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





                         [H.A.S.C. No. 112-93]

                CREATING A 21ST CENTURY DEFENSE INDUSTRY

                               __________

                                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 18, 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:

Friday, November 18, 2011, Creating a 21st Century Defense 
  Industry.......................................................     1

Appendix:

Friday, November 18, 2011........................................    33
                              ----------                              

                       Friday, November 18, 2011

                CREATING A 21ST CENTURY DEFENSE INDUSTRY
              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

Berteau, David J., Senior Vice President and Director of 
  International Security Program, Center for Strategic and 
  International Studies..........................................     5
Gansler, Hon. Jacques S., Professor and Roger C. Lipitz Chair, 
  and Director, Center for Public Policy and Private Enterprise, 
  University of Maryland.........................................     4

                                APPENDIX

Prepared Statements:

    Berteau, David J.............................................    55
    Gansler, Hon. Jacques S......................................    40
    Larsen, Hon. Rick............................................    39
    Shuster, Hon. Bill...........................................    37

Documents Submitted for the Record:

    Summary from Industry Roundtable at Akron, Ohio..............    69

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    [There were no Questions submitted post hearing.]
 
                CREATING A 21ST CENTURY DEFENSE INDUSTRY

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
  Panel on Business Challenges within the Defense Industry,
                         Washington, DC, Friday, November 18, 2011.
    The panel met, pursuant to call, at 9:04 a.m. in room 2118, 
Rayburn House Office Building, Hon. Bill Shuster (chairman of 
the panel) presiding.

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

    Mr. Shuster. The hearing will come to order. Good morning. 
The House Armed Services Committee Panel on Business Challenges 
in the Defense Industry meets today to continue our dialogue 
regarding the health and the future of the Nation's defense 
industrial base. Today we are hearing from two experts on the 
defense industrial base, and both these gentlemen have 
extensive expertise in the issues associated with maintaining 
an effective industrial base. Neither are strangers to the 
committee.
    I would like to welcome both of you back; the Honorable 
Jack Gansler, professor and Roger C. Lipitz Chair, and Director 
for the Center for Public Policy and Private Enterprise at the 
University of Maryland; and Mr. David Berteau, senior vice 
president and Director of the International Security Program at 
the Center for Strategic and International Studies.
    Mr. Gansler's recently released book Democracy's Arsenal: 
Creating a Twenty-First-Century Defense Industry, as well as 
Mr. Berteau's work at the Center for Strategic International 
Studies on the defense industries initiative lend great 
knowledge and insight into these extremely complex issues.
    In our hearings on the issue, we have heard from a variety 
of witnesses in the field and the Department of Defense about 
the current challenges and future projections regarding the 
United States defense industrial base. The conversation thus 
far has been very informative as each and every person we meet 
with brings a unique perspective about how to learn from our 
past failures and establish stability in the industrial base.
    Today we continue that dialogue by focusing on the future. 
In doing so we are asking some very basic questions regarding a 
complex subject matter. What can we do to adapt the current 
environment to meet the needs of the 21st-century security 
strategy? What can we learn from other nations who are 
implementing strategies that deal with this critical issue? 
What changes are necessary in our workforce and acquisition 
policies to meet that vision?
    This panel has the opportunity to highlight the challenges 
and successes of the defense industrial base as we examine 
challenges to doing business with the Department of Defense. 
Our defense industry today continues to have 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.
    I would like to take a moment to recommend that all members 
of the panel review a recent note--let me get this right so I 
don't quote the wrong year--to review a recent RAND report, and 
that is not the one from 1958 that I so happily report to 
people. I said to the staff the other day, did they just change 
the date on it? But I think there are some new and insightful 
findings. Each of the Members has a hard copy of the report in 
their packet of hearing materials.
    This report reviews Federal policy regarding small 
businesses and implications for future DOD policies and 
practices. Not only does it provide a primer on basic historic 
background on Federal small business policy, but it also 
examines trends in DOD contracting practices and small business 
utilization. I think it will be a useful resource for the panel 
as we continue our work in this area.
    As I mentioned in our last hearing on November 1st, the 
panel traveled to Congressman Betty Sutton's district in Akron, 
Ohio, in October. We met with small and medium-size businesses 
working on highly technical solutions to deliver capabilities 
to our warfighters, and also met with members of the University 
of Akron faculty and leadership to discuss their efforts to 
advance technology to meet DOD needs. The committee staff has 
prepared a summary memorandum of their discussion with the 
industry and has been provided to all the panel members. 
Without objection, I would like this to be entered into the 
record. Hearing no objection, so ordered.
    [The information referred to can be found in the Appendix 
on page 69.]
    Mr. Shuster. As I pointed out last time, our next field 
hearing roundtable will be happening on December 9th in 
Congressman Jon Runyan's district, the Third District of New 
Jersey. These sessions are invaluable to the panel's work, and 
I hope all our panel members can join us on this trip.
    At this time I yield to the ranking member Mr. Larsen for 
any remarks.
    [The prepared statement of Mr. Shuster can be found in the 
Appendix on page 37.]

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

    Mr. Larsen. Mr. Chairman, thanks for filibustering until I 
can get here.
    Mr. Shuster. Traffic?
    Mr. Larsen. No. Spanish and science.
    Mr. Shuster. Exams?
    Mr. Larsen. Middle school Spanish and science. It has been 
a while. I had to do a little review this morning with my 12-
year-old.
    But I want to thank you for putting this panel on today, 
and pleased to be joining the panel members here today.
    This panel is charged with looking at the ways DOD can 
improve its business practices not only for the benefit of the 
DOD budget, but for the benefit of local companies who want to 
provide services and goods to the warfighter. Over the past 
month, through hearings and district visits, we have gained 
some pretty valuable insight from the industry, and about the 
industry and about the Department on the challenges our 
industrial partners face doing business with the Department.
    In due time I am confident this panel will offer some 
recommendations to the full committee that will improve on some 
of these challenges; however, an important part of this task is 
understanding how the defense industrial base itself operates, 
and I hope the witnesses today can offer this panel a brief 
history of the events and factors that have shaped the current 
industrial base and what we should do in the future.
    I believe we are all aware of the key role our industrial 
complexes played with providing capabilities throughout the 
years in support of our national security. The industrial base 
has risen to each challenge from World War II through 
responding to the events of September 11, 2001. I would 
appreciate hearing from you on how our industrial partners must 
evolve, however, to meet the current economic constraints and 
the 21st-century threats that we face, to include global 
competition.
    Earlier this month the panel heard from Mr. Brett Lambert, 
the Deputy Assistant Secretary of Defense for Manufacturing and 
Industrial Base Policy. He made the point that references to 
``the'' defense industrial base implies a monolithic entity, a 
reference that is inaccurate. The defense industrial base 
includes companies of all shapes, all sizes, resourced all 
around the world. I am pleased to hear that DOD is currently 
attempting to map and assess the industrial base sector-by-
sector and tier-by-tier with hopes that we have a much better 
understanding than we have today of it. This will provide us 
and the Department a much better picture of what currently 
exists today, and perhaps provide some clarity on how to move 
forward.
    The 2008 Defense Science Board's Task Force and Defense 
Industrial Structure for Transmission, chaired by Dr. Gansler, 
noted that ``the nation currently has a consolidated 20th 
century defense industry, not the required and transformed 21st 
century National Security Industrial Base it needs for the 
future.'' So I look forward to hearing how we might get there. 
I look forward to hearing from Dr. Gansler and Dr. Berteau 
today on what steps we must take to establish a 21st-century 
national security industrial base.
    And with that, thank you, Mr. Chairman, for an opportunity 
to provide opening comments.
    [The prepared statement of Mr. Larsen can be found in the 
Appendix on page 39.]
    Mr. Shuster. Thank you, Mr. Larsen.
    And with that we will proceed with Mr. Gansler if you want 
to start.

