
IP [intellectual property] in order to do business with DOD. We 
actually heard something similar from a business in my district 
that is doing some work for one of the services, writing up the 
specs so they can go out and compete for the job that the 
military wants them to do for them, meanwhile just basically 
opening up their books to everybody else who now wants to 
compete.
    What is the alternative, or what is the solution to that?
    Mr. Hodgkins. Well, we have advocated a couple of 
alternatives to the way the Government and DOD approaches 
contracting. We think, as Mr. West noted, that we can be more 
effective in a two-way communication: Knowing the problems in 
the field and then having companies, whether they are large or 
small, understand those problems and identify solutions to 
those problems.
    That communication is not as effective as it could be. And, 
as Mr. West probably experienced in the service, when we 
translate those things into requirements and it gets handed off 
to a different community, there is frequently a disconnect 
completely.
    So we would propose that the Government look at more agile 
activities, certainly in the technology arena, that they look 
at doing things in a more rapid fashion, in a more agile 
fashion, in smaller increments, and you build capabilities in 
incremental fashions.
    For the contracting process itself, we think that there are 
ways that the Government can share--and there are other models 
that are used; British Columbia has an example as one--where 
the problem is provided to the community, the community 
responds, and pretty quickly the Government reviews those 
initial reactions, and they down-select to two or three 
companies they want to work with that they think actually offer 
something that they can achieve and they can afford.
    So there are models out there where you can more rapidly 
get to the solution; you don't expose.
    And the lead-time issue, of course, is another one, where 
you are left out there trying to support, in the case of a 
small or midsized business, a maybe longer lead time than you 
have capital for. You are expected to hire people and keep that 
team in place while the Government makes these decisions, but 
you may have no income from that program yet. And that becomes 
very difficult.
    So, trying to do things more rapidly, in a more agile 
fashion, in a more incremental fashion. And the funding issue 
is also important that I raised, because if we have a 3-plus-
year process of identifying what I want and then getting the 
money for it, that means that those companies are left hanging 
and the combatant commands are not able to deploy the 
technologies as quickly as they would like. So it is a 
combination of a number of things I have touched on that I 
think could improve the process.
    Mr. Larsen. Great. Thank you. If you could get us some more 
detail on that question in your response in writing, I would 
appreciate it.
    Mr. Hodgkins. Certainly.
    [The information referred to can be found in the Appendix 
on page 99.]
    Mr. Larsen. Thanks a lot.
    Mr. Shuster. Mr. Runyan.
    Mr. Runyan. Thank you, Mr. Chairman.
    Ms. Jacobus, you talk about the SBIR getting you to level 
IV. Can you give us, in your scenario, the hurdles that you had 
to jump to get to the next level, just so the panel can have an 
idea of what we have to go through?
    Ms. Jacobus. Well, one of the reasons the ATACS ammunition 
machine worked was that there was a crisis over in Kuwait. It 
was not an important or regular problem for an operator. It was 
a mountain of ammunition that was being backed up, with the 
supply chain clogged as well. So it was an urgent problem, and 
I think people were willing to work with me. So we got some 
swept-up money to start the first machine. And we put a mod on 
an active SBIR at Picatinny Arsenal to do it.
    But then when the new money came in to build it, I am sorry 
Mr. Schilling from Rock Island isn't here, but the people at 
Rock Island do essentially no R&D, zero. So they didn't even 
know how SBIR worked. And, luckily, with lots of phone calls, I 
found a gentleman at Picatinny who was able to take over the 
procurement, to put us on contract for that.
    And I think it was a special case because of the urgency, 
because we were able to put it in the field. We tested it along 
the way. But the Army had a safety feature, in that they had a 
full-time quality-control person, a QUASAS [Quality Assurance 
Specialist Ammunition Specialist], it is called, operator with 
us at the machine. So we actually did have, you know, doctrine 
of following the inspector being there.
    Since then, we have gone through the, you know, millions of 
rounds of testing and done what, in the normal process, would 
have been done before we put it in the field. So it really is a 
great example of how quickly things can be done if people are 
motivated and they need it. And I am just really sorry that 
there must be hundreds of other companies out there that have 
solutions to problems, who really don't have the way to 
transition them into the field.
    But for normal things, that lack of TRL-level test and 
evaluation money is a gigantic barrier for small businesses--
gigantic.
    Mr. Runyan. Thank you, Chairman. Yield back.
    Mr. Shuster. Thank you very much.
    Ms. Hanabusa for questions.
    Ms. Hanabusa. Thank you, Mr. Chairman.
