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



                         [H.A.S.C. No. 112-85]

                    THE DEFENSE INDUSTRIAL BASE: THE

                   ROLE OF 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

                            NOVEMBER 1, 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, November 1, 2011, The Defense Industrial Base: The Role 
  of the Department of Defense...................................     1

Appendix:

Tuesday, November 1, 2011........................................    35
                              ----------                              

                       TUESDAY, NOVEMBER 1, 2011
   THE DEFENSE INDUSTRIAL BASE: THE ROLE OF 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

Gudger, Andre J., Director, Office of Small Business Programs, 
  U.S. Department of Defense.....................................     6
Lambert, Brett B., Deputy Assistant Secretary of Defense for 
  Manufacturing and Industrial Base Policy, U.S. Department of 
  Defense........................................................     3

                                APPENDIX

Prepared Statements:

    Gudger, Andre J..............................................    52
    Lambert, Brett B.............................................    42
    Larsen, Hon. Rick............................................    41
    Shuster, Hon. Bill...........................................    39

Documents Submitted for the Record:

    ``DOD Best Practices and FY12 Strategy,'' Submitted by Brett 
      B. Lambert.................................................    67
    Hon. Ashton B. Carter's Memorandum on ``Defense Research and 
      Development Rapid Innovation Fund (RIF) Goals and 
      Implementation Guidelines,'' Submitted by Andre J. Gudger..    70

Witness Responses to Questions Asked During the Hearing:

    Mr. Larsen...................................................    79
    Mr. Shuster..................................................    79
    Ms. Sutton...................................................    81

Questions Submitted by Members Post Hearing:

    Mr. Larsen...................................................    86
    Mr. Shuster..................................................    85
    Mr. Joe Wilson, a Representative from South Carolina, 
      Committee on Armed Services................................    87
 
   THE DEFENSE INDUSTRIAL BASE: THE ROLE OF THE DEPARTMENT OF DEFENSE

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
  Panel on Business Challenges within the Defense Industry,
                         Washington, DC, Tuesday, November 1, 2011.
    The panel met, pursuant to call, at 3:00 p.m. in room 2212, 
Rayburn House Office Building, Hon. Bill Shuster (chairman of 
the panel) presiding.
    Mr. Shuster. Good afternoon. The hearing will come to 
order.
    I want to thank everybody for being here today.
    I think we are live on C-SPAN. Are we live on C-SPAN? We 
will be broadcast later, so we can watch it tonight. It will 
put us to sleep.
    Again, I thank everybody for being here today.

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

    Mr. Shuster. The House Armed Services Committee Panel on 
Business Challenges in the Defense Industry meets today to 
continue our dialogue regarding the health and future of our 
Nation's defense industrial base by receiving testimony from 
witnesses from the Department of Defense.
    While the Weapons System Acquisition Reform Act did much to 
increase transparency and foster competition, there is still a 
great deal of room for improvement in the Department of Defense 
business practices.
    Last Monday, the panel heard from policy experts and from 
various think tanks that have studied the structure, 
effectiveness, and efficiency of the defense industrial base. 
Our witnesses last week pointed out that our Nation lacks a 
coherent and complete strategy for our Nation's defense. 
Without such a strategy, the defense industrial base is left 
without the guidance and transparency necessary to ensure 
viability and efficiency.
    This panel is facing some complex issues, and nothing 
illuminates that more than the RAND study on military research 
and development policies, which I think I am going to carry 
around with me from here on out. I think it does a very good 
job of laying out the complexity of the issues as it offers 
some findings and recommendations of the policy of providing 
the military with new weapons and capabilities. The only 
problem with this RAND study is it is from 1958, so we are 
still talking about the same problems 50 years later. So that 
is what this panel wants to take a look at and change the way 
we are for the betterment of our Nation and our Department of 
Defense and for the warfighter, especially.
    As a panel, we traveled to Akron, Ohio, on Friday where we 
met with small and mid-sized businesses working on highly 
technical solutions to deliver capabilities to our warfighter. 
We met with companies making advanced coatings to prevent 
corrosion, composite armor, advanced aerodynamic control 
systems, and technologies to enable remote detection and 
identification of pathogens.
    Just like in 1958, our defense industry today is having a 
hard time getting clear requirements from the DOD [Department 
of Defense], bridging the gap between development and fielding 
and surviving overly burdensome, unresponsive program 
management policies and regulations. Navigating these issues is 
difficult for large defense contractors and near impossible for 
small businesses. Today's hearing is an opportunity for us to 
hear from these critical issues from witnesses from the 
Department of Defense.
    I would like to introduce, first, the Deputy Assistant 
Secretary of Defense for Manufacturing and Industrial Base 
Policy, Mr. Brett Lambert--thank you for being here, Mr. 
Lambert--and Mr. Anthony Gudger, the Director of the Office of 
Small Business Programs in the Office of the Under Secretary of 
Defense for Acquisition, Technology, and Logistics.
    Again, welcome. I look forward to hearing your testimony 
and frank discussion.
    But before we receive testimony, I would also like to take 
a minute to thank Congresswoman Betty Sutton and her dedicated 
staff for hosting the panel in Akron. It was an extremely 
informative visit.
    In addition to the roundtable with industry, we also had a 
remarkable discussion on the impact of corrosion on DOD's 
equipment facilities and got a briefing on the University of 
Akron's unique program in corrosion research and engineering. 
On the trip, I learned that the Department of Defense spends 
nearly $23 billion a year dealing with corrosion. That is $23 
billion out of a defense budget that we are not spending on our 
troops, and it is something that I think all members of the 
panel and the Armed Services Committee need to be aware of. So 
I want to thank Betty for bringing this important issue to our 
attention.
    Our next field roundtable will be happening on Friday, 
December 9th, in Congressman Jon Runyan's district, the 3rd 
District of New Jersey. These sessions are invaluable to this 
panel's work, and I hope all our panel members have an 
opportunity to join us on that trip.
    At this time, I turn it over to our ranking member, Mr. 
Larsen, if he has any comments.
    [The prepared statement of Mr. Shuster can be found in the 
Appendix on page 39.]

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

    Mr. Larsen. Thank you, Mr. Chairman, and I am pleased to be 
joining you and the other panel members here today.
    As we have discussed, this panel aims to discover the 
challenges facing the current defense industry partnership and 
the capabilities they produce and, based on that RAND report, 
perhaps solving them at some point as well.
    Small businesses are essential to a robust and agile 
industrial base as well as for a strong economy. The U.S. 
defense base has a long history of producing the best military 
systems in the world, and we have to ensure that this continues 
both for our warfighter as well because it does create jobs 
here in the U.S.
    Key aspects of a strong defense industrial base include 
assuredness of supply, American jobs, and ensuring the best 
technology for the warfighter. The mission of the manufacturing 
and industrial base policy is to monitor, preserve, and enhance 
the national security industrial base of the United States. As 
we know, small businesses play a critical role in the strength 
of our economy by creating technologies for many folks, 
including our warfighter. We need to ensure that our small 
businesses are given every opportunity to compete on a level 
playing field with larger businesses.
    Over the past few months, we have heard that small 
businesses face challenges regarding security clearances, lead 
times from DOD contract solicitation to submission due dates, 
ITAR [International Traffic in Arms Regulations] regulations, 
defense auditing, and other regulatory and procedural issues.
    I am pleased with what we have learned so far from our 
first panel hearing that looked at challenges our small and 
medium-sized businesses are having creating and maintaining 
opportunities within the Department of Defense. Testimony from 
that hearing was echoed during our district visits and 
roundtable discussions. In addition, comments from local 
leaders have been extremely helpful.
    So far, this panel has met with business readers in my 
congressional district in August. We visited Rock Island 
Arsenal in early October in Mr. Schilling's district. And last 
week I and other panel members met with industry leaders in and 
around Ms. Sutton's district in Akron, Ohio.
    Connecting today's hearing with our hearing on October 24th 
where we discussed the role and the future of the defense 
industrial base with witnesses from think tanks, we will hear 
today what DOD is doing to improve the defense business 
environment with a particular focus on small business. I look 
forward today to hearing today's testimony and thank you all 
for being here.
    Thank you again, Mr. Chairman.
    [The prepared statement of Mr. Larsen can be found in the 
Appendix on page 41.]
    Mr. Shuster. Thank you, Mr. Larsen.
    With that, we will start with Mr. Lambert, if you would 
proceed.

 STATEMENT OF BRETT B. LAMBERT, DEPUTY ASSISTANT SECRETARY OF 
  DEFENSE FOR MANUFACTURING AND INDUSTRIAL BASE POLICY, U.S. 
                     DEPARTMENT OF DEFENSE

    Secretary Lambert. Chairman Shuster, Congressman Larsen, 
and members of the panel and staff, thank you for the 
opportunity to submit our written testimony on behalf of the 
Department regarding maintaining a healthy and productive 
defense industrial base.
    I am Brett Lambert, the Deputy Assistant for Defense for 
Manufacturing and Industrial Base Policy.
    Let me begin by defining what we mean by the term ``defense 
industrial base,'' because I think the definition is important. 
The defense industrial base is comprised of an extremely 
diverse set of companies that both provide products and 
services directly and indirectly to the national security 
agencies, including the military.
    References to ``the'' defense industrial base that imply 
some monolithic entity are not analytically useful. The defense 
industrial base includes companies of all shapes and sizes 
resourced from around the globe, from some of the world's 
largest public companies to sole proprietorships to garage 
start-ups. Some companies deal directly with the Federal 
government, while the vast majority act as suppliers, 
subcontractors, and service providers in a value chain that 
leads to those prime contractors.
    Companies at any tier, and at any size, may offer critical 
or hard-to-produce products that ultimately lead to the systems 
used by our warfighters. Some products and services sold by 
companies in the defense industrial base are unique to defense 
applications alone, while most have substantial levels of non-
defense demand or are even sold exclusively on commercial terms 
such that the supplier may not even know that the products is 
used in our military systems. And, likewise, the military may 
not know it depends upon a primarily commercial component. 
Finally, while the pace of innovation is extremely rapid in 
some segments across our base, other segments are based on 
mature technologies where dynamic innovation is less important 
to the Department.
    In short, there is not a single defense industrial base. 
There is a defense market served by a diverse selection of 
companies which span and often reflect the greater global 
economy for goods and services.
    The U.S. military's superior operational capabilities are 
enabled by this diverse base, and for decades the U.S. has 
commanded a decisive lead in the quality of the defense-related 
research and engineering conducted globally and in the military 
capabilities and products that flow from this work. However, 
these advantages that have enabled American preeminence in the 
defense technology are not a birthright, and the key elements 
of that base are necessary to ensure U.S. dominance on future 
battlefields must be sustained and nurtured. The U.S. defense 
industrial base is critical to equipping our military with 
superior capabilities, and a strong, technically vibrant, 
financially successful industry is therefore in the national 
interest.
    As the era of sustained growth in defense budgets comes to 
an end, the Pentagon stewardship responsibility to ensure 
access to a robust industrial base becomes more challenging. 
The Department needs to adapt its industrial base 
considerations and actions to emerging fiscal realities.
    In the past 2 years, we have made significant increases in 
efforts to address the implications of the changes in both 
budgets and the nature of the industry. We understand that 
America relies on a defense industry that is healthy, robust, 
and innovative, and the Department appreciates that businesses 
must be motivated by the opportunity to make reasonable profit. 
Indeed, leveraging the inherent motivations to allow companies 
that perform well to increase profit levels above a mean is in 
the Department's interest. Likewise, individual companies that 
do not provide the government with quality products that meet 
our requirements on time at a reasonable cost should expect to 
make reduced profits. In the high-budget environments of the 
past, many companies have grown to expect high margins 
independent of quality. As budgets shrink, this practice must 
end.
    As the budget environment changes, we do expect some niche 
firms to face difficulty due to decreased demand. In such 
cases, we attempt to identify early warning signs through a 
variety of means to isolate and, if necessary, mitigate these 
issues, particularly if a firm offers truly critical, unique, 
and necessary capabilities. While to date these cases have been 
isolated, we must nonetheless be prepared for the occasion to 
tailor our investment policies to preserve essential 
capabilities, and we need sufficient insight to make these 
choices.
    Toward that end, we have undertaken an aggressive effort to 
map and assess the industry sector by sector and tier by tier. 
I can go into more detail during the question and answer on 
this particular effort.
    Finally, the Department relies on a variety of investment 
tools to directly sustain and improve discrete, critical 
industrial capabilities. Program offices routinely manage 
industrial-based issues as part of their programs to keep them 
on track.
    One key mechanism we also have at Office of the Secretary 
of Defense is the manufacturing technology, or ManTech, applied 
research programs. The Department also preserves critical 
capabilities through Research and Development investments, 
life-type purchases of materials and components, and 
acquisition strategy choices that sometimes give roles to 
multiple companies rather than rely on single suppliers.
    Another example of the industrial base investment the 
Department is working on is in partnership with 18 civil 
acquisition departments and agencies on initiatives to preserve 
and create essential domestic capabilities through forums such 
as the Defense Production Act Committee.
    Our commitment to working with industry, however, does not 
mean the Department should underwrite sunset industries or prop 
up poor business models. It does mean the Department will 
create an environment in which our vital industrial 
capabilities, a foundation of our strength, can thrive and 
continue to provide our warfighters with the best systems 
available at a reasonable cost.
    Congress has been actively involved in shaping and 
supporting many of these initiatives on this front, and the 
support has been both welcomed and appreciated.
    Congress has also supported the Department's engagement 
with industry, affording the Department the flexibility 
necessary to maintain a healthy industrial base; and on behalf 
of the Department we appreciate this support and look forward 
to our continued partnership to best serve the warfighters and 
our taxpayers while maintaining a financially healthy and 
technologically superior industrial base.
    Thank you.
    [The prepared statement of Mr. Lambert can be found in the 
Appendix on page 42.]
    Mr. Shuster. Thank you, Mr. Lambert.
    With that, Mr. Gudger.