 STATEMENT OF HON. JACQUES S. GANSLER, PROFESSOR AND ROGER C. 
   LIPITZ CHAIR, AND DIRECTOR, CENTER FOR PUBLIC POLICY AND 
           PRIVATE ENTERPRISE, UNIVERSITY OF MARYLAND

    Dr. Gansler. Thank you, Mr. Chairman and members of the 
subcommittee.
    It seems to me it is very clear that there is a major clash 
coming in the next few years between the security concerns 
facing the United States and the shrinking resources available 
to address them. As Admiral Mullen, then-Chairman of the Joint 
Chiefs, stated in August of last year, ``The single biggest 
threat to our national security is our debt.''
    The only realistic answer to this security affordability 
problem will be to increase efficiency and effectiveness of our 
defense investments, both in equipment and in manpower. 
Unfortunately, the recent trends are adverse to this need: 
Rising equipment costs, rising logistics costs, rising 
personnel costs.
    It is also important to note that trends in the cost of 
weapons are opposite to the trends in the commercial world, 
where, for example, each generation of computer routinely 
provides more performance at lower cost, and suppliers 
traditionally introduce next-generation systems on an 18-month 
cycle, a far cry from our 15- to 20-year DOD development cycle. 
Now, these adverse costs and cycle time trends are matched by a 
growing concern about the U.S. losing its competitiveness and 
its innovation leadership due to the decline in its science and 
engineering workforce and, as the budget declines, the very 
likely reduction, which I am very concerned about, in research 
investments as the dollars shift to near-term needs. Obviously, 
the resulting loss of innovation from these adverse manpower 
and research trends, will be felt in decreasing future U.S. 
international economic competitiveness and in the loss of 
national security technological leadership, both of which, I 
think, are catastrophic.
    Today the Nation faces a whole series of threats: 
Terrorists, pirates, irrational dictators, religious fanatics 
and so forth. But unfortunately, thanks to worldwide 
proliferation these people have a greater access to 
increasingly lethal weapons. For example, 100 countries have 
ballistic missiles that are increasingly competent. And 
cyberwarfare is becoming a great concern as potential 
adversaries develop sophisticated tools aimed at crippling not 
only the military and civilian infrastructures, but across the 
board.
    Clearly today the security environment is very different 
than in the 20th century, as you just heard. So the Nation has 
to prepare for 21st-century security needs even as fewer 
resources are available to do the job. There are new 
technologies available, there are required new modes of 
warfare, and there are new industrial structures that have 
resulted primarily from the horizontal and vertical 
consolidations that mark the defense industry in the years 
following the Cold War, as well as from the rapid advances that 
are taking place in the high-tech commercial world. And, I 
would argue, critically important has been the globalization of 
technology, industry and labor, and, very important, the 
requirement for coalition military operations in the future.
    So it is necessary to address our growing security 
affordability problem, and one of the major ways of doing that 
is to look at the question of how the DOD does its business, 
and, I would argue, both on the demand side and on the supply 
side. And these steps fall into four main areas. Overall 
acquisition process includes what we buy, that is the 
requirements process; how we buy it, that is the acquisition 
process; who does the buying, that is the acquisition 
workforce; and who the DOD buys from, which is the defense 
industrial base issues. And I would emphasize that these four 
issues are highly interrelated, and that all four have to be 
addressed in order to achieve the required changes.
    In my prepared remarks I addressed all four of these areas, 
and I have expanded upon them in the recent book that the 
Chairman just mentioned. I could briefly highlight some of 
these changes, but given my time constraint, I will assume that 
you have looked at the presented material.
    Mr. Shuster. During the questioning period we will get you 
to elaborate.
    Dr. Gansler. Fine.
    So then let me just simply jump to the conclusions, which 
is basically that two things are required to make a cultural 
change, and that is what we are really talking about here. One 
is a widespread recognition of the need for change, and the 
other is leadership with a vision, a strategy and a set of 
actions to implement that change. And that is up, as far as I 
can see today, up to Secretary Panetta, the White House and the 
Congress to implement these needed changes. There will be 
resistance, no question about that, and it is going to be very 
challenging. But on the other hand, I believe it can be done, 
and I think it must be done, and I think our future national 
security depends on it, and our fighting men and women deserve 
it.
    Thank you.
    [The prepared statement of Dr. Gansler can be found in the 
Appendix on page 40.]
    Mr. Shuster. Thank you.
    Mr. Berteau.

   STATEMENT OF DAVID J. BERTEAU, SENIOR VICE PRESIDENT AND 
    DIRECTOR OF INTERNATIONAL SECURITY PROGRAM, CENTER FOR 
              STRATEGIC AND INTERNATIONAL STUDIES