    Maybe this question is for Mr. Hodgkins. We have heard 
recently the whole concept about the fact that the DOD is not 
going to let contract bundling take place. Can you tell me how 
contract bundling has hurt the small businesses?
    Mr. Hodgkins. Well, contract bundling has been a practice 
that--the intent is to move together and buy, as the Government 
is trying to do in a number of areas, in bulk things that are 
related.
    What has come out of it, and I would identify as one of the 
conflicts in our socioeconomic policies, is that when you 
bundle things, as Mr. Smith noted, sometimes the job gets too 
big for a small business. And so--or they are moved into 
performing some unnatural role that they didn't start the small 
business to do.
    So I think the bundling practice has pluses and minuses. 
What we have to figure out is the balance on how to do that in 
a way that we get efficiencies of scale for acquisition for the 
Government, perhaps for commodity items, but find ways for 
small businesses to compete in those.
    Ms. Hanabusa. Mr. Smith, do you want to add anything on 
that?
    Mr. Smith. No. I think we live with it as a fact of life. 
And I actually believe, with the budget constraints we are 
likely to see in the next 10 years, there will be more of it.
    And the only thing I would seek your thoughts on is how to 
allow for some of the procurements to be set-asides in ways 
that are logical for small and midsized companies to compete 
for. There is a lot of value--the personal touch of a small 
business or the personal touch of a midsized business can lead 
to a building of trust that is, I think, healthy, and the ebb 
and flow, arm's-length relationship between companies and the 
Government. The larger the contracts, the more fiduciary 
responsibility, the more distrust, the more regulation.
    Ms. Hanabusa. So you actually feel that bundling has a role 
in the future as we start to cut the budget. You think that 
that is something that should be kept.
    Mr. Smith. I think it is a fact of life. I don't know if it 
should be kept. It is efficient, from the Government's point of 
view. As the budget is cut, they are going to have fewer people 
to acquire on the acquisition side. That means fewer contracts, 
which means each of the individual contracts are bigger.
    I think it is not preferable. I think more defined 
contracts, smaller contracts are preferable, from the 
Government's interest point of view.
    Ms. Hanabusa. Thank you.
    Thank you, Mr. Chair.
    Mr. Shuster. Ms. Sutton.
    Ms. Sutton. Thank you, Mr. Chairman.
    Mr. Smith, if you could just help to clarify. I know that 
you point out in your testimony that the lack of clarity 
regarding inherently governmental functions is a problem. So 
could you just expand on what you think those governmental--how 
that should be defined?
    Mr. Smith. I actually think it is very adequately defined 
in the FAR today, prior to the issuing of the policy letter 
that just came out within the last week or two. I think the 
definitions--you or I would probably agree that something is or 
is not inherently governmental. I don't think that is the 
issue.
    When you add other layers, things that are closely 
associated with you, it seems to me that you are no longer 
putting yourself in a position to look at something from what 
is the best thing for the Government. I mean, if companies are 
better at doing certain services, why would the Government not 
buy from them? Or if they are any less expensive for doing 
certain services at the same quality, why would the Government 
not want to buy from a company?
    Companies come and go. Companies do not have the long-
term--necessarily have the long-term tale of Government 
employees. So I see it as an advantage to the Government, to be 
able to buy something now and be able to stop buying it later. 
When you build an employee staff, I think you don't have that 
flexibility. You don't get the change of disciplines you might 
want. You are interested in biology today; you are going to be 
interested in electronics tomorrow.
    Ms. Sutton. Thank you.
    I yield back.
    Mr. Shuster. Thank you very much.
    And I want to thank all of you again for being here today. 
We appreciate you spending your valuable time. And I know small 
and medium-sized businesses or wherever you are--I mean, it is 
confusing to you, dealing with the Government. I know. But I 
appreciate you taking the time, and I know how valuable that 
time is to you.
    And also to you, Mr. Hodgkins, and your association for 
letting you come here today and sharing your insights with us. 
So we appreciate it.
    For the members of the panel, tentatively October 7th. If 
your staff hasn't been contacted, they will be contacted. And 
if you could, in rather quick form, yea or nay, that will make 
it easier for us to decide to move forward or not.
    Also, on October the 11th, that is the Tuesday after the--
after the 10th?--Columbus Day, we are going to have another 
hearing here with the panel. And your input--certainly we will 
be talking to the committee staff to get your input on that 
hearing also.
    So, with that, again, I thank everybody for coming today, 
and this hearing is adjourned.
    [Whereupon, at 4:30 p.m., the panel was adjourned.]
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                            A P P E N D I X