    STATEMENT OF ANDRE J. GUDGER, DIRECTOR, OFFICE OF SMALL 
         BUSINESS PROGRAMS, U.S. DEPARTMENT OF DEFENSE

    Mr. Gudger. Thank you, Chairman Shuster, Ranking Member 
Larsen, and members of the panel. Thank you for the opportunity 
to speak to you today about the defense industrial base and the 
role that small business plays within the Department of 
Defense.
    My name is Andre Gudger, and I am the Director in the 
Department of Defense for Office Small Business Programs, and I 
report to the Under Secretary for Acquisition, Technology, and 
Logistics. The Office of the Under Secretary of Defense for 
Acquisition, Technology, and Logistics is the principal staff 
element of the Secretary of Defense for all matters to DOD 
acquisition. Today, I will discuss the role of small business 
programs and some of our initiatives and tracking of small 
business goals.
    The primary role of the Office of Small Business Programs 
is to advise the Secretary of Defense on all things small 
business. This includes policy, oversight, and meeting 
statutory and regulatory requirements. The Office of Small 
Business Programs works hard to advocate for small businesses 
for inclusion in the acquisition process, the creation of 
awareness, and the dynamic role that small businesses play in 
our Nation's economy.
    In September, 2011, Secretary Leon Panetta issued a memo to 
the acquisition workforce emphasizing the importance to the 
entire Department of Defense on meeting its small business 
goals and showing the commitment of DOD's leadership in 
supporting small business. This was unprecedented. There has 
never been a Secretary of Defense to sign out a memo for small 
business in the Department's history, and the Secretary of 
Defense took it that serious where he signed it while he was on 
vacation.
    So when I look at the activities that the Department of 
Defense has outlined for the Small Business Program Office, we 
maintain three essential programs that is our base for creating 
opportunities for small business.
    The first one is the Mentor/Protege Program, where small 
businesses can receive a one-time developmental assistance from 
a larger company on developing their future capability. The 
other program that we manage is the Small Business Innovation 
Research and Technology Transfer Program, which is one of the 
most successful small business programs in the country, where 
this creates an opportunity for companies where we fund them to 
develop technologies, solutions, and services to meet the 
urgent needs of the Department. And, lastly, our Indian 
Incentive Program where we provide opportunity to Indian-based 
companies.
    When I think about the outreach that we have provided 
around the country, I personally have hosted several 
roundtables throughout the country looking for new ideas on 
increasing small business participation in our contracting 
process and making it for companies easier to do business with 
the Department.
    We have hosted two large-scale outreach events with our 
Deputy Secretary--at the time, he was the Under Secretary for 
Acquisition, Technology, and Logistics--Dr. Ashton Carter, 
where we offered matchmaking opportunities in the Department. 
And we plan on continuing this engagement because it was 
successful for us, and we will continue in future years.
    In addition to the outreach with the community, we also 
have opened the door in the Department where we have been 
engaging other stakeholders in the Department of Defense in a 
more coordinated effort on the opportunities and the value that 
small business brings and looking at including them in the 
overall center programs in the future of the Department and the 
direction that we are going.
    As I previously mentioned, Secretary Panetta issued a memo 
to the acquisition workforce. The military secretaries also 
issued a memo to their workforces about the importance of small 
business, meeting the goals and inclusion of small businesses 
in our direction as we continue to build capability.
    When I look at the next thing, our regulatory changes, one 
part of the OSBP [Office of Small Business Programs] 
initiatives was to create an opportunity where we recognized 
access to capital was a challenge for most small businesses, so 
we made a change in the DFARS [Defense Federal Acquisition 
Regulation Supplement] to allow for accelerated payments to 
small business, which was tremendous. We, with this change, 
were able to pay small business one-third earlier, faster than 
they normally would get paid, on average. We are looking to 
continue this in fiscal year '12. This puts billions of dollars 
in small business's pockets, and this was used to hire workers, 
expand their capabilities, and look for ways to participate in 
new contracting opportunities more rapidly.
    Next, we commissioned studies. One of the first studies I 
commissioned was a reduction of barriers for service disabled 
and veteran businesses so that we could reduce barriers to 
allow them to participate at a much higher level as they 
continued to develop their capability set within the Department 
of Defense.
    One of the next things we also did was the accountability. 
We have included small business evaluation criteria in senior 
execs who influence acquisition outcomes in the Department of 
Defense, particularly in acquisition, technology, and 
logistics. And, furthermore, we are looking at additional ways 
to include assessing ways of determining subcontracting 
achievement for the Department as well.
    Finally, I would like to talk about the impact in our 
current environment. The continuing resolution has a 
significant impact on us because our programs are impacted by 
the defense budget, and with the amount of uncertainty small 
businesses tend to not invest and make key hires for the 
future.
    In conclusion, I would like to thank the panel for allowing 
me to speak today. As you can see, our programs and initiatives 
have focused on increasing small business utilization through 
reducing barriers and streamlining the acquisition process. 
These initiatives address several of the issues this committee 
is seeking to identify based on its work plan.
    I look forward to answering any questions you may have.
    [The prepared statement of Mr. Gudger can be found in the 
Appendix on page 52.]
    Mr. Shuster. Thank you very much.
    From your testimony, you are making strides or trying to 
make strides in the right direction, but I think you are going 
to find out after today what we have heard around the country 
that those strides are very, very small and they need to be 
bigger and we need to figure out a way to break through the 
DOD, especially for these small and medium-sized businesses, to 
do more business, to make it easier for them to get their great 
ideas, products, and services to the warfighter and to the 
Department of Defense.
    I guess the first question I have is your view of doing 
business with DOD. Is it a market system? Is it a traditional 
market system that we use? Is that the way we should view it? 
Or is it something different from that, in your view?
    Secretary Lambert. I say that I read through the previous 
and I know most of the previous folks who have been before you, 
and I tend to agree with most of them. It is wrong, and I think 
it is a mischaracterization of the Department's position that 
we have this laissez-faire, let the market work, where, when 
possible, we prefer to allow the traditional market elements of 
competition to work. That is not--given the nature of some 
defense elements, nuclear submarines, where there aren't other 
products, there are elements of the defense industry where that 
is not appropriate. In those certain sectors, in those specific 
tiers, there is intervention that is necessary and nurturing 
that is necessary. So, where possible and where commercially 
products are available, we would prefer to allow the market to 
work.
    Mr. Shuster. All right, which makes some sense. But it 
seems to me when you are selling to DOD, you have one got 
customer, they regulate, they buy they tell you which end is 
up, which end is down, so it becomes very difficult.
    Could you go into some detail? You mentioned about you 
tailor some programs to preserve certain segments. And I agree 
with you. There are certain industries that are sunseted. We 
don't necessarily need them anymore. Or there are people out 
there, organizations, that are doing a poor job, and we can't 
save them and shouldn't. Can you talk about some of those 
programs that you tailor to preserve, some of the segments?
    Secretary Lambert. There are a few examples, and I think it 
goes to the heart of what I understand the task force is trying 
to get at. And I think the business panel in particular has a 
unique opportunity to address an area that I think has seen 
short shrift over at least the last decade, which Andre 
mentioned, which is the small and medium-sized businesses.
    At the prime levels, access to capital is not a significant 
barrier to continuing market performance. The lower you go down 
the tiers, it becomes more constrained. Then you have things 
like the CR [Continuing Resolution], the credit crisis, and 
different ratios that are required of these small businesses. 
So when we look at a program, you tend to stop--and I think you 
had Center for Strategic and Budgetary Assessment [CSBA] here, 
and they talked about their look at the prime level. But there 
is a lot of the analytic stops at the prime level.
    The real fragility we are seeing occurring is at those 
lower tiers where you have a provider or a technology. I will 
give one example.
    Recently, in the solid rocket motor industry, we have two 
providers. They do various things. We have two prime providers. 
But both of those primes at a lower level, much lower than just 
their next tier, rely on a single sub-supplier. So propping up 
the two primes, while it might be easier because we have more 
visibility into it, would do little to alleviate the concerns 
we have at that sub-supplier level.
    So when we need to intervene in those areas, we try to 
adjust programs so that we can create sustainable rates of 
production that are in the best interests of the primes but 
also in the best interests of the taxpayer over time.
    Mr. Shuster. Don't we need to do that? I think you 
suggested you need to do it earlier on--not wait until you get 
into a situation or it is critical. And that begs the question 
of having a defense industrial based policy to determine 
strategically are there six, are there eight, are there ten 
different segments? That we need to make sure we have the core 
competency there to build those products, the weapons systems 
that we need.
    Secretary Lambert. You are absolutely right.
    I was charged when I came into the office, in essence, to 
get the Department out of the role of firefighter, you know, 
waiting for a building to be on fire before we responded. And 
there are a number of mechanisms, it is not just one, that we 
use. Program managers tend to have a good visibility, but it is 
a soda straw visibility.
    We do need greater insight, and I think what this 
administration has been pursuing through various initiatives 
like the S2T2, the sector by sector, tier by tier review, is to 
gain insight before we dictate oversight.
    But you are absolutely right. We need better data at that 
second and third tier level before we can make these decisions.
    Mr. Shuster. The program managers, it seems to me--I think 
you said a soda straw--they have got to be able to look out 
wider, and they are pushing to get their program, their project 
out. I don't if they have much concern about the broader 
implications. If you are looking down a soda straw, they can't 
see. So how do we change that?
    Secretary Lambert. I think it begins with, again, the 
collection and the sharing of data. I know you received 
testimony about the great policy we have for Army berets, and 
that is correct, but I am not sure the Air Force or the Navy 
ever got that industrial base report.
    So some of it starts with the simple sharing of data, which 
my office is charged with doing, the collecting of what those 
soda straws are looking into at the lower tiers down to the 
elements, if you will, of some of these programs, and then try 
to take those tiers and string that thread across the defense 
enterprise so we have a better understanding, where we are 
beginning to see fragility at that lower base that has 
cascading implications not just across the program but across 
the services as well.
    Mr. Shuster. Does that sharing of information include 
talking to--having the project or program managers talk to the 
manufacturer? There is a lot of fear out there that if you are 
talking to the producer, if you are a program manager, there is 
going to be some kind of implication. It just seems to me you 
can't produce something for a customer unless you are talking 
to them and trying to figure out exactly what they need.
    Secretary Lambert. Absolutely, and I will let Andre jump 
in, because I know for small businesses that is particularly 
difficult. Having spent 20 years in industry, it has always 
been a surprise to me that the defense sector is the only one 
where as you get closer to negotiating the deal, the less you 
talk to the person you are negotiating with. But that is how 
the system is set up.
    But we have redoubled our efforts to do outreach to 
industry. I have had 300 and some meetings in two years that 
are both larger meetings but one-on-one meetings. So we have an 
active dialogue from the Secretary on down with industry to 
listen to those concerns at the CEO [Chief Executive Officer] 
level. But those, again, are at the medium and larger 
companies.
    I think your shop has really done a tremendous job in these 
local centers, going out locally to reach out to the small 
businesses.
    Mr. Shuster. Mr. Gudger.
    Mr. Gudger. Correct. We have taken an industrious approach 
to solving the small business industrial based challenges we 
have. Just this morning, our office met, down at Defense 
Acquisition University, met with the program managers so that 
we can better identify what the program manager is seeing, kind 
of get in front of the requirements that are being developed 
throughout the Department because they have visibility at the 
level where things begin.
    And something else that we did shortly after I took post in 
March was to really invest in a study, a forecasting study, for 
the small business industrial base looking at where we were in 
the Department and aligning ourself with the efficiency 
initiatives that were going on, and in particular Dr. Carter's 
Better Buying Power, saying how can we build a capabilities set 
with the current small business industrial base and have them 
make the right investments today for the future of our defense 
capability so that we would have the greatest military in the 
year 2020?
    So one of the leading things that we wanted to do was to 
say we can forecast better. So we can define the requirements, 
talking to the program managers, the program executive offices, 
kind of centralize those requirements based on standards and 
make them available to the industrial base via the Web or 
another outreach event. Then we can kind of hone in where they 
are making the key investments so that we can get better 
products in the future.
    Because we know if there is competition, then we are going 
to buy better, we are going to do better for the taxpayers, and 
then, ultimately, we will continue to create capabilities at a 
much higher tier. So we kind of rise up the tide to where we 
are creating things and technologies at a level at which we 
haven't created them before.
    So we see this as an opportunity to take a quantum leap in 
the right direction for not just fiscal year '11 and '12 but in 
future years.
    Mr. Shuster. It sounds like a start.
    How many people are in your department?
    Mr. Gudger. In our office? We have roughly about 30 or so.
    Mr. Shuster. How many in yours?
    Secretary Lambert. If you include the ManTech program and 
the Title III offices, which we also manage, and some of the 
Committee on Foreign Investment in the United States 
activities, it is around 35--38 now, I believe.
    Mr. Shuster. Mr. Larsen.
    Mr. Larsen. Thank you, Mr. Chairman.
    Mr. Gudger, with regards to the Office of Small Business 
Programs, one of the concerns that we have been exploring with 
regards to that particular--not you, but just the particular 
office--is that the office has been more about counting numbers 
to be sure goals are met. And I think the concern that we have 
about that is there is just so much more you can do, and I 
think your testimony reflects that you are doing so much more 
than that. So I want to explore a little bit about that.
    First off, do have you a report or a wrap-up of the 
roundtables you have done? We are doing our own roundtables. I 
think it would be very valuable to get the reports of the 
roundtables you have done so we can compare notes and make sure 
that whatever we produce is reflecting some of the things that 
you have discovered as well through your roundtables.
    [The information referred to can be found in the Appendix 
on page 79.]
    Mr. Gudger. Absolutely. And when I took post, one of the 
things I wanted to do was develop a best practice guide from 
OSD's [Office of the Secretary of Defense] perspective and make 