    Mr. Berteau. Thank you, Mr. Chairman, Congressman Larsen, 
members of the panel. I appreciate the opportunity to be with 
you here today. I particularly appreciated that the hearing is 
moved to this room. There is a certain honor to sit in front 
and be able to read the panel here of Article I, Section 8. I 
happen to carry in my pocket at all times a copy of the 
Constitution, and I have two phrases bookmarked here. One is 
Article I, Section 8. The other, of course, is Article II, 
Section 2. And much of our lives are spent on the interface 
between the role of the President as Commander in Chief and the 
role of the Congress as outlined in Article I.
    I am also struck, Mr. Chairman, by your opening remarks 
about the difficulties of solving these problems. When you get 
to this point in your career, and you realize you have spent a 
third of a century working on things that are all still just as 
broke in appearance as they were when you started, it can 
occasionally be a bit discouraging. However, my wife reminds me 
that if we hadn't been working on them, they would be even 
worse. And I take some solace in that, if you will.
    I would like to summarize briefly my statement and ask my 
written statement be included entirely in the record.
    We define the industrial base as not only the hardware 
companies--this is what we typically look at--but the services 
companies as well. And I have got a lot of data both in my 
testimony and drawn from our report on defense contract trends. 
I have provided a copy of this to the panel.
    The data basically showed three key facts. One is that the 
Federal Government in general, and the Defense Department in 
particular, spends as much money on services contracts as they 
do on products contracts. And it is important to keep that in 
mind.
    The second key data point is that the percentage of the 
defense budget that goes to contracts has essentially doubled 
in the last 20 years. If you go back to 1990, roughly 35 
percent of defense outlays were spent on contracts. In 2008, 
which is the year it reached its peak, it was about 65 percent. 
It is back down to about 53 percent now. And when we have 
fiscal year 2011 data, which we don't quite yet have, we expect 
that to decline a little bit more, but it will still stay 
roughly at 50 percent. So we have a reliance on contracts and 
on the base that provides those contracts that is greater than 
it has been historically. I think that is a significant issue, 
if you will.
    Contract dollars are roughly split between products and 
services. We separate out research and development as a third 
category. The reason is because from the Defense Department's 
perspective, R&D [research and development] is part of the 
investment because it is connected to procurement, it is 
connected to products. From the Government's database 
perspective, they count R&D as a service. So actually the 
single largest service contract in the Federal Government is 
the F-35 Joint Strike Fighter. Now, from my perspective that is 
not a service, that is a product, but because it is R&D, it 
gets characterized as a service. But we separate out R&D.
    And my last data point that I would do in my summary here 
is that R&D is at an historic low as a percentage of total 
contract dollars spent. Now, the database that we use doesn't 
include classified contracts. We lump those in as well. It is 
still at an historic low.
    There are three big challenges facing the industry today, 
from our perspective. And I should point out these are mostly 
my views. I use the data from CSIS [Center for Strategic and 
International Studies], but my opinions here are my own. The 
first is the impact of the plan reductions and the budget 
reductions that are under way. The second is the importance to 
recognize that industry today, unlike industry in the past, has 
to remain competitive in the global financial markets. We can 
no longer rely on just the Federal Government to provide the 
funding for these companies. They have got to be competitive 
financially. And the third is where innovation coming from in 
the 21st century, because we have a history of relying on 
defense contractors to come up with innovation. In today's 
world an awful lot of new technology is coming not from 
defense, not even from the U.S., but from global sources. And 
recognizing and addressing those challenges are a critical 
factor for this panel to address. So I will be glad to go into 
those as we go into the question period.
    [The prepared statement of Mr. Berteau can be found in the 
Appendix on page 55.]
    Mr. Shuster. Thank you very much. Why don't you go ahead 
and expound upon that, what you are talking about, the 
financial liability globally, a little bit.
    Mr. Berteau. The world in which we grew up in the 1970s, 
1980s, 1990s for defense contractors, the contractors depended 
on the Government for their revenue for the most part, and 
particularly after the consolidation in the 1990s. It really 
didn't matter to them all that much whether a contract was 
awarded on June 30th or on June 1st, because they weren't 
subject to the swings of quarterly stock financial reports as 
much as they are today. Companies could often finance both 
through their own savings and through the progress payments 
that the Federal Government made, and so they were less reliant 
on the global financial market.
    Today's environment, and all you have to do is listen to 
the quarterly analyst calls that the CEOs [Chief Executive 
Officers] and the CFOs [Chief Financial Officers] of the major 
defense companies do, they are so dependent on their standing 
at Wall Street in a way that they were not historically because 
they are part of the global financial community.
    Now, global financial markets invest their money 
irrespective of national security. All they are looking for is 
return, and if a better return can be obtained somewhere else, 
that is where they are going to go. The net result is that if 
defense companies are not competitive from a margin point of 
view, from a cash flow return on investment point of view, from 
a revenue point of view, if they are not competitive in the 
global financial market, that means they end up paying more for 
their cash.
    Ultimately an increasing cost to industry results in one of 
two things, either an increased cost to the Government or less 
capability for that industry to be able to provide to the 
Government. That, I think, is a different situation than has 
been true in the past. And many of the Government's rules and 
regulations regarding weighted guidelines for profit, regarding 
caps on fees, regarding how you manage contracts and negotiate 
contracts, tend to ignore the dependence of those companies on 
the global financial market. We haven't caught up in a 
regulatory sense with that global reality.
    Mr. Shuster. So we need to change the regulatory burdens 
that were put on these companies from the DOD?
    Mr. Berteau. I think we at least need to recognize two 
things. And I have actually been encouraged, because both the 
former Under Secretary for Acquisition, Technology, and 
Logistics, Dr. Ash Carter, and the current Acting Under 
Secretary, Mr. Frank Kendall, have stated publicly the need to 
recognize that we are not trying to drive corporate profits to 
zero, that we, in fact, need to recognize their legitimate need 
to be able to make money in order to stay in business.
    I think you reflected on the Defense Science Board study 
that Dr. Gansler led on the Defense Industrial Structures for 
the 21st Century. I happen to be a member of that task force, 
and I believe we had a witness who testified before us, off the 
record, of course, who mentioned the difficulty of driving 
costs down for a Government contract. You can correct me if I 
am wrong, but I think his quote was something to the effect of, 
``it is hard for me to explain cost, so it is easier for me to 
actually award a billion-dollar contract with 5-percent profit 
than a half-billion-dollar contract with a 30 percent profit, 
because nobody knows whether a billion dollars or a half 
billion is the right cost, but everybody knows that 30 percent 
is excess profit.''
    Now, this is similar to if I went to buy a car, and I said 
to the dealer, I am happy to pay you twice the amount for this 
car as long as I know you are not making any money off of it. 
That just doesn't make sense from a public policy point of 
view.
    Mr. Shuster. Right. And, Dr. Gansler, if you want to expand 
upon--well, let me back up a second and let me ask you both 
this question. And you have been at this a long time, and we 
have got this study from the 1950s at the RAND Corporation, and 
I think there is one from the 1970s and the 1980s and 2000. 
What is the key element over in the Department of Defense, or 
is it here in Congress, that has caused this to not be able to 
be fixed over the years?
    Dr. Gansler. I think it is the emphasis on cost instead of 
price.
    Mr. Shuster. Value.
    Dr. Gansler. Value that you are getting. Lately there has 
been even more of an emphasis in terms of a technically 
acceptable low bid. That is just totally inconsistent with 
high-quality technology and high-quality services. Instead this 
is a race to the bottom, how cheap can we buy things, instead 
of how you and I buy when we buy things, we worry about 
performance, and we worry about price. The focus today is much 
more on simply low cost and trying to figure out how to drive 
down the cost as contrasted to get higher performance at lower 
cost.
    We have got to focus on the results, not the process. In 
fact, recently there have been a number of people in the 
industry talking to me about the fact that the Government is 
focusing more on compliance than they are on results.
    Mr. Shuster. And we have heard that over and over again. We 
must treat our contractors like they are criminals. Before we 
find out anything wrong, we assume they are doing something 
bad. Do you have the same view?
    Mr. Berteau. Yes, sir. I would like to add one thing to it. 
I think it really is critical to focus on results. If you, for 
instance, are hiring a plumber to come fix a plumbing problem 
in your house, you don't actually put out an ad that says, 
please send me the cheapest plumber possible. And, if you found 
a plumber who actually works you tend to go back to that person 
because you know you are going to get value added. But it is 
because you know how to define the outcome that you are looking 
for at the front end.
    I think we not only have to have that focus on the outcome, 
but that outcome has to be defined in the requirements, not 
just written into the contract. A lot of these problems stem 
from insufficient attention--particularly in services 
contracts--insufficient attention at the front end to what it 
is we want to achieve here as opposed to just how many hours of 
time we want to buy from staff.
    Mr. Shuster. Dr. Gansler, you used the word 
``capabilities.'' What the end product is going to be capable 
of has to be clearly stated in the contract.
    Dr. Gansler. And that includes services, not just products. 
As pointed out, since last year 57 percent of what we bought 
were actually services, more than half of it. All of our rules, 
regulations, training, policies, et cetera, are all based upon 
buying goods. Buying an engineer is different than buying a 
tank. You don't put them through a R&D phase and a test and 
evaluation phase, but you do want to count on prior performance 
and demonstrated experience. You wouldn't get your heart 
surgeon on the basis of somebody with a degree and lowest 
hourly rate. You would check and see whether they have ever 
done a heart operation before and how well they did it, what 
the results were.
    But we are shifting the other way, and that is partly 