                           September 20, 2011

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                           September 20, 2011

=======================================================================

      
                     Statement of Hon. Bill Shuster

                Chairman, Panel on Business Challenges 
                      within the Defense Industry

                               Hearing on

                     Challenges to Doing Business 
                     with the Department of Defense

                           September 20, 2011

    Good afternoon. I'd like to welcome everyone to the first 
of a series of hearings this panel will hold examining business 
challenges in the defense industry. Chairman McKeon and Ranking 
Member Smith established this panel to take a deep-dive into 
the challenges facing firms that already work with the 
Department of Defense and those that want to do business with 
the Department. I'm honored that Chairman McKeon asked me to 
lead this panel alongside my friend from Washington State, Rick 
Larsen.
    Rounding out the panel membership are:

         LBobby Schilling, from Illinois. Bobby 
        represents the 17th district of Illinois which contains 
        Rock Island Arsenal. Bobby is a small-business owner 
        and has firsthand experience of the difficulties 
        dealing with Federal and State Governments.

         LBetty Sutton represents the 13th district of 
        Ohio. As co-chair of the Congressional Task Force on 
        job creation, Betty is dedicated to promoting good 
        business practices and creating American jobs.

         LJon Runyan from New Jersey. Jon represents 
        the 3rd district of New Jersey which contains Ft. Dix/
        Maguire AFB and has a vested interest in defense 
        business practices across the board.

         LColleen Hanabusa is from the 1st district of 
        Hawaii. She has been involved in Hawaii politics since 
        1998. With a large defense presence in Hawaii, Colleen 
        understands how important it is bring efficiency and 
        effectiveness to the defense industry.

         LAllen West from the 22nd district of Florida. 
        Allen retired from the Army in 2004 after 22 years and 
        brings a unique perspective of experience on both sides 
        of the table--Government and industry.

    I want to thank all of the members of the panel for taking 
time to lend their expertise to this effort. We've all heard, 
in our districts and across the country, from businesses that 
find it extremely difficult to successfully navigate the DOD 
acquisition system. This is particularly true for small 
businesses and those involved in science and technology 
efforts. While there are programs out there to assist 
businesses in transitioning innovative ideas and technologies 
to a final end-product that satisfies a military requirement, 
there are many obstacles in the way.
    In these current economic times, we must make good use of 
every tax-dollar we spend on defense and we can do this by 
leveraging the heart of the American workforce--small 
businesses. By reducing barriers to entry, we can generate 
competition, spur innovation, and stimulate the economy. I look 
forward to working with Rick and the other members of the panel 
to find ways to do just that.