it available to all of the components and services and agencies 
in the Department. So I would be more than happy to share our 
final product of our best practices guide, which is an 
inclusion of all our outreach events, all of the roundtables, 
and saying, hey, we now have a platform where we can share the 
best ideas and change where we are.
    I agree that if you look backward, a backward view of the 
office, we probably were very centric to socioeconomic and 
disadvantaged programs, more counting the number. Since March, 
we have taken a programmatic approach where we have aligned 
ourselves with the urgent needs of the Department. We have 
looked at those urgent needs in a way we haven't before and 
begun to develop programs to support that.
    For example, we worked very closely since I have been here 
with space, intel, operational energy, rapid equipped force, 
which is the brigade commanders out in the field. Mr. Lambert 
brought me into that meeting, so our offices are working 
together in a way we have never traditionally worked in the 
past.
    We now are looking at this as an opportunity that if we can 
align the small business industrial base, or the industrial 
base in general, with the direction the Department is going in, 
then the numbers will improve for themselves. And I think we 
are seeing that. Because, in fiscal year 2011 alone, we doubled 
our small business innovation research programs that have gone 
on to phase three. So doubling that in a very short period of 
time shows a commitment from the Department into the small 
business community on creating the central product and services 
that we need for the future.
    Mr. Larsen. Frankly, I don't mind that one of the purposes 
of the office is to count those numbers, be sure the goals are 
being met. I don't have a problem with that. The issue we are 
looking into is, again, there is so much more capability in the 
office. Whether you can do that with 30 people or not will be 
up to you to determine, but there is so much more you can do in 
addition to that.
    In your testimony, you said that you made a change earlier 
this year to the regulations and DFARS of implementing 
accelerated payments to nearly a third faster. When was that 
and what standard are you using that gets you to a third faster 
on the payments?
    Mr. Gudger. That is a phenomenal question.
    Mr. Larsen. I have been here 10 years. No one has ever 
called my questions phenomenal. Thank you very much.
    Mr. Gudger. We published the final rule on April 27th of 
this year. It was an area to reduce the barriers and move the 
bureaucracy.
    Mr. Larsen. We have heard this issue from small businesses.
    Mr. Gudger. Right. So we solved it with technology, through 
our financial system. We essentially didn't need the 
intervention of people. We took our financial system, and any 
small business who had a prime contract in a particular 
financial system, which was the first we updated--we have 14 we 
are updating over an 18-month period. But we targeted the 
largest one, MOCAS [Mechanization of Contract Administration 
Services], which is where 50 percent roughly of our spend comes 
from for small business. And on July 1, we implemented--
actually mobilized the move where the financial system was 
updated, and it automatically sent payments out to small 
businesses. It didn't have to do anything.
    On average, most companies have a net 30 payment day, and 
we were paying them on the average of net 20. So essentially 
for one-third of the year they will have money in their pocket 
that normally they wouldn't have.
    Mr. Larsen. And so these are small businesses that are 
primes.
    Mr. Gudger. Small business prime contractors.
    Mr. Larsen. So it doesn't yet apply to small businesses who 
are subs for a prime contractor, a larger contractor, is that 
right?
    Mr. Gudger. That is correct. The primes are in charge of 
paying their subcontractors.
    But I meet with large businesses as much as I meet with 
small companies, and I have encouraged them to look at DOD's 
lead. We are leading something, so look at our lead in this 
area, and encouraging them to be very prudent as they pay small 
businesses and look to doing that faster and better as well, 
where appropriate.
    Mr. Larsen. I notice there are issues that we have heard 
from small businesses that has to do with auditing, not that 
they don't want to be audited. But a business in my district, 
five people, being audited for work they did a couple of years 
ago, being audited as if they are a company of 30,000 for a 
contract that is obviously big for even them but unique for the 
Department in terms of work they are doing.
    So this issue of auditing as if you are a large prime, 
instead of auditing as if you are just a small business, you 
are going to hire people or take people off the job in order to 
fulfill the auditing requirements, is that something you have 
heard throughout your roundtables?
    Mr. Gudger. Oh, absolutely. Certainly we have heard that. 
And we look at this in two ways.
    First, Charlie Williams, who is the Director for the 
Defense Contract Management Agency who oversees a lot of audits 
now, we are working with his office in a way we haven't before; 
and we brought this issue up to him. And we are looking at 
reducing the number of small business audits as it currently 
stands.
    Most of it is driven by contract type. So if it is a cost-
reimbursable contract, it requires an audit. I have worked with 
the Defense Procurement and Acquisition Policy Office, and we 
are encouraging contracting officers in the acquisition 
workforce to be very cognizant of the type of contracts that 
they award. Award costs, reimbursable contracts, fixed-price 
contracts, level-of-effort contracts where appropriate, and 
that alone will begin an internal view of reducing the number 
of audits.
    Then the ones that require audits, we are going to look at 
the ones that are what we consider high risk and move them into 
priority and see if we can reduce the others.
    So we are looking into it. We are working those issues. So 
we are aware. We are making progress.
    Mr. Larsen. We want to continue to understand the progress 
being made.
    You mentioned DCMA, the Defense Contract Managment Agency. 
What about the Defense Contract Audit Agency, DCAA?
    Mr. Gudger. We are working closely with DCAA. Pat, I know 
him well, and we brought this issue to him as well. They are 
overloaded. We have a high workload with the number of audits. 
So Defense Contract Management Agency is helping pick up some 
of the load. So we are working with both of them in the 
reduction, yes.
    Mr. Larsen. All right. I may want to look further into 
that.
    A few more minutes?
    Mr. Shuster. Yes.
    Mr. Larsen. Mr. Lambert, in your testimony, you talked 
about the sector by sector, tier by tier. But it intrigued me, 
so I looked at your written testimony. You have actually given 
it a name, S2T2, which means I guess in defense language you 
have given it a program name, so you are actually focused on 
it, and it is not just some name you are giving it.
    So talk to us about what specifically--how you are 
approaching this sector by sector, tier by tier, what it means 
to you all and what kind of outcomes are you looking at from 
looking at the industry from a sector-by-sector, tier-by-tier 
approach and the implications for the issues at hand that we 
have?
    Secretary Lambert. Absolutely. We realized again a couple 
of years ago when we came in that we had a pretty good 
understanding at the prime level. So the sectors are the things 
that you would hear about--aircraft, missiles, ships--the 
classic sectors that we do the comptroller's budget analysis 
under. We have added to that under sectors emerging 
capabilities, such as unmanned systems and cybersecurity. Then 
the tiers are actually down to the component level. So you 
would have gyros, actuators, all the way down to, really, 
elements, if you will. And then--so that is the sectors and the 
tiers is to go down.
    We are pursuing it along four paths. My office is running 
it. But the first was a study or a survey that we commissioned 
through the Department of Commerce, which has the authority to 
have industry respond.
    We looked at about 25--I saw this was in a previous 
testimony as well--about 25. We picked five programs from each 
of those sectors that were representative, three programs of 
record, one R&D [Research and Development] program, and one 
rapid fielding program. We looked at all the contractors and 
all the subs that were involved in those programs. That ended 
up with about 25,000 contractors. That is how vast that base 
is. So we are only talking about a small number of programs, 
representative programs.
    We crafted a survey. That survey went out to about 5,000 
companies. I have a list of each one in your district, and I 
can say your district is performing and responding quite well. 
But they are companies you may not even have heard of. Because 
sometimes we hear that they didn't know they were producing 
products for the Department of Defense. And we are getting 
those surveys back.
    Mr. Larsen. If I may, I won't speak for the rest of the 
members, but I would love the list in my district.
    Secretary Lambert. Absolutely. You have seven.
    And we then go along and we looked at all of the previous 
studies that had been done in the Department and tried to 
collect those. We came up with about 105 industrial-based 
studies that have been done in the last 24 months alone, some 
larger than others, some repetitive. We tried to get the best 
information from the soda straws that we could find.
    We then went out to independent experts and asked them in 
their specific sector, space and so forth, to identify what 
they always hear, the problems with certain components or 
elements of that particular industrial base.
    Then we had each service give us a detailee for 6 months--
that was at the direction of Deputy Secretary Lynn--to work 
with the services to make sure we are reaching out to those 
program office.
    We are putting all of that information together in a data 
set that will then become the repository for the Department and 
a basis for which to allow not just individual assessments of 
the health of the industrial base, the gross anatomy of the 
industrial base, but also help us as we go through this next 
chapter of mergers and acquisitions and consolidation so that 
we understand what it is we are actually approving or having 
problems with from that very specific elements of the lower 
tiers.
    Mr. Larsen. Okay. That is it. A great start to the answer.
    I will yield back to the chairman.
    Mr. Shuster. And we will probably go back for round two.
    Mr. West.
    Mr. West. Thank you, Mr. Chairman, ranking member, and also 
thanks to the panel for being here today.
    A couple of questions to start off with.
    I get very concerned when you look and see a lot of these 
weapons systems--F-22 [Raptor stealth fighter aircraft], AAAV 
[Advanced Amphibious Assault Vehicle], Crusader [self-propelled 
howitzer artillery system], FCS [Future Combat Systems]--that 
all of a sudden we get going down the pipeline and then the 
next thing you know we cancel these programs. And, of course, 
when we are talking about budget cuts, we can't afford to have 
that too much longer.
    So when I look at the national military strategy--and I 
would like to get your take on this--do we have a national 
military strategy that really does articulate the requirements 
of the Department of Defense to the defense industrial base so 
that they can develop the right type of capabilities and 
capacities for our military to be effective?
    Secretary Lambert. Well, I know that again in previous 
testimony people have talked about other countries and what 
they do in the defense industrial base. We follow those issues 
pretty closely just to actually take what we consider the best 
from that. I think there is no doubt over the last decade in 
the programs, some of which you mentioned but many more that 
you didn't, where we spent billions and billions of dollars and 
never produced something.
    At the end of the day, our manufacturing base requirements 
production. So unless we get into production at a lot of the 
lower tiers, it is not going to help them to continue to spend 
money on the research and development. We need to get into 
production.
    In the past, in a permissive budget environment, that 
covers a lot of sins on both industry side I think and the 
Department side as we were trying to field systems as rapidly 
as possible. And I think adequate attention probably was not 
paid, out of necessity in some cases, to the implications that 
that had on the industrial bases, making what I call ``our 
plans based on an EKG [electrocardiogram] chart.''
    You mentioned acronyms. The one that doesn't come up very 
often in the Pentagon is P&L [Profit and Loss]. So we ask these 
companies to build up rapidly and then draw down rapidly, and 
it is very hard to get a steady state of industrial 
capabilities there.
    As we have drawn down the last 2 years, my office for the 
first time is engaged in program reviews. As we go through this 
budget cycle now, our office is very engaged with CAPE [Cost 
Assessment and Program Evaluation] and with the Deputy 
Secretary now on looking at industrial base implications as we 
make some of these hard decisions. So I would say it is better 
than it has been but not good enough.
    Mr. West. When you look at the procurement cycle or system, 
what type of recommendations or what type of strategies and 
initiatives is the DOD looking at so we can close some of these 
long procurement cycles?
    Secretary Lambert. Well, it is not in my department. Again, 
within AT&L [Acquisition, Technology and Logistics] and the 
individual services, I know that they are struggling with the 
fact that we build systems that last for 20 or 30 years. And I 
know Secretary Lynn was fond of saying, from concept to the 
first delivery, the iPad took 18 months, and it took him 24 
months to get a budget to think about developing the iPad. So 
there are those inherent difficulties.
    Again, it varies by sectors. With some sectors that are 
more mature, such as shipbuilding, it is not as large of an 
issue as it is with the IT [Information Technology] world where 
we need that refresh. And I think the Department continues to 
work and struggle with how we field everything that we need and 
be flexible enough to get the systems to the warfighter as 
quickly as possible.
    Part of that, we saw some capabilities like the MRAP [Mine 
Resistant Ambush Protected vehicle]. I think is a good example 
of where when the Department--when there is an urgent 
requirement, and in this case I think when the Secretary became 
the program manager, we did move much more aggressively and 
quickly to field those systems. And I think we are still 
learning the lessons from the last five years, at least on how 
to do that better across the Department.
    Mr. West. What are we doing--I know about the rapid 
equipping force. But are there other strategies and things that 
we are using so that we can go in and pull off those commercial 
off-the-shelf technologies so that we can get a lot of this out 
to our soldiers, sailors, airmen, marines, and Coast Guardsmen 
a lot quicker?
    Mr. Gudger. Absolutely. We are working very closely with 
the Assistant Secretary of Defense for Research and 
Engineering, and one of the key programs under that portfolio 
is the rapid fielding portfolio, where we are looking at 
development things that will take somewhere between 6 months 
and 2 years, which is a more rapid acquisition process in the 
Department.
    Our office has engaged them in a way, and we are working on 
some particular programs there where we are looking at--where 
they polled the entire defense internal stakeholder base on 
where they are going, where they see the future, what 
capabilities do they want to have in a 6-month or 24-month 
period. We are making that available to small business, and, 
where appropriate, if we see that they are one of our, let's 
say, sub-awardees, we are looking at how do we then award them 
the opportunity in a much more streamlined way. And we have had 
some early success there where they had a need, they had a 
capability.
    We had a company who had received one of our phase two 
awards, and it was more of a making the company available to 
them where they could bend it slightly and then rapidly acquire 
for it. So we are seeing some successes there.
    Mr. West. Thank you, Mr. Chairman. I yield back.
    Thank you, gentleman.
    Mr. Shuster. Thank you.
    And, with that, Ms. Hanabusa.
    Ms. Hanabusa. Thank you, Mr. Chairman.
    Mr. Gudger, you said something earlier. You said you want 
to be able to forecast better for the military for 2020. This 
has always been the major question, which is what is the 
military for 2020? So when you say you are going to forecast 
better for the military for 2020, what is your vision of the 
military for 2020?
    Mr. Gudger. Well, I am not at liberty to have a vision. I 
definitely support Secretary Panetta's vision, and it is broad. 
It is a broad stroke. And Deputy Secretary Carter. It is to 
have the most powerful military on the face of the Earth in 
that year. And my remark was if we forecast better now and give 
our industrial base a chance to create the capabilities that to 