because of the budget driving the sensitivity to cost, but it 
is wrong in terms of let us get high performance at lower cost. 
That really makes a lot of sense, and that is the way the 
commercial world operates.
    Mr. Shuster. Before I yield to the ranking member, if, Mr. 
Berteau, you would share the headline you had, you shared with 
me.
    Mr. Berteau. Mr. Chairman, I believe I put it back in my 
briefcase, but it is a headline from a three-star general in 
the Army Training and Doctrine Command, and his guidance on 
acquisition was ``Don't do anything stupid.''
    Mr. Shuster. That is the headline.
    Mr. Berteau. It is a pretty good guidance, I think; a 
starting point for acquisition and contracting.
    Mr. West. I was in the Army for 23 years. It is good 
guidance.
    Mr. Berteau. It is good guidance. It is sometimes hard to 
follow, but it is good to repeat it over and over again.
    Mr. Shuster. With that, I yield to the ranking member.
    Mr. Larsen. Thank you.
    With all these analogies about jobs, I want to point out 
something. If I need a heart surgeon, I probably need a heart 
surgeon once, right? I am not going to put him on--her on 
contract for my life, literally for my life once, but for the 
life of my life. I only need that person once.
    A plumber on the other hand, yeah, if the plumber does a 
good job, I may go back to her several times. But the question 
is at what point, then, do I decide I need to go out and look 
around a little bit more; I mean, not to get used to this 
plumber too much, because maybe things are changing out there, 
and maybe I can get better service from someone else, and I can 
throw some competition into this.
    That is the challenge that we are facing. Even though the 
dollars are being squeezed, what I hear you saying is that is 
going to benefit the larger contractors who already know the 
system, are in the system, and it is going to be a tougher time 
getting in some of the smaller and midsize companies that we 
are hearing from into the opportunities that exist with 
contracting, whether they are goods or services for the DOD. 
Can you talk a little bit about that?
    Mr. Berteau. Mr. Larsen, I think you are absolutely right. 
I mean, the thing that keeps that plumber performing is, in 
fact, both the threat and the reality that there is competition 
out there, and that there is competent competition that is 
cost-competitive and performance-competitive. Even in 
companies, commercial companies, that have long-term 
relationships with their suppliers, which is kind of what you 
would think the Government would want to get to, there is 
always that potential that we can pull the contract from you, 
we can find another supplier, we can qualify that other 
supplier, and we can competitively bid with that. And that 
threat has to always be out there, and I think it is incumbent 
on the Government to have it in place.
    Dr. Gansler. I would argue somewhat in the sense that there 
is a new suggested policy that says every 3 years we should 
recompete, period. I would argue just the opposite, that we 
should recompete, as you suggest, when the contractor doesn't 
get higher performance at a lower cost in that 3-year period. 
If they do, they deserve to be rewarded with a follow-on. If 
they continue to get higher performance at a lower cost over 
and over and over, that is wonderful, that is exactly what we 
want.
    The threat of competition is a very good threat. The forced 
competition is actually a disincentive to do better and better. 
And we have to be very careful about doing competition smartly, 
not just for the sake of competition. A scorecard isn't the 
right answer. We want to reward people for good performance, 
and that means higher performance at lower cost. And we should 
reward them for doing that. We have to understand that 
incentivizes for industry is what should drive this whole 
operation.
    Mr. Larsen. How do we ensure that the incentives for 
industry drive the operation and that we are allowing new 
actors the opportunity, new players the opportunity to 
participate in that competition?
    Dr. Gansler. Well, one of the easiest ways, one of the most 
effective ways that we have had for many years now is the Small 
Business Innovation Research program. That forces you to go to 
the small companies, which is great, and that has demonstrated 
very effective use of those dollars. And that I would encourage 
to be continued, even at the expense of the fact that the 
budget shrinking, because that is one way--I have talked to 
lots of small business firms that have been very successful and 
grown to be big firms as a result of starting out with the SBIR 
[Small Business Innovation Research] program. So there are 
techniques we have for the small business.
    Another thing I would argue is that the small business 
mostly fits into the lower tiers, and so requiring it as a 
prime contract only on the scorecard, I think, disadvantages 
the small businesses in many ways. I think that is a shift that 
could be taken as well.
    Mr. Larsen. Does DOD manage the industrial base in a 
coherent way, or is it service by service, agency by agency, 
day by day?
    Mr. Berteau. As we have been out and looked at a number of 
specific programs, that is weapon systems or categories of 
programs, shifts, satellites, et cetera, what we have found is 
that an awful lot of the industrial base, the management or 
even awareness--because the first element of management is 
actually having data that knows what is going on.The first 
level is left up to the prime contractors to know who their 
subcontractors are and what their subcontractors' 
vulnerabilities are. Most prime contractors have pretty good 
insight into the ones that are part of their contract, but not 
necessarily the broader industrial base.
    Then at the program level, at the program manager level, 
for the satellites or the ships, there is less awareness, but a 
broader awareness inside the Defense Department.
    But when you get to the enterprise level across all of 
DOD--that is where it falls short. There is very little 
integrated data, and there is no process for incorporating that 
data in real time in actual decisions so that when you are 
making a cut decision, for instance, you know what industries 
are going to be impacted by it.
    In part, Mr. Lambert, as he testified before this panel, is 
expecting that his sector-by-sector, tier-by-tier analysis will 
provide some of that information. There are two problems with 
it, though. One is it won't be comprehensive because it is not 
every sector across the board. They selected seven. The second 
is it won't be timely. It will essentially be 2 years out of 
date by the time they have got it all rolled up. And so it 
won't be particularly useful, because the decisions that we are 
making are not backwards decisions, they are forward decisions 
for fiscal year 2013 and 2014. So there is a lag there that 
they need to address.
    Dr. Gansler. I would suggest the one thing that has been 
misinterpreted, not by you, but often even by the press, and 
that is the concept of managing the industrial base. This is 
not picking winners and losers. It is not picking company A 
instead of company B or company C. What it is trying to say is 
what kind of a structure do we want for that industry? We want 
it to be competitive, we want it to be innovative, and we want 
it to be profitable. I mean, that is almost a dirty word for a 
lot of people in the Government sometimes, and that is wrong 
because that gives them the money to reinvest in research and 
in capital investment.
    So I think having the structure and looking at do we have 
enough--enough being at least two or three firms in any given 
sector--for competition? I mean, the jet engine business has 
two, but that is enough for serious, good competition, as the 
great engine war showed.
    And so we don't have to pick winners and losers in managing 
the industry. What we do have to do is worry about the 
structure of the industry. It is profitability, it is 
innovation, it is competitiveness. That is where I would focus. 
And make sure people understand when you say ``manage the 
industry'' what we are talking about.
    Mr. Larsen. Mr. Chairman, I will save for a second round. 
Thank you. I yield back.
    Mr. Shuster. Mr. Runyan.
    Mr. Runyan. Thank you, Mr. Chairman.
    Gentlemen, thank you for being here.
    Dr. Gansler, how does our U.S. industrial defense industry 
policy compare to our international powers around the world? 
Obviously you probably think we are a little behind the ball, 
as your testimony says, but how does it look?
    Dr. Gansler. Well, I think one of the major and most 
important aspects of our industrial policy is that our speeches 
say we want to have the commercial world, dual use, and we have 
barriers to doing that. By contrast, in terms of around the 
world, for many years now the Japanese have had an explicit 
statement of dual use. I go through Japanese aircraft plants, 
and I see the same machine tools being used on commercial and 
military. The Russians have a policy now of dual use, and they 
can implement it. And recently, the Chinese have come out with 
a statement of the importance of dual-use industrial 
operations. This is not just taking a piece of commercial 
equipment, but it is having the factories integrated.
    I might point out that, for example, Boeing used to build 
the commercial and military transports in the same plant, but 
as a result of cost accounting standards, they were forced to 
separate the commercial and military. In that case it was the 
allocation of independent research and development against the 
commercial. So it was penalizing the commercial even though 
they were achieving enormous overhead absorption for the 
military.
    There are huge benefits of dual use; the idea that you get 
technology transfer, you get sensitivity to cost, you get 
higher volume for overhead absorption and all these benefits. 
But we have barriers to dual use today. And countries like 
China, Russia, Japan, others, who have an industrial policy 
that actually follows those speeches can actually implement 
that dual use.
    We have recently even gone further, and now we are asking 
for proprietary data to recompete things after 3 years. Well, 
no commercial firm is going to give you their drawings. When 
you buy a car, you don't get the drawings in the glove 
compartment. Why would you want to do that sort of thing?
    It is another barrier being introduced along with export 
controls. Most commercial firms want a world market; they don't 
want just the domestic market. A good example of that would be 
in the infrared business. We used to own the night. Because of 
our export controls, we no longer own the night now in the 
sense that the French are well ahead of us now in night vision 
devices because of our export controls.
    We need to review our policies relative to buying 
commercial and having integrated dual-use plants in order to be 
able to achieve world-class competitiveness, because right now 
with the high-tech commercial, there is a big benefit to the 
DOD of being able to integrate plants and to buy commercial 
technology in the information area and a lot of other areas.
    Mr. Runyan. Now, does security policy and intellectual 
property play into that and the price of it also?
    Dr. Gansler. Absolutely. You have to be aware of the 
security sensitivity, and you have to be aware of the 
intellectual property sensitivity. I mean, one of the big 
issues right now is cyber security because of the fact that 
everybody now is into the information age. Clearly we have to 
start worrying about protecting not just DOD stuff, but 
commercial stuff; I mean, the power grid and things like that. 
So there has got to be a greater sensitivity to cyber security, 