                     Statement of Hon. Rick Larsen

             Ranking Member, Panel on Business Challenges 
                      within the Defense Industry

                               Hearing on

                     Challenges to Doing Business 
                     with the Department of Defense

                           September 20, 2011

    I want to thank Chairman McKeon and Ranking Member Smith 
for putting this panel together. In 6 months we will have 
substantive solutions to the challenges small and medium-sized 
businesses face when they approach DOD.
    The Federal budget is increasingly strained, and the 
military is not immune to cuts. However, we must ensure that 
the needs of the military to provide for national security and 
defense are not shortchanged.
    In order to accomplish this, the DOD will need to stretch 
their dollar and maintain robust competition. Better 
contracting will also offer a chance for job creation and 
growth for companies that often have the best products but find 
barriers in their path when they approach DOD. How to make and 
implement improvements is something we will aim to discover 
over the next few months.
    Small and medium-sized businesses need to be part of the 
defense industrial base, and that means rethinking the current 
model. Our goal must be to break down barriers and improve 
competition for defense contracting to get better prices and 
better products and services for the warfighter.
     I thank our witnesses for their participation today. 
Understanding the general framework of the challenges we face 
will help identify solutions.
    Last month, the Chairman joined me in Everett, Washington, 
in my district when I held a roundtable with local leaders. We 
spoke with them about their successes and their failures in 
working with DOD. One individual spoke of having to outline 
technical specifics to DOD in order to have a proposal 
released, only to then have the competition have access to 
those specifics. Another spoke of not receiving payment on 
time--a serious concern for small companies not flush with 
cash. We need to continue to talk and listen to these 
businesses and find solutions.
    I want to thank all my colleagues on this panel. I believe 
this entire group of members brings a diverse perspective on 
the issues. We are all here because we want to improve the 
chance for competition, for job growth and for making certain 
our military and our soldiers have the best options and 
capabilities available to them.

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                   DOCUMENTS SUBMITTED FOR THE RECORD

                           September 20, 2011

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              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                           September 20, 2011

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              RESPONSE TO QUESTION SUBMITTED BY MR. LARSEN

    Mr. Hodgkins. [The information was not available at the time of 
printing.] [See page 25.]
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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                           September 20, 2011

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                  QUESTIONS SUBMITTED BY MR. SCHILLING

    Mr. Schilling. How can we help industry deliver vital innovation 
and cutting-edge solutions?
    Mr. Hodgkins. [The information was not available at the time of 
printing.]
    Mr. Schilling. What measures can we take to ensure that the best 
and brightest our national STEM [science, technology, engineering, 
mathematics] efforts have to offer find opportunities inside the 
national defense industrial base, and overall national industrial base?
    Mr. Hodgkins. [The information was not available at the time of 
printing.]
    Mr. Schilling. United States manufacturing exports create good 
technology jobs across the country. What can be done to support foreign 
military sales that benefit job growth and make the U.S. industrial 
base more competitive globally?
    Mr. Hodgkins. [The information was not available at the time of 
printing.]