date don't exist for tomorrow, then in that year we will have a 
much more powerful military and national security posture.
    The study that we commissioned was to look at forecasting 
better. How can we take what the program managers and the 
program executive offices throughout the Department, all these 
requirements, what they see their needs would be in the future 
and bring them together in a way that not just small businesses 
but all businesses can understand them, it is clear where we 
may be going, it is made available to them sooner.
    So the study was to look at best practices, look at ways of 
sharing information and data so that if, for lack of a better 
term, if the Navy had a requirement that the Army was also 
developing, maybe we could look at working together, closer, in 
a streamlined way to produce the desired outcome.
    Ms. Hanabusa. Mr. Gudger, that is part of the problem. You 
want to work together, and you want to come up with a better 
program, and we are talking like now maybe 9 more years into 
the future. And unless there is somebody that has that vision, 
a clear vision, what is the time for a small business person, 
from the time you have an understanding of what it is that we 
are going to need to the point where you put that out or you 
help them get an understanding of that, and what exactly do you 
do for small business so they can then meet that demand in 
2020?
    We have heard testimony that some of our big projects take 
15 years to get there. In a prior hearing, I think the 
organization--CSIS [Center for Strategic and International 
Studies] had a gentleman come before us who I thought said it 
really well. He said, policy is really set by acquisition. How 
we acquire determines our policy versus our policy determining 
how we acquire. Because if we continue to buy certain kinds of 
fighter jets or certain kinds of equipment or continue to build 
a certain way with a 15-year lead time, that is going to 
determine that military in the year 2020 or into the future.
    So how do you intend to help small business when that has 
really been, for lack of a better description, that has been 
the way our modus operandi has been?
    Mr. Gudger. I agree that 10- or 15-year programs are 
unacceptable, and I know Dr. Carter has a big focus on that not 
being acceptable. What we are doing for small business in this 
area we are doing a host of things, but one in particular thing 
I can mention is like our rapid innovation fund, where we have 
taken Department urgent needs and made them available to small 
businesses and looking to rapidly acquire for them. I think 
that this is a great example, illustration, of the level of 
attention that the leadership in the Department is paying to 
small business, understanding and recognizing the dynamic role 
they play and working with our office in a way and engaging----
    Ms. Hanabusa. Mr. Gudger, I don't want to interrupt you, 
but let me tell you something.
    One of the things that I hear you saying is, because we 
don't have a clear focus, it almost seems like--well, 15 years 
is about how long it takes us to build a fighter. So what you 
are almost relegating small business to do is a certain kind of 
work that you think is going to have an immediate demand and 
immediate work. So you don't see small business really 
participating in the long term for the bigger projects. Is that 
what I am hearing you say?
    Mr. Gudger. No. My number one goal is to make available 
expeditiously any opportunity that is a maximum practical 
opportunity for a small business, and that is exactly what we 
are doing. Traditionally, small businesses have not built 
tankers or ships or fighter jets.
    Ms. Hanabusa. But they do subcontract.
    Mr. Gudger. But they do subcontract.
    Ms. Hanabusa. They are part of the process. They have 
challenges as a result of that, right?
    Mr. Gudger. Absolutely.
    Ms. Hanabusa. So are you looking at that as part of what 
you are looking at?
    Mr. Gudger. Oh, absolutely.
    Ms. Hanabusa. Then you have got to look at 15 years 
potentially in the process and how you are going to insert the 
small business into that?
    Mr. Gudger. Absolutely.
    Ms. Hanabusa. So you are looking at that?
    Mr. Gudger. Absolutely.
    Ms. Hanabusa. So when we get your roundtable report, we 
will see that in that report?
    Mr. Gudger. Yes. Anything that addresses any portion of the 
industrial base on short- or long-term programs, we are looking 
at ways to address those.
    Ms. Hanabusa. Thank you, Mr. Chairman.
    Mr. Shuster. We are going to have a second round if anybody 
has interest in it.
    With that, Mr. Runyan.
    Mr. Runyan. Thank you, Mr. Chairman; and, gentlemen, thank 
you for being here.
    Mr. Gudger, you mentioned in your opening statement about 
the memo from Secretary Panetta setting some benchmarks or what 
have you. Are they much different from standing operating 
procedure from before, or is he just trying to plant that seed 
again in everyone's mind?
    Mr. Gudger. I think it goes a step beyond the standard 
operating procedure for the one simple fact that it never 
happened before, so there is no real benchmark against it.
    But, in addition to that, at the time, Under Secretary 
Carter, sent out a memo with actionable items that was 
addressed to all of the acquisition, technology, and logistics 
workforce, and also he provided a copy to encourage the 
military secretaries to also adopt very similar things. Those 
actionable items are materializing. In fact, one of the 
actionable items was to put in small business criteria and 
performance evaluation of seniors that affect the outcome of 
acquisition, and that is happening.
    So we are looking at the actual items that went out. So it 
went beyond just a memo. It looked at key things that we must 
accomplish in order to reach this end state, whether it is one 
year out or 15 years out. These actionable items are to address 
the short term and long term, and there has been significant 
progress there.
    When we look at our tracking numbers, we look at our total 
percentages for small businesses and prime contracting 
opportunities, and we look at fiscal year '10, because '11 is 
still settling. But when we look at '10, we actually--dollar-
wise, looking at the goals that we had, we actually met the 
total dollars that should have gone to small business. I think 
that is a testament to, one, what we are doing and, two, what 
the future may hold as we continue to push forward and increase 
our prime contracting numbers.
    Mr. Runyan. Well, in your view of that percentage, though, 
can it grow drastically more?
    Mr. Gudger. I would like to say it is encouraging good 
behavior. Drastically more, I am uncertain of drastically more.
    Mr. Runyan. In reaching a lot of these--I am sure the list 
is long, and I won't ask you to go through a lot of them, but 
just off the top of your head a few of them--and are there any 
roadblocks, regulations, that you have noticed so far that have 
kept you from proceeding with any of them?
    Mr. Gudger. No, I don't see any huge roadblocks. In fact, 
one of the actual items was a biweekly meeting with our 
office--or with me--with all of the acquisition executives for 
services and components. I invite them in, which includes the 
head of contracts, and we together develop strategies and we 
share these best practices with them on what we are doing in 
the Department to meet our goals.
    One of the action items, as a best practice we had a 
threshold of small business directors and specialists sitting 
on peer reviews, which is their review of the acquisition 
process. So our best practice was that our office put out to 
reduce that number, and we said on all previous users of over 
$500 million or more--so the large acquisitions where small 
business need to be included in--we look and see if a portion 
of it can be set aside for small business. And if it is not 
possible, we then have started to put in language where we are 
requiring the prime contractors to meet a certain subcontract 
number for small businesses.
    So that is inclusive of any opportunity, planned 
acquisition of $500 million or more. So that is a successful 
story. We actively engaged with them. We have been successful 
in breaking pieces out for small businesses to participate in, 
and we certainly have been very successful in ensuring that 
small business has a required minimum contracting goal inside 
of the larger planned acquisitions.
    Mr. Runyan. I know specifically myself I have had three 
different service-disabled veterans in my district reach out to 
me that are having issues getting DOD contracts themselves. I 
am sure a few of them will be part of the panel that we are 
having December 9th back in the district. Having that 
discussion with them, the DOD itself has this 3-percent 
mandate, and a lot of times it is not being fulfilled. That is 
the reason why we are here.
    With that, Chairman, I yield back.
    Mr. Shuster. Thank you.
    Go ahead, if you want.
    Mr. Gudger. I would like to respond to that.
    The service-disabled veteran community is--although I have 
to say that I care about all the programs equally, that is one 
that is near and dear to my heart. In fact, that was the first 
study I commissioned when I got in this position, was the study 
on reducing the barriers for service-disabled, veteran-owned 
businesses.
    And there is a silver lining in our cloud at DOD. Yes, I 
was disappointed when I took this position that we had not met 
that goal. But in fiscal year 2011 we have already--since I 
have taken post, we have already increased our service-disabled 
veteran-owned contracting by $500 million since March of this 
year, and we are going to continue to do better. The numbers 
have been going year over year, but that is the single largest 
jump we have had in the last three years, and we have a 
continued focus on that particular community.
    I have performed a lot of my outreach events have been with 
the service-disabled veteran-owned community, and I am the co-
lead on the veterans task force for employment for 
entrepreneurs, entrepreneurship subgroup. And, in fact, I have 
reached out to the service-disabled veteran-owned community. A 
few groups, a name like VET-Force, I brought them in and made 
them members of my subgroup so that we could get the best ideas 
and the best ideas would be heard and to show them that not 
only are we going to talk about doing better, we are going to 
do better, and it is going to be an inclusive environment 
inclusive of their ideas.
    Mr. Shuster. Would you identify some of the biggest 
barriers? You said you did a study----
    Mr. Gudger. Well, the study is actually still ongoing.
    But, yes, some of the biggest barriers is the current 
industrial base for where the urgent needs and the things that 
the Department buys actually having certified service-disabled 
veteran-owned businesses with a capability to perform those 
functions. When we look at the industrial base, it is the 
smallest group. And so when we look at how much money we spend 
and how we spend it, there is simply not enough companies there 
to participate across the board in all the things we do. Yes, 
they do certain industries well.
    But we are working with them. That is the reason why we are 
forecasting better, making our urgent needs more available by 
way of our Web site, and kind of helping them set the tone and 
direction for the things that they need to develop, whether it 
is a product or service.
    Mr. Shuster. Thank you.
    Ms. Sutton.
    Ms. Sutton. Thank you, Mr. Chairman.
    Mr. Lambert, on page 6 of your testimony you make a couple 
of statements I would just like to get clarification on. You 
say companies exist to make money and without the potential no 
one would be competing to win defense contracts.
    That is understandable. Everyone gets that.
    And then at the end of the next paragraph you say, in the 
high-budget environments of the past, many companies have grown 
to expect high margins independent of the quality of their 
performance.
    When I read that sentence, it is concerning to me. How did 
that happen in the first instance? Could you just expand on 
that for me?
    Secretary Lambert. Sure.
    I think, as I said before, not just in this cycle but in 
the four previous cycles we have seen in defense budgets when 
we went and looked at the past lessons, a permissive budget 
environment does cover a lot of sins. And that is a permissive 
budget environment, it is important to remember, because of the 
requirements of conducting two ongoing operations that we 
faced.
    But I think it would be hard to argue with the fact that 
when we had programs in trouble or we are bleeding, we tended 
to cauterize that wound with money. Because we needed the 
program. We needed to get it fielded because it was important 
to the warfighter. And in that process I think a lot of--or 
some discipline went out of the system. That was the entire 
point of Dr. Carter's Better Buying Power Initiative and the 
Efficiencies Initiative, was to return that balance.
    So when we look at the financial ratios of the leading 
primes and some of the other defense companies, they grew quite 
substantially over this period of time, understandably again, 
and there wasn't much differentiation. I think what we are 
trying to restore now is a balance of rewarding with better 
profitability those companies which perform well, while making 
it clear to those who don't that the expected profitability 
that they may have had in past years will not continue.
    Ms. Sutton. Okay. And if I could just get a little more 
information and help in quantifying what you talk about on page 
7, and I know there have been questions about this. The effort 
that you are undertaking to map and assess the industrial base 
sector by sector, tier by tier. Can you quantify how much--how 
far along you are, given the massive amounts that you have to 
deal with?
    Secretary Lambert. Yes. It is a massive amount, and that is 
why it is important that as we do this it is not a study, it is 
a continued effort to collect data that will continue to be 
refreshed probably with deep dives every quarter in different 
sectors.
    But of the roughly 5,500 surveys--we will start with that--
that were sent out, more than half have been returned and we 
are going through. There were 17 in your district, and we are 
going through those.
    We work with the companies to fill them out. We are happy 
to share with anyone who cares what the survey looks like. It 
is quite comprehensive.
    Some of the initial results are affecting some of the 
budget decisions or at least showing early signs of fragility. 
We have been tasked to get some early product up to the 
Secretary's office by the end of November, and so we are 
working toward that goal.
    The independent studies we have done have all been 
concluded, and we are integrating those. The studies that my 
staff have done have all been concluded, and now we are 
continuing to work with the services to collect the information 
they have, and some of the services have been great in 
responding.
    Ms. Sutton. And I would like to avail myself of accessing 
some of that.
    Secretary Lambert. Absolutely.
    Ms. Sutton. And could I just ask you--and, actually, I 
would like both of you to think about this--are issues of 
guarding proprietary information and intellectual property 
hindering the development of our industrial policy? And, if so, 
what are those issues and how are you dealing with them? Just a 
small question.
    Secretary Lambert. Is it specifically related to data 
rights or intellectual--or who owns the data from the 
contractors of the government?
    Ms. Sutton. I think it is your choice. I think it is all of 
those things.
    Secretary Lambert. It is a complicated question. And 
certainly we have it with some of the independent research and 
development that companies themselves pursue and that we 
reimburse, the question of who owns that data.
    I think, again, over time, lines have been blurred. There 
is a group working on that inside of AT&L--I have been in the 
meetings. I am not part of the official group--about how do we 
better define who owns what property at what stage. And the 
goal of that is really pretty straightforward. If the 
government owns the data and the rights to a component of a 
major system, we then have the opportunity at a future time to 
compete that component, to bring in new competitors, to 
introduce competition.
    And this is what is important the Department understand and 
for everyone to understand about competition. It doesn't have 
to be symmetrical competition. It can be asymmetrical 
competition at a later stage or a different component or a 
different product.
    We have an example that we brought of a product that we 
funded through the Title III program that changed the way we 
are building ammunition, but it has also helped the medical 
community. That is something we are inserting into a program 
after the fact. So then data rights do become an issue. Because 
we want to make sure if the taxpayer paid for this equipment, 
if it paid for the production, and if we are paying for the 
maintenance of it, we own the data. So that if the company 
decides to go in a different direction down the road and 
decides not to service the Department or if we want to 
introduce competition at a later stage, we reserve that right.