and we do want to make sure that everybody protects 
intellectual property and highly classified, sensitive stuff.
    Mr. Runyan. But is it to a point where we are just talking 
about globalization of the workforce? Are we afraid that we 
don't know what that tipping point is where security might 
actually cost us more, and actually prosecution and follow-up 
of all that intellectual property being stolen, that that might 
be a hurdle?
    Dr. Gansler. See, I would argue just the opposite; that our 
barriers today to using foreign students, foreign scholars, 
foreign technology, and working with foreigners is actually a 
barrier to us.
    In fact, let me give you some examples. Enrico Fermi was 
not a U.S. citizen when he built a nuclear bomb here in the 
United States. Most of the people who founded Silicon Valley 
were not U.S. citizens. We allow them, by the way, to be in the 
Army; 3 percent of the Army are non-U.S. citizens. But we don't 
allow them in defense plants. If I go now to a university where 
a significant majority of the graduate engineering and science 
students are non-U.S. citizens, I think we need to take 
advantage of that because we are a nation of immigrants.
    And you can do security checks on their family and that 
sort of thing, but for us to say they must be U.S. citizens to 
be able to take advantage of their advanced technology and to 
work on research programs, I mean, Ronald Reagan, not an ultra-
liberal, he put out a policy, NSDD-189, that said all 
fundamental research should be free and open and publishable, 
anybody can work on it, they don't have to be U.S. citizens. 
But now lots of times the DOD, DOE [Department of Energy], 
others put into their research contracts the requirement it 
must be done by U.S. citizens. That doesn't make sense to me 
when so large a share of the really outstanding science and 
engineering students, and graduate students particularly, are 
non-U.S.
    Mr. Runyan. Thank you for that.
    I also agree with incentive-based contracting. In my past 
life if you didn't perform, you were gone. It keeps a lot of 
people honest. It keeps you very focused and motivated.
    I yield back.
    Mr. Shuster. Ms. Sutton.
    Ms. Sutton. Thank you, Mr. Chairman.
    I really appreciate the discussion about sort of value-
driven decisionmaking. Earlier this week we did a seminar, 
which I helped sponsor, related to value-driven engineering, 
and we should apply this in many, many realms of Government.
    So one of the questions I have, Dr. Gansler, it is 
intriguing to me that you talk about the potential cost savings 
by increasing the use of diplomacy and other soft forms of 
power. Could you expand on that a little bit more and try to 
quantify what potentially we could accomplish by doing that?
    Dr. Gansler. You know, an obvious example would be China 
helping us with North Korea, or Russia helping us with 
Afghanistan, or other issues that we have where we could 
collectively apply pressure. Similarly, if we were able to work 
more effectively with even our allies so that we would have 
joint programs with our, say, NATO [North Atlantic Treaty 
Organization] allies.
    When you think about the fact that 100 nations have 
ballistic missiles, and we want to worry about missile defense 
based on the fact that in the future we will be in a 
coalition--you can't sort of say, well, there is a bunch of 
missiles coming in at us, and you pick up the phone and say, 
Hans, you take the first, and, Pierre, you take the second one; 
I will take the third one. It has to be integrated and 
automatic.
    We can save a lot of money if we did it that way as well, 
because we would have joint development, which they would pay 
for part of it, like we did in the Joint Strike Fighter. 
Remember, a couple of counties put up $1 billion each? So we 
can save money by the economies of scale, volume production, 
and by integrated systems. By assuming and exercising and 
practicing with our coalition allies, we will actually save a 
considerable amount of money and be much more effective as a 
force, which goes to the total value point. It is not just for 
saving money, it is for force effectiveness.
    Ms. Sutton. Are there papers out there? Is there someplace 
where I can find more information about the quantification of 
that so that we can see the value of these alliances? Is there 
someplace where it is actually quantified?
    Mr. Berteau. We have done a couple of pretty thorough 
literature searches on the issue, particularly of economic 
development, and I don't know that we have found a good set of 
answers there, but I will be glad to take that question and go 
back and look.
    If I could add one more thing to what Dr. Gansler said. 
There needs to be a recognition of that potential value of 
contribution from allies, et cetera, at the requirements phase, 
and what that sometimes means is that the military has got to 
give up a little bit of what they want in order to get the 
contribution from those who can add value to it. So the trade-
off is we might not get 100 percent of what we want, we may 
only get 95 percent, but we end up saving 10 percent of the 
cost, and so the trade-off is one that is cost effective. I 
can't quantify that, though, but you can find places where it 
did not happen.
    Dr. Gansler. I might point out that every U.S. weapon 
system today has foreign parts in them, and they are there 
because they are better, not because they are cheaper.
    Ms. Sutton. Let me ask you this: How can DOD and industry 
best anticipate our future threats; how should we be doing 
that? What are we preparing for, and how do we figure out what 
to prepare for?
    Dr. Gansler. I would argue that one of the biggest 
characteristics of future threats is uncertainty, and therefore 
what we need is responsiveness, and we don't have that today. 
We have no ability to respond rapidly to changes in threats. 
You may remember in the first Persian Gulf when we needed to 
get more Patriot missiles. The line was available, lots of 
excess capacity in the line, but they didn't have parts because 
they hadn't prepared for the need for surge in that case.
    The ability to shift from one type of scenario to another 
type rapidly, the ability to work with our coalition allies 
rapidly certainly is required. I think it is the uncertainty 
that--the spectrum is too large. I mean, we wouldn't have 
thought about pirates a few years ago that we are going to 
worry about and on up to nuclear war. When you think about that 
full spectrum, it is impossible to be able to individually 
prepare for every one of those because of affordability. We 
don't have enough money to do that. So we have to be able to 
shift from one to the other, and that means flexibility, and it 
means practicing shifting rapidly.
    Ms. Sutton. Would you say that the capacity to manufacture 
is also an important element that we need to maintain?
    Dr. Gansler. Manufacture and redesign. It is not just 
building the same thing. Whenever a new threat shows up--look 
at what happened with the roadside bombs. We hadn't expected 
that, so we weren't prepared. We hadn't designed our systems 
for it. It took a couple of years to just even recognize it was 
a new requirement going to the requirement side. And then 
finally, we get into the budget cycle, and that takes 3 years, 
and then finally you get the design process through, and then 
finally you go into production. That is not a fast response.
    Ms. Sutton. Thank you.
    Mr. Shuster. We will probably have an opportunity for 
another round.
    Mr. West.
    Mr. West. Thank you, Mr. Chairman and Mr. Ranking Member. 
Gentlemen, thank you for being here today.
    And as I have said, I was told don't do anything stupid 
quite a few times in my military career.
    Vice Chief of Staff of the Army General Chiarelli 
implemented a portfolio review process as far as their 
acquisition of new weapons systems. Have you all had an 
opportunity to sit down and talk to him or review that process 
that he has, and did you find that that was something being 
used in any other of our Services?
    Mr. Berteau. We had some talks with them as they laid out 
how they were going to approach it. I have not seen the results 
of that analysis yet. But one thing that I think is worth 
noting is they recognize, when you look at portfolios, you have 
to have a way of measuring capability across more than one 
weapon system. You can measure that capability pretty well; the 
hard part is determining how much is enough. How do you 
validate the boundary, if you will, of sufficiency? It is very 
hard to validate that except against something that sort of 
looks like a threat.
    So you can't just have capability in the abstract, it has 
got to be capability in a portfolio against some measure of 
requirement
    Dr. Gansler. I would also argue that what that is is a 
capability, not a platform, and there is a big difference 
there. Some people tend to think of it as, well, do I have to 
upgrade my tank, or do I have to upgrade my airplane as 
contrasted to what I really need for the potential threats in 
the 21st century, which are very different things.
    The type of equipment that we are going to need in the 
asymmetric world of the future, you know, capability against 
cyberwarfare; capability against war among the people; the 
different intelligence capability; the benefits of unmanned 
systems, air, land and sea systems, and so forth, these are 
very different than sort of the linear projections from the 
past. We have to think about it in that form as well.
    Mr. West. You bring up a great point because the Army that 
I was commissioned into in 1982 and the threats that we saw 
then were totally different than the threats that I saw in 
2005, when I went to Afghanistan. So that leads me to what I 
think is a major thing that we need to look at.
    When you read our National Security Strategy, when you read 
our National Military Strategy, I do not think that it really 
provides the ability or the focus to the defense industrial 
base to understand this new 21st-century battlefield, these new 
threats, and, therefore, the new type of weapon systems and 
tools that are needed on the battlefield. Do you all concur or 
disagree?
    Dr. Gansler. I tend to agree. We do have an institution 
that has a lot of institutional inertia, and it doesn't 
necessarily think about what might be different. And that is 
understandable. I mean, disruptive technologies have a lot of 
resistance to them.
    I will give you an example. When I was Under Secretary, 2 
years in a row the Air Force zeroed the unmanned airplane, the 
Global Hawk. I had to force them to buy an unmanned airplane, 
but that is why it was resistant. I mean, it was really 
countercultural, and that is what disruption is. It is very 
difficult to ask a user for something new. They will tend to 
think is that is something better than what they now have? But 
these new environments coming from the research push of new 
technologies, disruptive technologies, are where we have to be 
thinking, and new kinds of warfare, you know, new threats that 
people are presenting.
    It is hard to have an institution that is geared around 
certain structure to shift to a new one. We need to emphasize 
that. I mean, if you recognize why DARPA [Defense Advanced 
Research Projects Agency] was established, it was because the 
Russians put up a satellite, and none of the Services have been 
worrying about satellites. So we created an organization that 
would look at things that weren't being done by the Services. 
And that is what we have to start thinking towards and maybe 
figuring out ways to have a DARPA in each Service or something.
    Mr. Berteau. Congressman West, I would add you are right to 
focus on those documents, the National Security Strategy, 
National Defense Strategy, National Military Strategy, the 