    Mr. Schilling. How can we help industry deliver vital innovation 
and cutting-edge solutions?
    Mr. Smith. I am answering this question from the vantage point of a 
Federal professional services provider who has primarily supported 
clients in the science and technology (S&T) domain. Strategic Analysis 
Inc. (SA) is lucky enough to have been part of many programs and 
contracts that have delivered vital innovation and cutting-edge 
solutions as: A consultant to the Government, advising on the ideas and 
efforts of other businesses and organizations, both large and small; 
and as a developer of innovation and cutting-edge solutions ourselves.
    The challenges to delivering innovation begin with simply trying to 
``get in the door'' to understand the needs of a Federal client or 
identify if a technology or idea could apply or be useful to a Federal 
client. When my company started, companies had the ability to offer 
innovative ideas to potential buyers of services. Government managers 
that sought contractor support were willing to discuss their 
requirements as well as to listen to innovative ideas, tools and 
methodologies. Companies such as mine were willing to offer proprietary 
approaches hoping that the discussion might lead to procurement 
opportunities and knowing that their innovations would be protected 
from competitors.
    Today, discussions with program managers are limited any time a 
procurement is anticipated. New contracting constraints are being 
practiced and concerns of unfair competitions that could lead to a 
protest have resulted in limited scope Task Orders that are awarded on 
a lowest-price technically acceptable basis with no room (both within 
the scope of individual Performance Work Statements and the overall 
scope of the base contract) to do more than what is ``technically 
acceptable.'' Contracting officers are very reluctant to have the 
program managers entertain innovative ideas for fear that it would give 
a company a competitive advantage. The approach is either to 
communicate the entire discussion between the program manager and the 
contractor, compromising any proprietary information discussed, or to 
prevent the discussion from occurring altogether. Overall, companies 
have become more in the dark on what their clients might need and more 
reluctant to share their ideas. Many companies now worry that ideas 
discussed will be compromised during the procurement process. This 
concerns companies because they might no longer have the differentiator 
that wins the next award.
    In general, the conversations not only need to be allowed but even 
encouraged. To level the playing field, the process has to be open to 
everyone and each organization needs to identify a process for keeping 
ideas coming in the door. This does not mean just more industry days. 
It means allowing companies the opportunity for 1-on-1s prior to 
finalizing any particular solicitation. This also could include easier 
base access, open access to program managers and/or their staff 
representation, and training, when needed, of individuals involved with 
a procurement. The U.S. Government should allow for the opportunity to 
discuss innovations without fear of compromise during the procurement 
process.
    For 25 years as a consultant to the Government, SA has provided 
advice and expertise that has supported decisions by the Government to 
fund, not fund, continue funding or terminate programs and projects 
that develop the next generation of technologies. One of the greatest 
challenges for moving new technology from the R&D phase to the hands of 
the operators is technology transition. Many technologies do not find 
an operational home because of a mismatch of what the operational 
community needs or wants and what they get. What we believe will help 
is to continue to increase the number of opportunities to expose 
industry, academia and other Federal organizations to the end-user to 
provide them with the opportunity to understand what is really needed. 
The DOD should facilitate meetings with DOD users to understand gaps 
(there are very few DOD organizations that facilitate face-to-faces 
with the decision makers); and provide visibility of funding to help a 
small business know where to focus. The SBIR and STTR programs are 
invaluable in this regard with early seed money as well as funding 
through TRL 4.
    Internally, SA has also developed cutting-edge solutions. We have 
done so for two reasons: To develop innovations that reduce the cost of 
services while not diminishing vital mission support such as through 
business process re-engineering; and developing solutions that answer 
technical problems our clients are trying to solve including submitting 
ideas through Federal BAA and SBIR programs. Government services 
contractors can be a significant contributor to innovation if allowed 
to do so through the procurement system. But, there are now significant 
deterrents to innovation within the DOD acquisition system for 
professional services, such as those imposed as a result of new 
contracting practices and organizational conflict of interest (OCI) 
implementations.
    For a service provider such as my company, innovation can be a key 
differentiator among the many companies competing for work. We have 
developed innovations internally primarily through independent research 
and development (IR&D). To do so, we have looked at our client needs 