    Mr. Gudger. Oh, I agree with Mr. Lambert. I am a part of 
the meetings, although I am not one of the owners.
    The Department is certainly moving in the direction that we 
are building on standards, and these standards will allow us 
to, no matter if we want to introduce competition and buy 
better and look to become more efficient in the future, it will 
allow us to create and produce the competition.
    For a small business industrial base, it is somewhat a 
challenge for a lot of small businesses who are very concerned 
with intellectual property and protecting intellectual 
property. And that is one of the areas in our office that we 
are now looking at. It is a new thing for us in our office to 
take on intellectual property rights and ensuring that 
intellectual property is protected as it relates to small 
business. We haven't seen any major issue or any issue since I 
have taken position, but we understand that it could be a 
potential challenge in the future.
    Ms. Sutton. Mr. Chairman, if I could just say, because we 
have heard this issue come up in the context of small business, 
so I would really love to understand more of what you are 
doing. You said this is new. So if you could expand on that at 
a later time I would appreciate it.
    Mr. Gudger. Oh, absolutely. We are meeting with industry 
now to understand all the issues they have and what is 
bothering them so we can craft a response and a way of helping 
assist them in this area. So I would be more than happy to come 
back and make the data available to you.
    [The information referred to can be found in the Appendix 
on page 81.]
    Ms. Sutton. Thank you.
    Mr. Shuster. Mr. Lambert, am I to understand that, being 
the industrial base person, you are not participating in the 
discussions?
    Secretary Lambert. No, we participate. There is a group 
that was formed to follow up on the Better Buying Power 
Initiative, which is called a senior integration group, that 
Dr. Carter convened a year and a half ago. It was meeting 
weekly on Saturdays for many, many months as we went through 
this process, and we continue to be part of that.
    There are subgroups as part of that leadership team, 15 or 
20 people, and then there are subgroups who solely have 
different responsibilities. I am not on the subgroup that is 
doing the data rights or the intellectual property, but they 
report back to this senior integration group.
    Mr. Shuster. So you are participating?
    Secretary Lambert. That is right.
    Mr. Shuster. I think, as Ms. Sutton said, that is a 
recurring theme we hear. Some people have even said that--I 
don't know if we had anybody before us--that said we are not 
going to do business. Because if we have to give up our 
intellectual property rights, we will take it elsewhere.
    Secretary Lambert. Absolutely. It is part of our issues 
that we deal with on commercialization.
    I would also say that one of the areas where we are 
completely aligned with industry and we both need to do need to 
do a better job is in the protection of our own intellectual 
property from theft and from some of the cyber issues we have 
been seeing. We can quibble with who owns the intellectual 
property for a widget, but we can all agree that we don't want 
that intellectual property going to third parties who don't 
have a claim to it legally.
    Mr. Shuster. And with that, Mr. Schilling, you are 
recognized for questions.
    Mr. Schilling. Thank you, Chairman.
    Thank you, gentlemen, for being here today. I am actually 
kind of impressed because we have got folks that are doing some 
studies and, rather than throwing them into a file cabinet, 
they are reaching around and doing some things about it.
    You know, we are to the point as a Nation with the budgets 
going on is that--and with the threats that are out there--we 
have to be doing something. It is not we should. It is that we 
need to and we have to.
    I got the opportunity to speak at the U.S. Chamber 
yesterday, and I took questions at the end. The first question 
was a veteran, and he brought up exactly what we were talking 
about here. And you answered most of it, and I think it is 
great that you are taking that head-on.
    But, also, the women-owned small businesses, also.
    And then one of the things is I was kind of curious as to 
why maybe they missed those goals. And then we know you are 
doing something differently about it now, which is great, but 
then is there anything that we can do legislatively to help you 
guys to push that forward?
    Mr. Gudger. One of the things that would help us 
tremendously--in fact, the Chamber recognized us for 
outstanding performance with women-owned business not too long 
ago, actually, about a month ago. So we are happy that we have 
made tremendous strides there and that they have recognized for 
us for those strides.
    What we can do in the future is to really focus on the 
reauthorization of our key programs--Mentor/Protege, SBIR 
[Small Business Innovation Research], and our STTR, Small 
Business Technology Transfer program. That is where a lot of 
opportunity not for just women but service-disabled, but there 
is a lot of opportunity there for them. And with that if we 
could focus on the reauthorization on programs I think that we 
can continue to foster an environment where we are maturing and 
growing, some of the micro businesses become small and the 
small to grow and be successful. It is a success story when 
they grow outside of the size standard. I think that is one of 
the key things that we could focus on in fiscal year 2012.
    Mr. Schilling. Very good.
    When we talk to the small businesses one of the things that 
they have, of course, is a problem with capital. What is the 
Department of Defense doing for the small guy visibility to--
you know, the lower-tier folks--to help them get out there in 
front and highlight their business since they don't have the 
money to do the marketing? What might be needed? I guess either 
one of you might be able to answer that one.
    Secretary Lambert. Go ahead.
    Mr. Gudger. We kind of initiated about three or four things 
that we are doing.
    One is there is a memo that went out from the Under 
Secretary encouraging the contract and acquisition workforce to 
host outreach events in fiscal year 2012. Continue them on. We 
started them in fiscal year 2011, and they were successful, so 
to continue it on. Because that is a way of meeting businesses 
that we traditionally don't have or we don't have a supplier. 
That is a way to get to new vendors and increase our industrial 
base, which is key.
    Some of the other things that we are doing to assist with 
that is to look at businesses that have been successful and 
making our mentor program available to the successful 
businesses where they can work with either new entrants or 
current businesses who are doing business with the Department 
of Defense and want to do more business with the Department. We 
see that as a successful way of doing a cross-transfer of 
capability and skills. So we are encouraging them to team 
together so that they can offer a unique capability in a way 
that they haven't done before. So that is a huge encouragement, 
and we are seeing that starting to happen.
    In fact, one of the smaller Department of Army contracts, 
we kind of combined the two, and then those two companies came 
together, and they ended up winning a much larger effort 
because of that encouragement of why don't you guys look at 
putting your capabilities together and do something unique for 
the Department, offer us a great capability at a reduced cost. 
So we are happy to see that kind of thing happening.
    Mr. Schilling. Very good.
    And then, Mr. Lambert, so we kind of get the competition 
part of this out of the way, but how many do I have in the 17th 
District?
    Secretary Lambert. Oh, let me see. I think you had nine.
    Mr. Schilling. Oh, we are going to have to get to work.
    Secretary Lambert. Yeah. I will get your list here.
    Mr. Schilling. Okay. But the DOD--how do they determine 
when there are strategic gaps and shortfalls in the defense 
industrial base?
    Secretary Lambert. Well, that is an issue; and historically 
it has been when something has gone wrong. And that typically 
occurs whenever there is a break in production and 
subcomponents, the capability to manufacture atrophies, or the 
people go out of business. So it is not just the plant, but it 
is the physical--it is the design teams and the other elements 
that are so vital to our industrial base.
    And, in the past, if a program office doesn't manage, and 
there are varying degrees of success at that level, then we end 
up--it costing more, sometimes delaying entire programs that 
can then result in the spiral of death that everyone is 
familiar with.
    What we are trying to change with the S2T2 database is to 
create this repository where we can go in early and we can 
uphold those threads. So if you had an Army program, as the 
case was in the solid rockets, that was maybe changing their 
behavior in accordance with the direction given to them by the 
program manager and the service itself but it was going to have 
a cascading effect across the other services or the other 
departments, then we need, as OSD, to come in and try to align 
that, and that has the benefit of creating stable production.
    I mean, one of the issues I think that Congressman West 
raised earlier, I am not sure if we are as bad at planning for 
our industry as some would allude to. I think we give fairly 
good visibility compared to other industrial sectors as to 
where we are going. Where we fall down is in the execution, the 
starts and the stops, the nontransparency and the ``EKG 
charts'' of production numbers.
    If we can give industry transparency through communications 
and make that our desires and our plans and back it up with 
execution clear to industry and to the financial community, we 
find that the markets tend to work and companies tend to get 
the investments they need. It is when we don't do that that we 
see these instabilities, particularly at the second- and third-
tier levels.
    Mr. Schilling. Thank you, gentlemen.
    Mr. Shuster. Thank you.
    We are going to go for a second round of questions and 
start with Mr. Larsen.
    Mr. Larsen. Thank you.
    First, I want to make a point--a broader point about the 
panel, at least in my view, because it wasn't clear in my 
opening statement. As we get into a budget-constrained 
environment it is extremely important that these small and 
medium-sized businesses still have an opportunity to 
participate in contracting. Because they are still going to be 
there and be able to provide innovation, services, products to 
the warfighter through the Pentagon. So it is extremely 
important that we, at least in my view, we stay focused on 
that.
    The second point I want to make is about IP [intellectual 
property]. We heard views from folks in my district where they 
actually developed proprietary information as part of a 
contract for one of the services, but in order to compete for 
that they had to hand that over to the service in order for the 
service to write the requirements so they can go out and 
compete in a broader community, thereby legally transferring 
this protected intellectual property to the rest of the market. 
So there is nothing nefarious about it except that the rules 
work against the company who developed the intellectual 
property, and that ends up, obviously, being to the detriment 
of the company itself.
    So those two points and then there is a question.
    Mr. Gudger, on SBIR and the tech transfer, can you answer 
the ``so what'' question? That is, what impacts are there when 
we do a 30- or 60- or 90-day reauthorization to SBIR and tech 
transfer versus a 1-year, a 2-year, a 3-year authorization?
    Mr. Gudger. Long-term authorization is always better for 
small business because it allows them to make the investment 
and feel more comfortable making the investment. Small 
companies have a much more difficult time with the start, stop 
and go, and then the uncertainty. So they are very reluctant to 
making the investment in developing technologies or--because 
the program may not be around to continue to fund them.
    And then the second thing that bothers or hampers small 
business in a way that is much different than a larger base is 
the lack of direction when that happens. When programs are 
short-term reauthorized, small businesses are not quite sure if 
this is a sign that a program is going to go away, whether the 
technology will be of interest to the Department, if it is 
reauthorized longer term will the Department go in a different 
direction. These things hamper them from making the investment 
that we would like to see them make to create the capability we 
want. And many small businesses say, if the government doesn't 
believe long term in the program or the product, then it is 
very difficult for me to. And so that is a challenge.
    Mr. Larsen. All right.
    I have something for Mr. Lambert here. But just one new 
area for the Department, relatively new area, is the emphasis 
on renewable energy and the role renewable energy can play in 
our national security. And I know hearing from folks, again 
where I come from, it is a great direction to go. There maybe 
is not as much transparency because it is sort of still feeling 
out how our small businesses can help out the Department in 
that effort. So I will just keep that in mind--if you can just 
keep that in mind.
    Mr. Lambert, I understand that you have an example of a 
small business innovation that you have brought. Can you talk 
about that and perhaps play a little show and tell?
    Secretary Lambert. Sure. There are a couple. Actually, I 
came over yesterday to see them. They are not as small as they 
used to be. But the Department invested through our Title III 
authorities a company down in North Carolina.
    Mr. Larsen. The Defense Production Act.
    Secretary Lambert. The Defense Production Act, correct. We 
were actually looking for silicon carbide for some weapon 
systems, but it had the tertiary benefit of enabling commercial 
technology. And, in fact, the LED [light-emitting diode] lights 
in the Rayburn cafeteria are derived from this--were purchased 
from this company who are now producing them for commercial 
purposes. You can buy them at Home Depot.
    But that was an example of where we need innovative 
technology that--because it was everyone's problem; therefore, 
it was nobody's problem. But once you could get the Department 
engaged and with our buying power--we did Wedge 5 at the 
Pentagon with these lights, and now you are using them in the 
cafeteria, and they are quite nice, as I found out.
    Now, the other company is a small firm. I will leave these 
with you. I don't think I can take them out again.
    Mr. Larsen. I am surprised you got them in.
    Secretary Lambert. It wasn't easy, apparently, just so you 
know.
    This is a polymer. The net effect of this, this has a lot 
of commercial medical applications, but nobody was investing in 
it. A small company down in Mississippi did this polymer insert 
into a .50 caliber round.
    The practical effect of this--and think about it--if you 
are a marine humping these things at 10,000 feet, they are 30 
percent less weight, they have actually increased accuracy. We 
have injected, molded, and made them drop inso that they are 
now--if you think about the cascading effects that that small 
base has--we can load more of them on a pallet. It requires 
less fuel to transport them. Therefore, there are fewer 
convoys. Therefore, there are fewer casualties. All of this 
because of a simple--relatively simple, the company would say--
idea that the Department of Defense funded through our Title 
III authorities.
    That now has implications. They are doing these injected 
moldings with the polymers. They are looking at medical 
applications.
    These are the kinds of things that if the Department--just 
like in our ManTech programs where we get a ten for one return 
on investment. When you talk about forward leaning and thinking 
about what we need to do next, not just as a Department but as 
a Nation in terms of manufacturing, these are the kinds of real 
applications that I think the Department can be proud to point 
to and say there is a guy somewhere over in Afghanistan that 
has lightened his load because of this polymer, and probably 10 
years from now there is somebody going to be on an operating 
table that is going to survive because of these polymers.
    Mr. Larsen. Thanks. I will have to defer to the chairman, 
Mr. Gudger.
    Mr. Shuster. Go ahead.
    Mr. Larsen. Oh, I am sorry. You brought in something.
    Mr. Shuster. I want to make sure that the polymer has a 
medical benefit, not that round?
    Secretary Lambert. Right. That is correct.
    Mr. Larsen. Opposite of the medical benefit.
    Secretary Lambert. Right.
    Mr. Gudger. Just to show you how well we coordinate 
together, I couldn't let Brett play show-and-tell without me so 
I brought the body armor that a small business made to stop 
that .50 caliber round. In fact, this was made by a company 
called MQ. Then it was made and an urgent requirement in the 
field in Afghanistan and Iraq for the need for body armor and 
to sustain multiple blasts from IEDs [Improvised Explosive 
Devices] and other munition. A small company made this, and 
they are a subcontractor. They don't do this as a prime--they 