report of the 2010 QDR [Quadrennial Defense Review]. There is a 
lot of good in there, but it doesn't have the precision to 
allow you to prioritize and make trade-offs, particularly as 
the budget is coming down.
    Congresswoman Sutton asked about the information for 
industry that would come out of those. It is not in there. If 
you look back, last summer the Defense Department submitted to 
this Congress a report on China military capability out to 2030 
and beyond. We have more precision in what we say China is 
going to have in 2030 than we have about what we are going to 
have in 2030. That is not quite balanced.
    Mr. West. Thank you very much, gentlemen.
    I yield back.
    Mr. Shuster. Thank you.
    That satellite question is once again a failure of the 
Intelligence Community to be able to predict accurately what 
occurred over and over again from the last 60 years. They 
haven't been quite right on predicting what the future holds.
    Dr. Gansler. There was a lot of resistance in the 
Intelligence Community to the establishment of IARPA 
[Intelligence Advanced Research Projects Activity] for the same 
reason.
    Mr. Shuster. Right. Well, that was an earmark by--my 
understanding--Congressman Hunter and Congressman Lewis forced 
the Air Force and forced the military to go develop and buy 
those [Unmanned Aerial Vehicles]. So thank goodness for that, 
and thank goodness for earmarks.
    Ms. Hanabusa.
    Ms. Hanabusa. Thank you. Thank you, Mr. Chairman.
    I think General Dempsey said when he appeared before us 
that the only thing we know is that we have been 100 percent 
correct in not being able to predict anything.
    On that note, Dr. Gansler, I started to read your book, 
Democracy's Arsenal, and one of the things that struck me was 
why the choice in the title of ``Democracy's Arsenal'' versus 
``America's Arsenal for the 21st Century'', or something along 
those lines? In your testimony just recently about the concept 
of the joint development and the fact that our allies--or we 
would have to begin to look at development in terms of 
coalitions working together, was that part of your thoughts in 
talking about the arsenal of the future just being democracy's 
arsenal; that we would be required to pull together our allies 
as opposed to just being United States-centric in our views?
    Dr. Gansler. That is a very good point. In fact, as you 
know, in the book I try to emphasize the importance of global. 
I was just doing a play on words about Eisenhower's statement 
about the reference to the arsenal of democracy, which was the 
industrial base.
    But the emphasis actually, if you want to use the title, is 
the subtitle, Creating a Twenty-First-Century Defense Industry, 
not simply preserving a 20th century industry. That is the 
important difference that we are talking about here. And I 
think that emphasis of shifting to the 21st century is the 
focus. Part of that does have to do with the commercial world 
and the global world, and to the extent we can shift to 
recognizing the global benefits, democracy or not, that is 
really the focus of what I was trying to get at.
    Ms. Hanabusa. One of the portions of your book that I was 
intrigued by, and this is something that we have been looking 
at, is that we do not have or we are losing that industrial 
base, that industrial base that, like you said, General 
Eisenhower said, made the difference in winning the war. Yet we 
know that China, for example, is building ships a lot quicker 
and potentially better than we are because we are losing that 
knowledge in this process, but at the same time China is the 
rising threat in the Pacific.
    So how do you see us getting to a point of a global 
situation of joint development, or is it one basically that we 
have to focus on with our allies and relaxing things like ITAR 
[International Traffic in Arms Regulations], for example, and 
being able to do that kind of joint development and dual use 
and everything in a more efficient way?
    Dr. Gansler. Well, that was partly the question that Ms. 
Sutton raised relative to soft power, to the extent that I 
think we should try to stop treating China as a threat and 
treat them as a partner in achieving peace and stability in the 
world. And to the extent we do that, we will be far better off 
in getting that help, if you will, with, say, North Korea or 
other places where they could be of assistance to us. In terms 
of dealing with our allies, stop thinking as much about 
building walls around America, but thinking in terms of what is 
the most effective solution for the world.
    To the extent that I think ITAR and other barriers that we 
have can be addressed, we need to really focus on that. And in 
many ways that is that soft power issue, working with our 
allies instead of trying to each separately compete.
    Ms. Hanabusa. Mr. Berteau, I think on October 24th, one of 
your colleagues, Mr. Chao from CSIS, appeared before us, and in 
that testimony I was asking him the question about, you know, 
we don't know what the future is. Even to 2020, we don't have 
any idea what that military is going to look like. How can we 
then start to plan, because we are talking about the budgets 
every time that are before us? One of the coined phrases that I 
came up with after that was that we are setting policy by 
acquisition. In other words, we are making acquisition 
decisions now, and that are going to affect us 15, 20 years 
from now, and that seems to be the policy of our vision of the 
military in the future.
    Do you agree with that?
    Mr. Berteau. That is absolutely a clear view of what goes 
on. I happened to be with Secretary Cheney after the launch of 
Operation Desert Storm in 1991 to move Saddam Hussein and the 
Iraqi Army out of Kuwait. He placed two phone calls after the 
initiation of those activities. One was to former Secretary of 
Defense Cap Weinberger, the other was to former Secretary of 
Defense Harold Brown, so both a Republican and a Democrat. And 
what he said was the capability we are use using today is 
thanks to the decisions you made 10 and 15 years ago. And I 
think that same thing is true for today.
    The hard part is not recognizing that looking backwards. 
The hard part is recognizing going forwards what the 15-year 
implications of the decisions we are making today. And inside 
the Department of Defense, the past is far more powerful than 
the future, and it is always trying to kill the future.
    Congressman West commented about the very different Army of 
today than in 1982. That Army of today is shaped by the people 
whose mentality was created 15 and 20 years ago, and the past 
is resonant in them. I think it is incumbent upon you all to be 
thinking through the filter of what is going to be important 15 
or 20 years from now; how do we work backwards from that and 
use that as a way of shaping today's decisions.
    Ms. Hanabusa. Thank you very much.
    Thank you, Mr. Chair.
    Mr. Shuster. Mr. Schilling is recognized.
    Mr. Schilling. Thank you, Chairman, and thank you, 
gentleman, for showing up. We are getting a lot of good things 
out of this today.
    What I would like to just ask, I just really got three or 
four questions if I have time for them. So how do you define 
industrial preparedness, and then how can Congress help promote 
it?
    Dr. Gansler. Well, the point that came up much earlier, 
which is preparing to be able to do something that was 
unexpected as contrasted to something that was really expected, 
is the difference that I think we lack today. This is the 
difficulty of predicting the future. I guess Yogi Berra's is 
the most popular statement about that one: ``Forecasting is so 
difficult, especially about the future.''
    It does seem that we need the flexibility and 
responsiveness, and we lack that. Even in the budget process, 
you know, there is no money set aside. The only reason we were 
able to do some responsiveness in the last decade has been 
because of the supplementals. That is sort of a slush fund. If 
we didn't have that, we would not be able to rapidly respond to 
changes that are required.
    So we need to think about how one could do something 
rapidly, including getting the money for it, and also to be 
prepared in terms of the procurement practices and the 
policies. In some cases it requires us just taking action 
rather than going through the formal process that we do, which 
tends to take 3 to 5 years before you get the procurement and 
the budget and everything else all lined up to do something 
that requires a fast response.
    That is the preparedness area that I think we have to spend 
most of our attention on and which we don't have today. The 
process is not responsive today.
    Mr. Schilling. That is a very good point. Who knows what is 
coming at us, and if we can respond quickly enough.
    I would like to ask you, sir, do you believe that the 
future of defense, the industrial base basically, would be 
stronger if it is allowed to partner more freely with the 
military organic base?
    Dr. Gansler. I would argue that the word ``partnering'' is 
a subset of competition. If you think of it as a sole-source 
partnering, I would say we will not be more efficient. If you 
think of it as a form of the competition--I think back to one 
competition where we ran--the DOD ran a competition for 
maintenance, and it was won by a public sector, actually Warner 
Robins in that case, but they gave 60 percent of it to the 
private sector in order to win. That makes sense. I mean, there 
are some very competent, qualified and capital-provided-for 
public-sector operations.
    When we compete public against private, what we find is 
that on average, no matter who wins, the savings are over 30 
percent, and the performance goes up, but Congress has passed 
laws against doing that. You don't allow that anymore, the A-76 
competitions. Now, my view would be you should allow the A-76 
competitions and allow partnering on those so when the public 
sector bids, they can have a private-sector subcontractor or 
vice versa. Take full advantages of the capabilities in both 
the public and private, but do it in a competitive environment, 
not a sole-source environment. That is the difference. You have 
eliminated that competition.
    I find it hard to believe that when you can show the data 
overwhelmingly favor the idea of competition in the public-
private sector--and I should emphasize only for non-inherently 
governmental functions. The Government obviously should be 
doing governmental functions. But a lot of things, like wrench 
turning; read the Constitution, it doesn't mention wrench 
turning in the Constitution as an inherently governmental 
function. Therefore, that should be allowed to be competitive. 
And to the extent that it is competitive, the public sector 
will often win some of those, and they will win them often in a 
partnership. That is fine. I have no problem with that at all.
    But on the other hand, the inverse of it is mandating that 
it be done in the public sector. That is sole source. That is 
monopoly. That doesn't usually get low cost and high 
performance.
    Mr. Schilling. Very good.
    Mr. Berteau. Could I add two short things to that and then 
let you get the rest of your questions? One is I think we have 
a definition of core requirements, true in the maintenance 
business, implied in engineering and R&D as well. I think it is 
actually a very good time to revisit that question, because I 
think the view of ``core'' is again a view of the past from a 
mobilized conventional war perspective, and I think there is a 
21st-century way of thinking about what core capability do we 
need to have inside the Department of Defense. I would urge 
that the panel and the committee take a look at that question.
    The second is investment in future capability. Partnering 