and have identified modest investments that solve or try to solve 
specific problems that they have expressed to our employees. We are 
small, but we have exceptional people in support of our clients. They 
see opportunities for improvement. We are not contractually tasked with 
such IR&D. We do it in order to add value to our clients. Our solutions 
have included innovative office automation approaches and tools tied to 
the specific business processes of the offices where we work. All in 
all, we have tried to capture the best ideas from our staff. Our 
clients have found the result of such investments quite valuable. 
Innovative solutions can be achieved through changes in business 
processes, through creative re-engineering of an organization and 
through the introduction of new ``solutions.''
    The challenge that we have recently encountered is the difficulty 
in providing such innovations under the contract that it was identified 
for. We are finding that in order to help our clients by offering 
solutions, we have to provide the solutions under an entirely different 
contract vehicle. We believe the contracting environment has become 
hypersensitive on compartmentalizing functions to the point of 
deterring new ideas or pursuit of the ``best'' ideas. Further, we have 
become reluctant to invest in innovation as it no longer can be a 
discriminator in contract awards. The requirements for services have 
become stylized descriptions of labor categories and the competitions 
become all about the lowest price offerings, leaving, once again, no 
room or rewards for innovation. We recommend strongly that, in S&T 
environments, lowest-price contracting strategies be avoided because 
you will get what you pay for. Additionally, we believe all contracts 
should put in place options for innovation even if not funded on Day 1.
    SA has and continues to develop ideas through the Federal BAA and 
SBIR programs. When a conflict of interest poses a threat to the 
viability of the idea, SA has either spun off an R&D company or 
terminated the pursuit. Spinning off small subsidiaries in specific 
technology areas and facilitating their success through investment has 
enabled the technology to be investigated free of any restrictions. 
Even as a small company, we have employed this approach, sometimes 
successfully; sometimes not. In each case, the seed of the technical 
innovation was an employee with an idea and the motivation to carry it 
further. Our innovations have included software, advanced sensors, 
renewable energy study methodologies and novel materials ideas. Two of 
the companies remain viable today. There has been one business that had 
to be closed because of OCI issues in a zero-tolerant environment to 
affiliates.
    OCI is one area that has become much more restrictive to companies 
providing both technical consulting and developing technical solutions 
to the same clients. While a clean line reduces even the appearance of 
impropriety, it also may prevent ideas from being fully explored. 
Companies will simply not invest their intellectual capital on a path 
that might lead to a contract that has the appearance of an OCI 
concern. They see no return on their investment. For a small business 
with a limited set of clients in their portfolio and a limited set of 
assets, hitting a dead end with a client because of a possible OCI 
could mean death to the idea. We have many smart people with good ideas 
that will lay dormant over this concern.
    Mr. Schilling. What measures can we take to ensure that the best 
and brightest our national STEM [science, technology, engineering, 
mathematics] efforts have to offer find opportunities inside the 
national defense industrial base, and overall national industrial base?
    Mr. Smith. We believe that the STEM issue is a National Security 
issue. Without a workforce properly trained in STEM domains, we will 
not have the warfighters needed to defend our Nation on the next 
generation of battlefields, battlefields that include the cyber domain. 
Industry has always been challenged with providing a workforce that 
supplements the Federal Government's workforce providing expertise that 
can ebb and flow with the fluctuations of needs. Industry has just as 
much interest in addressing the STEM negative trend as the Federal 
Government. Industry invests in training, education and charitable 
contributions to STEM initiatives. Industry organizations such as NDIA 
and WID have implemented scholarship programs and funded and supported 
initiatives in the different communities where their chapters reside. 
Businesses have also put aside hundreds of thousands of dollars towards 
STEM initiatives nationwide including scholarships and grants. 
Competitions, conferences, classroom lectures and financial donations 
to schools are all ways that industry is addressing this issue. The 
Department of Defense has significant ongoing programs aimed at 
fostering STEM education. The DOD Science, Technology, Engineering, and 
Mathematics (STEM) Development Office focuses on education and outreach 
to inspire, develop, attract, and retain highly-qualified, diverse, 
world-class STEM talent to meet the DOD and the Nation's current and 
future complex scientific and technological challenges. Many such 
programs fall under the National Defense Education Program (NDEP), 
outlined below.