provide the armor that fits into other polymers that are bent 
and made for other pieces of the body. But this is a great and 
phenomenal thing that small business is doing as an example of 
our SBIR success story.
    Mr. Larsen. Okay.
    Mr. Shuster. Is that ceramic?
    Mr. Gudger. No. It is made from bonding carbon and 
silicone.
    Mr. Shuster. Ms. Hanabusa.
    Ms. Hanabusa. Thank you, Mr. Chairman.
    So, Mr. Lambert, how many do I have in my district?
    Secretary Lambert. You have it looks like one.
    Ms. Hanabusa. Oh, I have one?
    Secretary Lambert. But that is the one we found. So if you 
can tell us more.
    Ms. Hanabusa. I have Hawaii. That is right. They keep 
reminding me that.
    Mr. Gudger, the question that I have asked at all of these 
meetings has been about SBIR and small business; and I notice 
that you interface with Small Business Administration. And I 
think you can see like on page 9 of your report. So what I am 
trying to understand is, because Mr. Larsen has told me very 
clearly about the jurisdictions between the SBA [Small Business 
Administration] and DOD, so I want to understand from your 
perspective what and how you work together. Because you are 
asking for reauthorizations and so forth, and, you know, that 
may not be our issue. So can you tell me first what your role 
is with relation to the SBA and, also, in terms of SBIR, 
whether when the grants are being reviewed what your role is in 
that process, if any, and was that body armor a phase two SBIR?
    Mr. Gudger. It went phase two and went on to phase three. 
It became a program that was----
    Ms. Hanabusa. Aren't you impressed that I would even know 
that?
    Mr. Gudger. Yeah.
    Ms. Hanabusa. Anyway, can you answer those questions, 
please?
    Mr. Gudger. Yes. Our role with SBA, SBA has a statutory 
requirement for overall small business, and they also are the 
administrator of the overall small business innovation research 
program.
    However, our program is standalone, and it is based on the 
reauthorization from Congress. And, typically, it takes both 
House and Senate to reauthorize a program from my seat. Now, 
when we do receive SBIR applications, we get thousands of them 
every year, tens of thousands of them every year, and we reward 
a few thousand every year, depending on the need. So, on 
average, 4,000 that we reward; and, on average, we receive 
about 14,000 applications. We are very instrumental in that 
process.
    The Office of Small Business program has a program manager 
that oversees the program for the Office of Secretary of 
Defense and works jointly with the Research and Engineering 
Directorate Assistant Secretary along with the service SBIR 
program managers to ensure successful administration of the 
program and that the urgent needs of the Department are 
fulfilled.
    Ms. Hanabusa. So when you say you award, your Department or 
your office awards, I think you are an office----
    Mr. Gudger. Yes.
    Ms. Hanabusa. Are you awarding SBIR grants?
    Mr. Gudger. Yes. We award phase one and phase two grants 
out of our office.
    Ms. Hanabusa. And what role does the SBA play if you are 
awarding the SBIR grants?
    Mr. Gudger. They play no role in our awards.
    Ms. Hanabusa. So SBIR, as I understand it, about 50 
something percent of their money is actually defense because it 
is a percentage of the budget, right? So do you get to control 
over the whole 50-something percent of the money that SBIR has?
    Mr. Gudger. No. The SBIR program is a percentage of the 
total DOD budget. And it is a small percentage, about a percent 
and a half now, I believe, which represents just about $1.5 
billion. And our office oversees the broad agency announcements 
that go out five times a year, and we collect information, and 
we arrange with our other component agencies on selecting 
successful awardees that meet the requirements outlined in the 
broad agency announcement.
    Ms. Hanabusa. So you actually award all of the SBIR. 
Because my understand is SBIR's total funding is from basically 
all contracts, all budgets. But you do control the SBIR 
component that is funded through the DOD budget--percentage of 
the DOD budget?
    Mr. Gudger. Yes. I am responsible for the industrial base, 
and we work very closely with the services in successfully 
awarding these.
    Ms. Hanabusa. So the Mentor-Protege' program which we heard 
about, what is the funding source for that?
    Mr. Gudger. That is also a congressional reauthorization. 
And it is a relatively small amount compared to other programs 
in defense where it is between $20 million and $25 million 
annually. But it is a significant job creator in the 
Department. It is phenomenal for a small business to also gain 
capability in developing infrastructure for their company so 
they can move on to be successful suppliers to the Department.
    Ms. Hanabusa. But isn't the assumption that somehow they 
are going to move forward with the mentor, which is usually a 
larger defense contractor, so they kind of get gobbled up in a 
way?
    Mr. Gudger. You know, the consolidation of the industrial 
base is a challenge everywhere. That is very true. But we look 
at that as a success story. We don't penalize them for growth. 
In fact, if they gain a capability in the Department, as long 
as they continue to stay in front of it, I think there is no 
reason why we wouldn't continue to work with them in some 
fashion.
    Ms. Hanabusa. Thank you.
    Thank you, Mr. Chair.
    Mr. Shuster. Thank you.
    Mr. Gudger, you don't do phase three, correct?
    Mr. Gudger. Correct.
    Mr. Shuster. That has to be supported by the acquisition by 
one of the services, is that correct?
    Mr. Gudger. Well, phase three are not just solely the 
services. It could be the component agencies as well. But phase 
three becomes a much larger program. We look to help them 
develop in phase one feasibility.
    Mr. Shuster. And do you drop off then after phase two? You 
have no say in the matter in phase three because--and I am sure 
there are some things if you talk about--I don't know how the 
UAVs [Unmanned Aerial Vehicles]--I know the UAVs were 
earmarked. If they had gone through the SBIR process I am 
pretty sure the Air Force would have said, no, we are not going 
to do it; there are no pilots on that thing.
    So are you involved in phase three at all? Do they consult 
with you? Do you have the ability to say, this is pretty good 
stuff; we have got to figure out some way how to move this. Or 
are you done after phase two?
    Mr. Gudger. That is somewhat of a complicated answer, 
because it depends on the technology and the need of the 
Department. But we certainly kind of go through the entire 
portfolio of OSD and look at successful phase two and match 
them up with program managers who may want to buy that 
technology or services who may have that need. They pick up and 
award the contract directly to them. But we make information 
available to them through our database, and we continue to 
track them and track the success in future years, yes, we do.
    Mr. Shuster. Because there may be products that cost up 
front is big and you get one of the services to say no. But if 
you guys are looking at it and saying, look, but over the next 
20 years we could save millions or billions of dollars, it 
would make some sense to keep pushing that.
    So, with that, Ms. Sutton.
    Ms. Sutton. No more questions.
    Mr. Shuster. Okay.
    And the final questions I have, we get a sense out there 
when we are talking in our field hearings with these smaller 
businesses, and even I think with the big, the tier one primes, 
there is a sense of hostility between DOD and contractors. And 
some of it comes about because the media picks up on a $500 
hammer or a couple-thousand-dollar toilet seat, which I think 
those are both space shuttle problems. But, you know, still, 
the media pounds on it.
    And, as I recall, the space shuttle toilet seat, if you go 
back there, is they only made like five of them, and they were 
out of a very specific--so it cost a lot of money to make them. 
You couldn't just go down to the Home Depot and get one.
    So the media does some of that. But I think the Department 
of Defense has some culpability in creating this tension when 
we have got to figure out a way to get more together, whether 
we are talking about the communications that we talked a little 
bit about here earlier, the audits and the communications, you 
know, not being able to talk. As you mentioned, the closer you 
get to the contract you got to stop talking to your customer, 
which is crazy.
    Can you solve this hostility problem? I think it is a huge 
hurdle that we have to overcome. I don't know if we can 
legislate to stop it, if we have got to break the culture 
somewhere at DOD to stop it.
    Secretary Lambert. It is very much a culture, and I was 
surprised, frankly, when I came in. I think what we have tried 
to do over the last few years is, within the leadership, 
explain very clearly that, despite spending about a billion and 
a half dollars a day, we don't make anything, and without our 
industry partners we can't field an army.
    And Dr. Carter started by having an open door policy, 
Secretary Lynn did, and Secretary Gates. I conducted over, as I 
said, 300 meetings either individually or with groups and 
associations like NDIA [National Defense Industrial 
Association] for the second and third tiers, AIA [Aerospace 
Industries Association] for the larger ones, and then with 
individual companies.
    It really is trying to get that message out there that we 
need to better communicate, to be more transparent. And we send 
memos out to that effect, but the practical--pushing that down 
is a real challenge within the Department and one that I have 
to give a lot of credit to both Dr. Carter and Frank Kendall.
    It doesn't get any press. But they spend as much time going 
internally to the buying commands preaching that message of 
cooperation and working with industry to get best value for the 
taxpayer and warfighter than they do going to the companies 
themselves. I have seen a tremendous change in just the last 18 
months as you work down that process. But it is very much an 
internal process we are working through.
    Mr. Shuster. Mr. Gudger, do you have any?
    Mr. Gudger. Oh, absolutely. Being a former business owner I 
walked in with a certain bias to the Department and 
understanding the challenges that we faced. I thought I would 
do something that would help alleviate that challenge for small 
business. I understood that how you engage a culture and 
modernize a culture without baking small business industrial 
base into the process early. So we are making tremendous 
strides there.
    In fact, I look at doing that through training. So our 
office created a small business training course that program 
managers must take now in order to receive their program 
management certification so they understand the small business 
base, they understand how to look for innovative technologies, 
they look at bringing them in the process during certain 
milestone reviews.
    We created a tool called MaxPrac, which is the other part. 
It is the cornerstone to alleviating small business issues that 
say, hey, I just want a fair chance. So MaxPrac is the maximum 
practical opportunity tool that we developed and we share with 
other agencies throughout the government. I think we shared it 
with about 17 other agencies where it is a market-research-
driven tool where we can find opportunities where we are 
currently engaged in a small company.
    Let's say it is in the Army, for example, and the Navy is 
not engaged in that company and may be paying more for that 
resource or it is going to a large company. We now have a tool 
where we can identify and compare to other services or agencies 
in a Department or against other agencies in the government so 
that, one, we can buy better and reduce costs and, two, promote 
competition or promote the ability for opportunities to be 
competed in the future amongst small businesses. We are taking 
an analytical approach to this.
    And then on the other side--that is the prime contracting 
side. On the subcontracting side, looking at long-term, we have 
looked at in the acquisition process influencing what we call 
weighted factors, which is, all things being equal in a plan 
acquisition, that the prime contractor for that, whether large 
or small, if they have met small business criteria that they 
outlined in previous contracts, all things being equal, small 
business has consideration for who will get that award in the 
source selection. Once you are awarded, then your fee--we 
affect a fee construct if you don't continue to meet those 
goals.
    So it is to provide an incentive, one, on providing market 
research from a prime contracting opportunity; and then, two, 
looking at it from a subcontracting opportunity over the long 
term ensuring that we give consideration of small business for 
subcontract opportunities where primes have done well; and 
then, if they don't do well, we can have some accountability 
through fee construct.
    Mr. Shuster. And MaxPrac, how is that initiated? Who 
initiates that?
    Mr. Gudger. It is administered by our office. All of our 
small business directors and specialists throughout the 
Department of Defense have a copy. We have trained all of our 
head of contracts, and we are working downstream to all of our 
contracting officers. We have 27,000 in our acquisition 
workforce. And we started this initiative--this analytical 
approach this year, probably in May of this year, where I 
launched it at our annual conference in New Orleans. And it is 
starting to help us produce significant, strides in 
accomplishing our goals.
    Mr. Shuster. So your contracting officers initiate that? 
That is not--a private-sector company doesn't come in and say, 
hey, I can provide the same product to the different service?
    Mr. Gudger. It is a two-pronged approach. We meet with 
businesses all the time where we can buy better. And then when 
it is time to conduct market research, which is part of our 
acquisition process, that is when we use the tools. So, one, we 
can get it from industry in outreach events; and, two, we have 
a tool that helps us look at a mountain of data and make sense 
out of it pretty quickly.
    Mr. Shuster. Mr. Lambert, you also said that you are 
rewarding companies for better quality. That is contrary to 
everything I hear. It is--you know, my goodness, it is heresy 
by giving somebody a bonus for doing a great job in the 
government.
    Secretary Lambert. Well, again, it goes to trying to place 
incentives in a direction that truly incentivizes instead of 
punishing. And it is true that in the world that we are coming 
from I think quite often it was--the question was how to reduce 
profitability, not how to increase it as a motivating tool. I 
think Dr. Carter and Mr. Kendall have been clear upon that.
    To your point, Congressman, it is not so much the 
profitability of the primes. The worse thing that would happen 
is, if we hurt the profitability at the prime level, that 
surely is going to cascade down to the subs, just as it did in 
the auto industry, and that is the last thing we want to be 
encouraging. So it is a very short-term solution to a long-term 
problem, and we just can't allow program offices and 
departments to run programs and operations that way. We won't 
have a base if we do that approach.
    Mr. Shuster. And my final question is, how many companies 
in my district on your list?
    Mr. Gudger. In your district--your district is strange.
    Mr. Shuster. I have been told that before.
    Secretary Lambert. Because you have a lot of different 
things. But there is one that was on the survey. But I know of 
several others that are close by that have a lot of people that 
live in the district.
    Mr. Shuster. Well, you know, they say that a Member of 
Congress is a reflection of his district, so I have been said I 
have been strange before, too.
    Secretary Lambert. Well, it is an important one, if that is 
helpful.
    Mr. Shuster. Thank you. I really appreciate you being here 
today.
    You know, you have said a lot of positive things, and I 
don't doubt that you are making strides. And, Mr. Gudger, you 
have been there for several months. But what we are hearing out 
there when we go out in the business community is a different 
story. So, hopefully, with your efforts and what we are trying 
to do here we can push that out.
    Because I think the defense industrial base is so critical. 
I don't believe that it is a traditional market system like we 
have in other things, and we have got to make sure we are 
making the right strategic decisions so that, down the road, 
the next enemy, the next war we fight, we have all the right 
stuff on the shelf to be able to provide for our warfighters.
    So, again, I really appreciate you coming in today; and we 
look forward to continue talking with you as we move down the 
road.
    And you are going to provide us with, as Mr. Larsen 
requested, your roundtable feedback so we can see if it matches 
up. So we would appreciate that greatly.
    [The information referred to can be found in the Appendix 
on page 79.]
    So, again, thank you all very much for being here. Thank 
the members for being here and the audience for being here.
    The hearing is adjourned.
    [Whereupon, at 4:40 p.m., the panel was adjourned.]