is fine, but I don't think it makes sense for the Government to 
facilitize capability that is already present and resident in 
the supplier base where you have a global supply chain already 
in place. So that is an area where you could save money and 
focus your investment on the places where that core is really 
needed, and I think it is a good time to take another look at 
that.
    Mr. Schilling. Very good. Thank you, gentlemen.
    Mr. Shuster. If you have any further questions, we are 
going to do a second round, and we will start with you, if you 
want to finish up, if you have another question.
    That last question, can you give us a concrete example on 
that last question about what you are talking about?
    Mr. Berteau. Probably my best concrete example would be the 
new K-46 Air Force tanker, which is based upon a commercial 
derivative airframe that has a global supply chain already in 
place. This would have been true, by the way, regardless of who 
won that competition. Both competitors had an existing 
commercial airframe with a global supply chain in place.
    I don't think it makes sense to spend, say, $4 billion 
facilitizing depots to do commercial airframe repair work. The 
Air Force ought to focus on the military-unique capabilities 
that it ought to have the capability to perform in house. That 
is one where I think it would merit a hard look.
    Mr. Shuster. Thank you.
    Mr. Schilling. Actually, they answered my last question 
already.
    Mr. Shuster. Sorry about that. Thank you.
    With that, we will go to a second round. If we want to 
start with Mr. Runyan, I will finish up last. Do you have any 
further questions?
    Mr. Runyan. Just kind of to make a point, we have been 
sitting here talking about whether it is core capability force 
strength versus our ability to respond to what is happening 
today. What is more important? I know there is a value to both 
of them, but, I mean, moving forward?
    Mr. Berteau. This is kind of the historical dilemma of 
national security. I think that, in general, the military has 
tended to want to pay more attention to protecting their long-
term investments, again based upon their current view of what 
those long-term investments ought to be.
    It was instructive to watch the dilemma that Secretary 
Gates had when he came into the Department of Defense and 
recognize he is the first Secretary we have ever had who 
spanned two Presidents and two parties. It took him 2 years to 
get the military to focus on actually winning the wars that we 
are fighting today.
    He had to personally intervene to get MRAP [Mine Resistant 
Ambush Protected] vehicle procurement on the table. He had to 
personally intervene to increase the Air Force's development 
and deployment and use of unmanned aerial vehicles across the 
board. It took the personal, strong, repeated intervention of 
the Secretary using his full title and authority to make that 
happen. So the inertia of the institution mitigates against it.
    That said, their vision of what that future is, that they 
are trying to protect the investment in, is so muddied and so 
unclear, and General Dempsey is absolutely right, it is 
unblemished by predicted success here.
    So there needs to be a third way, and that third way needs 
to say we need a clear articulation of what the future is we 
are aiming at, but it needs to be flexible enough that we are 
okay standing up tomorrow and saying, okay, we are smarter now 
than we were yesterday, so we are going to make a little bit of 
an adjustment. That is not present in the institution at all. 
It is kind of a lousy answer to your question, but it is the 
only way I can see to go forward.
    Mr. Runyan. I think also what we have raised here and also 
in past hearings we have had, when you have that intervention, 
the process of whether it is a contract or anything to execute 
that and get it out there is one of the major obstacles, 
because even if the response is there to execute it, it may 
have changed by the time you get it to the field.
    Dr. Gansler. You also need to worry, it seems to me, about 
the exercises that you run. One way of trying to be prepared 
for unexpected things is to put them into the exercise. The 
problem, of course, is that that messes up the exercise. When 
they would want to prepare for Navy operations, the mines might 
mess it up. Or if you want to prepare for an Air Force 
operation, electronic warfare might mess it up, or cyberwar 
attacks and so forth.
    What we need to do is be creative in the exercises in order 
to see how we would respond to command and control decisions 
and to other use of current equipment in unexpected new ways. 
There are two different approaches here for solving the 
unexpected, one of which is to get some new equipment for that 
unexpected area or some new service. But the fastest way is 
using the current stuff in a new way, and we ought to introduce 
that into the exercises, I think.
    Mr. Runyan. Thank you both.
    Chairman, I yield back.
    Mr. Shuster. I do mention the MRAP and up-armored 
``Humvees'' [HMMWV, High Mobility Multipurpose Wheeled 
Vehicles]. It was a big surprise to the military, but talking 
to the Special Forces community in Somalia, they learned the 
lesson. They had an up-armored [Humvee] from some country, 
South Africa or somewhere, that they utilized, and when they 
came back, one of the lessons learned was if we are going to go 
in an urban environment, we need an up-armored vehicle. That 
fell on deaf ears until we started seeing people being killed.
    Dr. Gansler. That is a good example of the multinational 
design. The underneath part of that is a South African design, 
the shock absorbers are a German design, the armor is an 
Israeli design, and some of the electronics are Asian. We take 
full advantage of that, including having the Secretary of 
Defense as the program manager to get it fast.
    Mr. Shuster. Right.
    Ms. Hanabusa.
    Ms. Hanabusa. Thank you, Mr. Chairman.
    In that same meeting that General Dempsey said what he 
said, Leon Panetta also said how that we prepare for the future 
is we've just got to be damn flexible. The problem is what are 
you being flexible for?
    I represent Hawaii, and I met with one general there, and I 
said, here is the Pacific, the theater of the century. What is 
the threat going to look like? And he proceeded to say, well, 
counterinsurgency here, counterterrorism here, maybe follow-up 
force here. And I said, you are naming everything that we have 
had from the past to now. But, I said, the fortunate part is 
that people like--I will speak for myself--people like me, who 
don't understand necessarily all the nuances, are the ones that 
are going to make the decisions on what gets funded.
    So the reality is we have to be flexible, we have been 
terrible in predicting, we are setting policy by acquisition, 
and we should work for a democracy's arsenal that should be a 
joint development.
    But the real issue is kind of like, okay, let's put that 
all together, and how do we do that? I think we need to 
understand what people foresee as the future. Unless we know 
what the future is, and no one knows, I understand that, what 
is the best guess that you have as to what we need to look like 
or what we need to prepare for? Because, as you said earlier, 
it is the budget that is going to determine that, or the lack 
of the flexibility within the budget that is going to cause our 
potential--not necessarily our demise, but at least set us back 
for 5, 6, 7 years.
    So does anyone want to take a stab at that? So when I cast 
my vote I can think, oh, Dr. Gansler said this, or Mr. Berteau 
said that, and maybe I will go with that.
    Dr. Gansler. The one thing you didn't list in your list of 
characteristics you would like to have is low cost. In order to 
have the flexibility that you need, it has to be affordable 
also. And especially with the budgets shrinking, affordability 
becomes a very important characteristic.
    One thing we don't do in our requirements process most of 
the time is to have cost as part of the requirement. Now, that 
is a military requirement, because quantity is determined by 
unit cost, and if we can get the flexibility that comes from 
having distributed sensors, distributed shooters, netcentric 
operations with low cost nodes in that system, we can actually 
afford to have the flexibility to handle all these unexpected 
things.
    Well, the way to do that would be to make cost part of the 
requirement. We have done that, at least in one or two 
programs, successfully, like JDAM [Joint Direct Attack 
Munition]. I have a handwritten note from the Secretary of the 
Air Force--Chief of Staff of the Air Force, I am sorry--saying 
he has only three requirements for that precision guided 
missile; that it should hit the target, it should work, and it 
should cost under $40,000 each. Today it hits the target, it 
works, and costs $16,000 each. Now we can afford to get enough 
of them, and if we need more of them, to buy them, we can 
afford to do that.
    But in other programs we have lost that flexibility. I 
mean, the Joint Strike Fighter was going to be a $35 million 
airplane. We kept that in the name, it is now the F-35, but it 
now costs over $100 million. We have lost the emphasis, and 
that is understandable. In the last 10 years we have been 
living in a rich man's world. Cost wasn't important. Now cost 
has to be the driver, and affordability for all of those 
constraints that you placed on it I think are right. That is 
just one more item, but it is going to be a critical one.
    Ms. Hanabusa. But some of that will be taken care of if you 
have economies of scale to offset it, because what we tend to 
do is hold it close to our vest, and therefore we can't kind of 
sell it on the open market.
    Mr. Berteau.
    Mr. Berteau. I would like to expand on that, and that is 
that the part of cost that is most ignored is lifecycle cost, 
the total cost of the program. The Defense Department resists 
putting a number on this and giving that number to you because 
they say it is uncertain. Well, it is all uncertain. Give me 
your best guess, give me a range, give me the probabilities 
associated with that range. That is a tool that you can use on 
every vote on every issue and for each program.
    It is even true for services contracts as well as for 
hardware. Force them to do that, because the Defense Department 
has an infinite negative value of money. A dollar today will 
not be spent to save $100 down the road, because that dollar 
today is worth more than that $100 down the road. The only way 
that you can offset that is from the Congress.
    Ms. Hanabusa. Thank you. Thank you very much.
    Dr. Gansler. That is actually a design characteristic, the 
lifecycle cost. So Dave is right. Build it in by designing it 
to be maintainable, for example.
    Ms. Hanabusa. I know Ms. Sutton will probably talk to you 
about corrosion, which, broadly defined, is anything unintended 
that deteriorates. But thank you very much.
    Mr. Shuster. Thank you.
    Ms. Sutton.
    Ms. Sutton. Well, I did just say to him that is what 
corrosion mitigation and prevention is all about.
    Ms. Hanabusa. I didn't hear you, but I knew you were going 
to say it.
    Ms. Sutton. But it is, and it is a good example of how we 
can enhance value for the taxpayers. We are losing $400 billion 
a year in our economy to the cost of corrosion, some 32- or 36-
, I can't remember--billion----
    Ms. Hanabusa. Twenty-two billion.
    Ms. Sutton. Twenty-two. See, I have got these guys on 
message. I am so glad. And, of course, we are doing work to try 
and build in prevention and mitigation up front, which just 
makes sense. So it is a commonsense thing.
    Okay. So we had a discussion about the value of working 