          K-12 teachers and students: NDEP's K-12 Programs tap 
        into educational innovation. NDEP has cast a nationwide net in 
        search of some of the best and most innovative K-12 science and 
        engineering education initiatives in the country.

          Undergraduate and graduate students: The Science, 
        Mathematics And Research for Transformation (SMART) Scholarship 
        for Service Program supports undergraduate and graduate 
        students pursuing degrees in STEM disciplines. The program aims 
        to increase the number of civilian scientists and engineers 
        primarily working at DOD laboratories.

          World-class university researchers and their 
        students: The National Security Science and Engineering Faculty 
        Fellowships (NSSEFF) program provides extensive, long-term 
        financial support to distinguished university faculty and staff 
        scientists and engineers to conduct unclassified, basic 
        research on topics of interest to DOD.

          R&D programs aimed at STEM: There are also R&D 
        programs to develop tools and techniques in support of STEM 
        education. The DARPA Computer Science in Science, Technology, 
        Engineering, and Mathematics Education (CS-STEM) program is an 
        example.

    With all things being equal, the solution, we believe, resides 
somewhere in the collaboration of Government and the defense business 
sector. The U.S. Cyber Challenge Coalition is a great example of how 
Industry and the Federal Government can successfully partner to tackle 
one area of the STEM domain without the ``your money'' or ``my money'' 
driving the dialogue. However, one partner that is not apparent in many 
initiatives is the educators and educational administrators. The 
educational domain has to be part of any solution, idea or initiative 
that is proposed. In the end, the teachers and other educational 
professionals carry the weight of any successful model every day and 
they should be enlisted to fight this battle. We believe DOD should 
increase its emphasis on fostering enthusiasm and interest in STEM at 
an early age. Research is clear that the earlier one can reach a child 
in their educational development, the more lasting the effect. In fact, 
our family feels so strongly that more needs to be done in this area 
that we started a non-profit organization in 2010 that is beginning a 
research and mentorship thrust in middle school STEM education, The 
Leadville Institute. This organization has starting by supporting 
specific STEM programs in the two communities where we are located, 
Arlington, VA, and Colorado Springs, CO. We are taking small steps in 
2011, with aspirations to gain broader support from the defense 
industrial community, particularly small and midsize companies.
    So what more can DOD undertake? DOD and its contractor base should 
be partners in local communities across the country. A coordinated 
outreach and mentorship program would pay significant dividends in 
addressing emerging defense workforce gaps. The huge projected 
shortcoming in computer sciences is such an area. We recommend 
initiatives that reach middle school students and include participants 
from both Government and the private sector. DOD might find unique ways 
of challenging youth such as through ``Grand Challenges,'' focused 
games, on-line games like FoldIt.it and technical competitions. Many 
such competitions exist on a national scale. We need competitions aimed 
at younger students, as well. There is a critical need to reach younger 
children--give them a challenge to overcome and then empower them with 
a sense of ownership in their successes.
    Mr. Schilling. United States manufacturing exports create good 
technology jobs across the country. What can be done to support foreign 
military sales that benefit job growth and make the U.S. industrial 
base more competitive globally?
    Mr. Smith. Since my company is a service provider, not a 
manufacturer, with facilities and staff all located inside the CONUS, I 
cannot provide any personal experience or analysis to fully address 
this question.

    Mr. Schilling. How can we help industry deliver vital innovation 
and cutting-edge solutions?
    Ms. Jacobus. [The information was not available at the time of 
printing.]
    Mr. Schilling. What measures can we take to ensure that the best 
and brightest our national STEM efforts have to offer find 
opportunities inside the national defense industrial base, and overall 
national industrial base?
    Ms. Jacobus. [The information was not available at the time of 
printing.]
    Mr. Schilling. United States manufacturing exports create good 
technology jobs across the country. What can be done to support foreign 
military sales that benefit job growth and make the U.S. industrial 
base more competitive globally?
    Ms. Jacobus. [The information was not available at the time of 
printing.]

                                  
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