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




                            A P P E N D I X

                            November 1, 2011

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


              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                            November 1, 2011

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

      
                     Statement of Hon. Bill Shuster

    Chairman, House Panel on Business Challenges within the Defense 
                                Industry

                               Hearing on

                      The Defense Industrial Base:
                 The Role of the Department of Defense

                            November 1, 2011

    The House Armed Services Committee Panel on Business 
Challenges in the Defense Industry meets today to continue our 
dialogue regarding the health and future of our Nation's 
Defense Industrial Base by receiving testimony from witnesses 
from the Department of Defense. While the Weapons Systems 
Acquisition Reform Act did much to increase transparency and 
foster competition, there is still a great deal of room for 
improvement in the Department of Defense's business practices.
    Last Monday, the panel heard from policy experts and from 
various think tanks that have studied the structure, 
effectiveness, and efficiency of the Defense Industrial Base. 
Our witnesses last week pointed out our Nation lacks a coherent 
and complete strategy for our Nation's defense. Without such a 
strategy, the Defense Industrial Base is left without the 
guidance and transparency necessary to ensure viability and 
efficiency.
    This panel is facing some complex issues and nothing 
illuminates this more that this RAND Report on Military 
Research and Development Policy. I think it does a very good 
job at laying out the complexity of the issues as it offers 
some findings and recommendations on policy for providing the 
military with new weapons and capabilities. The only problem is 
that it was written in 1958 and not much has changed.
    As a panel, we traveled to Akron, Ohio, on Friday where we 
met with small and mid-size businesses working on highly 
technical solutions to deliver capabilities to our warfighter. 
We met with companies making advanced coatings to prevent 
corrosion, composite armor, advanced aerodynamic control 
systems, and technologies to enable remote detection and 
identification of pathogens.
    Just like in 1958, our defense industry today is having a 
hard time getting clear requirements from the DOD, bridging the 
gap between development and fielding, and surviving overly 
burdensome, unresponsive program management policies and 
regulations. Navigating these issues is difficult for large 
defense contractors and near impossible for small businesses.
    Today's hearing gives us an opportunity to hear about these 
critical issues from witnesses from the Department of Defense.
    I'd like to introduce:

         LDeputy Assistant Secretary of Defense for 
        Manufacturing and Industrial Base Policy, Mr. Brett 
        Lambert, and

         LMr. Andre J. Gudger, Director of the Office 
        of Small Business Programs in the Office of the Under 
        Secretary of Defense for Acquisition, Technology & 
        Logistics.

    Welcome gentlemen, I look forward to a frank and 
informative discussion.
    Before we receive testimony, I would also like to take a 
minute to thank Congresswoman Betty Sutton and her dedicated 
staff for hosting the panel in Akron. It was an extremely 
informative visit. In addition to the roundtable with industry, 
we also had a remarkable discussion on the impact of corrosion 
on DOD's equipment and facilities and got a briefing on the 
University of Akron's unique program in corrosion research and 
engineering.
    On the trip, I learned that DOD spends nearly $23 billion 
per year dealing with corrosion. That's $23 billion out of our 
defense budget that we're not spending on our troops and it's 
something that I think all the members of this panel, and the 
Armed Services Committee, need to be aware of.
    Betty, thank you for bringing this important issue to our 
attention.
    Our next field roundtable will be happening on Friday, 
December 9th to Congressman Runyan's district--the 3rd district 
of New Jersey. These sessions are invaluable to this panel's 
work and I hope all of our panel members can join us on the 
trip.

                     Statement of Hon. Rick Larsen

 Ranking Member, House Panel on Business Challenges within the Defense 
                                Industry

                               Hearing on

                      The Defense Industrial Base:
                 The Role of the Department of Defense

                            November 1, 2011

    Mr. Chairman, I'm pleased to be joining you and the other 
panel members here today.
    As we have discussed, this Panel aims to discover the 
challenges facing the current government-defense industry 
partnership and the capabilities they produce.
    Small businesses are essential to a robust and agile 
industrial base as well as for a strong economy. The U.S. 
defense base has a long history of producing the best military 
systems in the world. We must ensure that this continues--both 
for our warfighter and because it creates jobs here in America.
    Key aspects of a strong defense-industrial base include 
assuredness of supply, American jobs, and ensuring the best 
technology for the warfighter. The mission of the Manufacturing 
and Industrial Base Policy is to monitor, preserve, and enhance 
the national security industrial base of the United States. 
(Note: Mr. Lambert, one of the witnesses, heads this office.) 
As we know small businesses play a critical role in the 
strength of our economy by creating technologies for our 
warfighter. We need to ensure they are given every opportunity 
to compete on a level playing field with large business.
    Over the last few months, we have heard that small 
businesses face challenges regarding security clearances, lead 
times from DOD contract solicitation to submission due dates, 
ITAR, defense auditing and other regulatory and procedural 
issues.
    I am pleased with what we've learned so far from our first 
Panel hearing that looked at challenges our small and medium-
sized businesses are having creating and maintaining 
opportunities with the Department of Defense. Testimony from 
the hearing was echoed during our district visits and 
roundtable discussions. In addition, comments from local 
leaders have been extremely helpful.
    So far, this panel has met with business readers in my 
congressional district in August. We visited Rock Island 
Arsenal in early October in Mr. Schilling's district. And last 
week I and other panel members met with industry leaders in and 
around Ms. Sutton's district in Akron, Ohio.
    Connecting today's hearing with our hearing on October 24th 
where we discussed the role and future of the defense 
industrial base with witnesses from think tanks, we will hear 
what DOD is doing to improve the defense business environment 
with a particular focus on small business. I look forward to 
hearing today's testimony and thank you all for being here.
    Thank you again, Mr. Chairman.



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


                   DOCUMENTS SUBMITTED FOR THE RECORD

                            November 1, 2011

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





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


              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                            November 1, 2011

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

      
             RESPONSE TO QUESTION SUBMITTED BY MR. SHUSTER

    Mr. Lambert. Please see the document ``DOD Best Practices and FY12 
Strategy'' on page 67. [See page 33.]
                                 ______
                                 
              RESPONSE TO QUESTION SUBMITTED BY MR. LARSEN
    Mr. Gudger. Issues and Concerns Identified at the Roundtable:

    Insourcing

        b   A challenge to small business in this climate is 
        insourcing. Government needs to identify those functions that 
        are, in fact, ``inherently governmental'' in nature.
        b   The fear is that decisions are made in an arbitrary nature 
        without regard for facts. Would like to see a mechanism for 
        small business to address the loss of personnel to insourcing. 
        Initiative--The pendulum is already swinging the other way.
        b   Government initially used insourcing to build workforce--
        specifically its acquisition workforce. Many agencies took at 
        face value.

    SBA and DOD Relationship

        b   The relationship between SBA and DOD is not fully 
        communicated or understood by the small business community.

    Congress and White House Action

        b   A serious concern about the deadlock between parties in 
        Congress.
        b   It affects small businesses, especially from investors when 
        the economy is seen as in an unstable time.
        b   Across the country small businesses are advocating for 
        bipartisan collaboration and action.

    Clean Energy

        b   More information about clean energy initiatives and avenues 
        for eco-friendly businesses to expand in the industry.
        b   If there are resources available for clean energy, how are 
        they best offered?

    Government Contract Bidding

        b   A general gap in knowledge about and how to bid on 
        government contracts as a small business.
        b   Contracting world seems to be fixated on price and fail to 
        include other important factors such as quality.
        b   More information requested about government contracting 
        opportunities.

    Mentor/Protege and SBIR Programs

        b   More information and awareness building about the benefits 
        of the Mentor/Protege program.
        b   Need long term re-authorization of Mentor/Protege and SBIR 
        programs
        b   Large businesses are often hesitant toward the program 
        because they do not have enough of an interest in the MPJV.
        b   There should SBA programs should be more streamlined and 
        more awareness needs to be promoted.
        b   Foreign companies that are prime contractors in the USA 
        need to be educated/informed on the Mentor/Protege program.

    American Jobs Act

        b   The American Jobs Act and the related legislation directly 
        affect many small businesses.
        b   There is a widespread gap in knowledge about the bill and 
        further action the Obama Administration has taken since the Act 
        failed in Congress.

    Youth Entrepreneurship Initiatives

        b   Small businesses are concerned about the youth of America.
        b   Roundtable participants who want to hire remark that 
        graduates or young workers are looking for jobs, rather than 
        pursuing entrepreneurship paths that would ultimately lead to 
        greater innovation for the whole country.
        b   There is similarly a lack of skilled manual labor.
        b   There is a need for the promotion of trade school as a 
        viable career opportunity compared to the standard general 
        four-year education.
        b   A major concern is how the Administration plans on dealing 
        with this issue of youth motivation and education reform.

    Payment withholding

        b   Simply because prime contractors have not received payment 
        themselves, hurting the subcontractors.

    Red Tape

        b   Too much red tape, it is really hard to deal with the DOD 
        and is an extremely lengthy decision process.
        b   Paper work requirements present significant burden to small 
        businesses (example: program requirements and Veteran 
        certification).
        b   It takes too long to award projects.
        b   Certifications are critical, but the process is grueling 
        and too long, with too much paperwork. Any way to streamline 
        it?
        b   There is also a concern about the high barriers to entry 
        for small businesses such as capital, taxes, and funding.
        b   There is a call for the administration to help make a 
        better environment for risk taking, especially for startups.
        b   The microenterprise RS Code should be explained more. If 
        people knew on the front end exactly how much revenue they 
        would be taxed on and what credits and rebates they would be 
        eligible for it would offer more stability.

    Capital Limitations

        b   Banking regulations requiring collateralization with cash 
        instead of assets which makes things very difficult.
        b   Revision of bonding policies and coding is urgently needed.
        b   The government needs to provide support to protect IP 
        rights and capital formation.

    NAICS codes revisions.

        b   NAICS code thresholds are too low.
        b   By the time small businesses have established staffing 
        processes and infrastructure to properly manage/prime an 
        effort, they have outgrown small business size standard.

    Veteran Employment

        b   Veteran employment concerns.
        b   Incentives and training programs for both the veteran and 
        the company hiring veterans.

    Infrastructure and Transportation

        b   Transportation Infrastructure investment has been a concern 
        brought up in every roundtable across the country.

    Auditing Reform

        b   Too many audits on small businesses.
        b   They have sufficient inaccuracies and on top of the 
        inaccuracies the audits are causing many delays and impeding 
        progress.

    Long-Term Solutions rather than immediate fixes

        b   Need long-term solutions that encourage businesses to make 
        investments in people.
        b   Long-term tax breaks, broader approach to regulations for 
        tax breaks.
        b   A business will make investments if it knows it's getting 
        the return.

    Policy Suggestions

        b   Explain the Rapid Innovation Fund better, and how it works.
        b   Revisions are desperately needed for the acquisitions 
        process; it really needs to be streamlined.
        b   There should be local business representatives during 
        government contracting bids.
        b   There also needs to be very clear and concise requirements 
        and timelines for the bids.
        b   Recommend bringing in people with real-life experience to 
        teach small business skills more efficiently about contract 
        bidding.
        b   Small business training grants. The relationship between 
        the contractor and the mentor is failing. The HU incubator 
        wants to be the clearinghouse to help build the relationship 
        between small businesses and mentors.
        b   Use technology to update union programs so that DoL 
        training and apprenticeship programs perform better and do not 
        last too long.
        b   There is a need for federally backed loans for trade 
        schools. If there are already such loans, they should be on a 
        higher scale with lower rates.
        b   There is a lack of proper trade skill training in the 
        workforce that the act should invest in improving with the 
        ultimate goal of workforce development.
        b   We need to get the word out to promote institutions 
        (businesses and community colleges) to hire and train the 
        unemployed.
        b   Community colleges should partner with the Federal 
        government to provide for job training.
    [See page 11.]
                                 ______
                                 
              RESPONSE TO QUESTION SUBMITTED BY MS. SUTTON
    Mr. Gudger. The Office of Small Business Programs (OSBP) 
understands the importance of intellectual property issues faced by 
small businesses. OSBP continues to be proactive in understanding these 
concerns and in developing policy and programs that foster environments 
for small business to continue to innovate. Through industry 
roundtables, we have been able to get a real sense as to what some of 
the intellectual property issues that small businesses face. We are 
working closer with the U.S. Patent and Trademark Office (USPTO) and 
are analyzing our SBIR and Mentor/Protege programs to ensure that our 
policies and procedures are aligned with the direction of the USPTO. As 
a result of the USPTO now participates in our outreach events, 
including our 2011 Small Business Innovation and Research conference 
and our upcoming Mentor/Protege conference in March 2012. [See page 
22.]
?

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


              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                            November 1, 2011

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

      
                   QUESTIONS SUBMITTED BY MR. SHUSTER

    Mr. Shuster. It has been reported to the Committee that remarks, 
made by Department of Defense officials a few weeks ago at the 
Association of the United States Army conference, indicated there would 
be a requirement, prior to any future/further insourcing, that Senior 
Acquisition Executives certify that there would not be an adverse 
impact or harm to the industrial base. Can the Department verify if 
such a requirement exists, is being implemented, or is being considered 
and what the rationale/justification may be? If so, please explain how 
that reconciles with sections 129a and 2463 of title 10 and whether it 
was coordinated with the Office of the Under Secretary of Defense for 
Personnel and Readiness, who is responsible for insourcing oversight 
and policy in the Department?
    Mr. Lambert. While the Department greatly values the contributions 
made by private sector firms as a part of the Department's Total Force 
of military, civilians, and contract support, no such certification 
requirement exists. We recognize that the private sector and the 
industrial base are, and will continue to be, a vital source of 
expertise, innovation, and support to the Department.
    At the same time, the Department is committed to more appropriately 
balance its workforce and meet our statutory obligations to annually 
review contracted services, identifying those that are more appropriate 
for government performance and should be insourced. This includes 
services that are:

          inherently governmental or closely associated with 
        inherently governmental in nature;

          may otherwise be exempted from private sector 
        performance (to mitigate risk, ensure continuity of operations, 
        build internal capability, meet and maintain readiness 
        requirements, etc);

          require special consideration for government 
        performance under the provisions of 10 USC 2463; or

          can be more cost effectively delivered by the 
        government consistent with a cost analysis and in support of 
        section 129a.
    Mr. Shuster. 10 USC 2330a requires that the Department submit an 
inventory of contracts for services annually that is based on direct 
labor hours and associated costs collected from contractors. The 
Department consistently has resisted implementing this requirement as 
required by statute. While we appreciate the Department's ``Better 
Buying Power'' efforts to control costs by moving increasingly to firm 
fixed price contracts, absent a compliant inventory, this policy poses 
significant risks. Gauging reliance on contracted services by dollars 
alone is not an accurate measure of workload, as contractors can use 
the ``trade-space'' afforded in their pricing structures on firm fixed 
price contracts to do additional duties, particularly when there is a 
civilian workforce cap in place. What is the Department doing to 
implement the requirements of 2330a, and in particular to link that, as 
required by 10 USC 235, to the budget to preclude year of execution 
increases in contracting?
    Mr. Lambert. Without an accurate accounting of the direct labor 
hours expended on services, as required by law, how can the Department 
prevent work that was being done by civilians or military, since we 
have both a civilian cap and declining end-strengths, from being 
absorbed by contractors within that trade-space? Essentially, the 
dollars spent aren't increasing, but the level of service is since the 
Department has no true accounting of contractor equivalents executed 
compared to the budgeted levels.
    In order to take decisive and deliberate steps towards meeting the 
requirements of 10 USC 235 and 2330a, the Department submitted a 
consolidated plan on November 22, 2011 to the Congressional defense 
committees. The plan identifies both short- and long-term actions the 
Department will undertake to improve the inventory of contracts for 
services, so that we have an accurate accounting of the direct labor 
hours expended on services. As an enclosure to the plan, the Department 
provided a copy of the draft guidance that will be issued to the 
secretaries of the military departments and the directors of the 
defense agencies and field activities. That guidance will include the 
prescribed methodologies for collecting direct labor hours from 
contractors. The Department is continuing efforts to strengthen the 
relationship between the Inventory for Contract Services and the budget 
justification materials. The FY 2013 budget guidance to the DOD 
Components requires the budget estimates to be informed by the FY 2010 
Inventory for Contract Services. The FY 2013 budget guidance also 
requires that all components report funding for contracted services 
(utilizing object class information) and contractor full-time 
equivalents for all appropriations at the budget-line-item level of 
detail.
                                 ______
                                 
                   QUESTIONS SUBMITTED BY MR. LARSEN
    Mr. Larsen. Could you briefly describe the legal and procedural 
definitions of a small business as it relates to your responsibilities?
    Mr. Gudger. The Department of Defense relies on the size standards 
established by the Small Business Administration (SBA) for its 
definitions of small business. The SBA establishes size standards for 
all for-profit economic activities as they are described under the 
North American Industry Classification System (NAICS) Identifying 
Industry Codes. Size standards based on annual receipts are determined 
by the concern's three most recently completed fiscal years. Size 
standards based on number of employees are determined by the concern's 
12 most recently completed calendar months (not its calendar year). 
Some SBA programs, such as the Small Business Innovation Research, 
Small Business Investment Companies, and Surety Bond Guarantee, have 
unique size standards designed to accommodate their specialized needs. 
You may find a more comprehensive explanation of size standards by 
going to www.sba.gov and selecting ``Size Standards.''
    The Office of Small Business Programs' responsibilities are defined 
by the Small Business Act and are explained on our web page at 
www.acq.osd.mil/OSBP/. We strive to fulfill our mission statement 
through creating opportunities and maximizing the contributions of 
small businesses.
    Mr. Larsen. In your oral and written testimony you discussed 
several challenges small businesses face with securing work with the 
Department of Defense. You also mentioned various statutory and 
regulatory programs you oversee that assist small businesses with 
overcoming some of those challenges. During recent field hearings held 
by the Defense Business Panel, many of our medium-sized companies 
shared their experiences of similar challenges with capturing or 
maintaining work with the DOD. Are there any programs/procedures within 
the Department that track the challenges faced by our medium-size 
industrial partners? Are there any programs, procedures, or goals that 
assist those businesses that fall outside of your small business lane, 
but are not large contractors, with performing work for the Department?
    Mr. Gudger. The Office of Small Business Programs (OSBP) recognizes 
small businesses based on the Small Business Association's (SBA) size 
standards as set in the SBA's Small Business Size Regulations. The SBA 
defines business entities as ``small'' or ``other than small.'' The SBA 
does have programs like the Small Business Innovation Research, Small 
Business Investment Companies and Surety Bond Guarantee that have 
unique size standards to assist different businesses' needs. Programs 
such as Small Business Technology Transfer, the Rapid Innovation Fund, 
and programs in the Office of Manufacturing and Industrial Base Policy 
such as the ManTech and the Title III program also provide 
opportunities to medium size enterprises to perform work for the 
Department. Additionally, OSBP works closely with SBA to ensure that 
growing companies have a smooth transition to becoming medium or large 
companies. An example of this includes recommending to SBA that it 
grant waivers to companies that are graduating from the 8(a) program 
and could lose contracts under which they have exceptional past 
performance and should remain on the contract. DOD also encourages 
teaming and for medium size firms to participate as mentors in the 
Mentor/Protege program.
    Mr. Larsen. During your testimony, you briefly mentioned the Rapid 
Innovation Fund. Please explain the role of your office in implementing 
the Fund. Describe how the Department's implementation of the Fund 
meets the goals and intent established by Congress in both statutory 
and report language.
    Mr. Gudger. The Department implementation and the role of the 
Department of Defense Office of Small Business Programs and the Rapid 
Innovation Fund are outlined in USD AT&L Memorandum dated 12 August 
2011. The USD AT&L Memorandum can be found at: http://www.acq.osd.mil/
chieftechnologist/publications/docs/USA003854-11_Signed.pdf. (The 
memorandum can be found on page 70.)
    The Department goals are in accordance with section 1073 of the 
National Defense Authorization Act for FY2011 and the 2011 Defense 
Appropriation Act which reflect the emphasis on rapid, responsive 
acquisition and engagement of small innovative businesses in solving 
defense problems.
                                 ______
                                 
                   QUESTIONS SUBMITTED BY MR. WILSON
    Mr. Wilson. You may be aware of campaigns led by foreign NGOs to 
boycott U.S. companies involved in the manufacture pursuant to 
contracts with the U.S. Department of Defense of weapons systems that 
they don't think the United States should have. Specifically, landmines 
that are compliant with the Ottawa accords and cluster munitions that 
are compliant with the U.S. policy on unexploded ordnance.
    Do you believe these boycotts are exclusively driven by NGOs, or 
are some foreign governments also complicit in them? If so, which ones?
    Mr. Lambert. To the Department's knowledge, the campaign is driven 
by NGOs and not by foreign governments. That said, a handful of States 
party to the CCM (Belgium, Ireland, Luxembourg, and New Zealand) have 
chosen to criminalize investment in the production of cluster 
munitions. The Department is not aware of any foreign governments 
currently boycotting U.S. defense contractors for producing cluster 
munitions for the U.S. Government.
    Mr. Wilson. Are you concerned that these kinds of boycotts may 
dissuade some U.S. companies from continuing to supply these weapons to 
the Department of Defense?
    Mr. Lambert. While we have not seen specific evidence to indicate 
that U.S. firms have been dissuaded from supplying the Department of 
Defense, we remain concerned about the current and future impact of 
boycotts on the industrial base, particularly in regards to the 
pressure on banks and insurance companies to stop servicing DOD 
suppliers if they continue producing certain products.
    Mr. Wilson. What specific steps have you or other officials of the 
U.S. Government taken, if any, to resist these boycotts and support 
U.S. defense contractors that have been targeted by them?
    Mr. Lambert. If notified of such a boycott, it is my understanding 
that the Department of State would be willing to raise the issue with 
the appropriate foreign officials. With respect to particular steps 
taken in responses to action by specific foreign governments, I defer 
to the Secretary of State.
    Mr. Wilson. Have you, or to your knowledge, other officials of the 
U.S. Government expressed your concern about these boycotts to any 
foreign governments? If not, why not?
    Mr. Lambert. If notified of such a boycott, it is my understanding 
that the Department of State would be willing to raise the issue with 
the appropriate foreign officials. With respect to particular steps 
taken in responses to action by specific foreign governments, I defer 
to the Secretary of State.
    Mr. Wilson. Does your office track these boycotts and the potential 
impact on the United States industrial base, and if not, why not?
    Mr. Lambert. When we become aware of a boycott, we work to identify 
potential impacts to the U.S. industrial base.
    Mr. Wilson. Do you believe the United States Government in general, 
and the Department of Defense in particular, should continue to do 
business with foreign banks and other foreign businesses that are 
engaged in boycotts of U.S. defense contractors?
    Mr. Lambert. The influence of activists and foreign governments on 
the U.S. defense industrial base is a complex issue. Protecting the 
U.S. defense industrial base and national security interests will 
require the DOD to collaborate effectively with other Executive Branch 
agencies and Congress. Before taking action, such as ceasing business 
with a particularly entity, we must ensure we thoroughly understand 
potential risks and communicate those risks to our industrial base. We 
will work closely with the industry sector and foreign nations to 
preserve domestic industrial capabilities.
    Mr. Wilson. Does the Department of Defense have sufficient 
authorities to address foreign boycotts of the U.S. industrial base?
    Mr. Lambert. The influence of activists and foreign governments on 
the U.S. defense industrial base is a complex dynamic. Protecting the 
U.S. defense industrial base and national security interests will 
require DOD to collaborate effectively with other Executive Branch 
agencies and the Congress. We must do more to understand and 
communicate the risks to the industrial base and work closely with 
other nations to preserve domestic industrial capabilities.

                                  
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