together with allies in many capacities. Now, I come from Ohio, 
a place with an extraordinarily strong manufacturing base, 
built in no small part through defense work. You know, I am the 
daughter of a boilermaker who worked in a factory that made 
boilers for our--you can guess who that is. So there is nothing 
more important to me.
    Obviously our defense is important, but also jobs are 
really important. So let's talk about the other side of that 
coin and the interest that we have in, as we develop our 
industrial base policy, the commitment we should have to jobs 
and putting our people to work, because I know it is a bit 
complicated and a trade-off.
    So could you both comment on that?
    Dr. Gansler. Well, one of the things that I think is really 
important is to recognize that technology, industry and labor 
are now globalized, and that means that foreign investment in 
the U.S. creates jobs and creates exports, in fact, in many 
cases greater than U.S.-owned but foreign-located here in the 
U.S.
    For example, the sixth largest defense company domestically 
located is BAE. The headquarters happens to be in London, but 
the workers are in the U.S. And they do an enormous amount of 
export as well, and that creates jobs. So the equity coming in 
and the exports going out from these foreign-owned companies is 
a benefit to the U.S. in terms of jobs and taxes.
    Ms. Sutton. I know that it can work that way, but it 
doesn't always work that way. Again, here is the problem of the 
complexity of these policies.
    Would you like to comment, Mr. Berteau?
    Mr. Berteau. There is a lot that we suspect, but don't know 
here. We are pretty sure that there is probably some 
contribution made by defense manufacturing to sustain or 
enhance the competitiveness of the U.S. manufacturing in the 
global economy, but we don't have very good places where we 
know how to spend our dollars so it sustains that. Let me give 
you two examples.
    In the shipbuilding business we have evolved now to where 
U.S. shipbuilders fall into one of three categories basically. 
They are either building warships for the U.S., and we still 
build by far the best warships on the planet. They are also the 
most expensive. I am not quite sure where the trade-off is 
there.
    The second is Jones Act trade, where we are required to 
have U.S. hulls in order to do intercity transfer.
    And the third is where we are actually globally 
competitive, and that tends to be in businesses like oil 
services, small vessels, small high-speed vessels, et cetera, 
where we actually have a globally competitive manufacturing 
base that is as good or better than anybody else and is cheaper 
and competitive.
    There is no relationship between where the Navy has spent 
its money on those major warships and where those small high-
speed vessels and oil services businesses are globally 
competitive. That is not by design that there is no 
relationship; it has just evolved that way. There are 
opportunities to see where that can happen.
    Now, let me give you the other example. The other example, 
commercial communications satellites, right? The U.S. Defense 
Department is absolutely dependent on commercial communications 
satellites for all of its communications. Ninety-five percent 
of bandwidth downloads in Afghanistan are over a commercial 
market floating overhead. It just happens to be the capacity 
there. We need to pick our next war spot carefully and make 
sure there are enough satellites over it.
    But we have no responsibility for making sure those 
satellites are up there. We assume they are there because there 
is a global commercial market that provides it. One of those 
satellite operators said to me, woe unto you, DOD, if Princess 
Diana and Michael Jackson happened on the same weekend, because 
you don't have enough money to buy time anymore.
    Ms. Sutton. Thank you.
    Mr. Shuster. Mr. Larsen, do you have further questions?
    Mr. Larsen. Dr. Gansler, how should the Department weigh 
efficiencies achieved through contract consolidation against 
the potential that such consolidation can eliminate small 
business opportunities?
    Dr. Gansler. Let's see, there are two things in that 
question. One relates to small business alone, and the other 
relates to competition per se.
    One of the things that I think--the second half of that is 
easiest, is why don't we compete things when we know the 
benefits of competition; for example, on the second engine for 
the Joint Strike Fighter. Hopefully you have all read The Great 
Engine War [The Air Force and the Great Engine War], and you 
are familiar with the fact that by having the two engine 
suppliers in the U.S. both build them----
    Mr. Larsen. It wasn't enough that we lived it, that we had 
to read it, too?
    Dr. Gansler. The reality is you want to make sure you got 
the benefits of it, you know, the fact that both of them got 
higher performance at lower cost and higher reliability as that 
program went along because they competed for share of the 
business. Now we have the largest program in history, and we 
are not doing it. It makes you wonder. It affects employment as 
well as it affects everything else. But most importantly, it 
affects how many we can buy with higher performance and higher 
reliability, so why wouldn't we do it.
    Now to go to the second half of your question about the 
small business effects of competition. It seems to me that if 
you think about where the small business has its biggest impact 
on the large programs, it is at the lower tiers, and therefore, 
trying to encourage small business participation in the large 
programs is a big benefit for the small business, and it is a 
big benefit for the primes who can manage those small 
businesses.
    Now, what we do find too often, unfortunately, is that the 
small business is just a front for the subcontractor 
activities, and that is asking them to manage the larger 
contracts below them. I don't think that is a necessary benefit 
to us.
    So I think we do want to think more about the small 
business at the lower tiers as part of the contractual 
discussions and making that maybe part of the incentive for 
awards, but doing it carefully, not just as a scorecard basis 
again, but making sure we are getting small businesses that do 
a good job. So past performance for them counts just like past 
performance for the large ones.
    Mr. Larsen. Let me give you a specific example, not of this 
issue, but a specific example of a company that is in my 
district that came up at our roundtable we had in August.
    This particular company does a service for one of the 
Services, and they were asked to basically develop the 
requirements, develop the how-to, the manual, just develop 
everything. And then in order to compete for the job, they had 
to hand over everything. Then the Service went and competed 
that job so that all the competitors for this particular small 
business, locally owned, had to compete for the work that they 
did for this particular Service, and the competitors got to see 
all the work and then compete for it as well.
    Is there a way to protect that intellectual property in the 
contracting process?
    Dr. Gansler. Yes. Actually, one of the things that has been 
happening that really bothers me is the trend to not having the 
unsolicited proposal being awarded because it doesn't count as 
a competition. But when someone comes in with a really good 
idea, why wouldn't you fund it?
    We used to do that, and it made a lot of sense, and the 
small businesses were usually the ones that came in with these 
good ideas. And they would just simply say, here is a great 
idea; would you just pay for the development of it? And then 
you can later have a competition for not the design, don't give 
out the drawings, but for the function. You can have functional 
competitions, and they make a lot of sense.
    But I would encourage the idea that when a small business 
has a good idea, they get it funded on a sole-source basis. 
There is no risk to that. It is small money, and usually that 
is the way to get disruptive ideas in.
    Mr. Larsen. Mr. Berteau, any thoughts?
    Mr. Berteau. I think there are three challenges that have 
to be tackled before you can fix the problem that that company 
faced there.
    One is that the Defense Department just fundamentally 
doesn't have enough good data about particularly the second- 
and third-tier suppliers, and that is where those guys started 
from, if you will. They may have gotten up to that point--in 
part because the Government no longer pays for that 
information. And because the Government doesn't pay for it, and 
most of the contractors only operate on a cost-reimbursable 
basis, they don't collect that information either. So the data 
is just simply not there.
    And that is in both directions; that is, small businesses 
that have large businesses as their subcontractors, and large 
businesses that have small businesses as their subcontractors. 
So you don't really have a good picture of the true universe, 
and that makes it very hard to make any policy judgments or 
policy decisions.
    The second is the difficulty that any individual procuring 
contracting officer has making a decision that recognizes the 
reality that you described there, a reality that says, this 
actually isn't fair. This doesn't make sense. They have got to 
have such an amount of justification and documentation that 
warrants a decision that looks like a violation of the rules, 
but really isn't, because the rules are written to permit that, 
to permit judgment.
    This gets back to the question of the acquisition 
workforce, which I think was alluded to earlier both in 
statements from you all and in Dr. Gansler's testimony. We 
don't have the experience base in our defense acquisition 
workforce today. And if there is only one thing that this panel 
does, you have got to reinforce the need and the efforts to 
rebuild the capability of that workforce, because we rely on 
their judgments in making those contracting decisions. And you 
don't get that experience except through the passage of time, 
and you can't work 10 times as hard for 1 year and come out 
with 10 years' worth of experience, although we tried that.
    And I don't think you have--in your case, I think if you 
peel back the layer, you will see that there is an inadequate 
amount of information, and so they err on the side of, well, 
let's just protect ourselves. There is an inadequate experience 
level in the workforce, so they err on the side of let's just 
follow the checklist. And there is an inadequate willingness on 
the part of the leadership to let them take them take a risk 
and say, you know what, we deserve to pursue it is the right 
way here. I don't think you have any of those present there, 
and you got to tackle all three of those.
    Mr. Larsen. Thank you.
    Mr. Shuster. Let me follow up on that.
    So we are lacking that. Why are we lacking it? There has 
been folks leaving that part of the defense, or we don't know?
    Dr. Gansler. You passed the law about the 25 percent 
reduction is one of the reasons--Congress did. This was Duncan 
Hunter. What happened was in the period--in the post-Cold War 
period, the dollars shrunk, and the DOD properly cut back, and 
then you passed a law, another 25 percent. So we had a huge 
reduction. Then when the budget went way up, the DOD 
undervalued the value of this acquisition workforce.
    For example, the Army had five general officers with 
contracting background. When I did that commission for 
Secretary Gates, they had zero in 2008. Defense Contract 
Management Agency had four general officers. They went to zero. 
They went from 25,000 people to 10,000 people.
    Now what I am seeing is each of the agencies are starting 
to bring in interns, in fact, over 1,000 interns, and only 3 
highly qualified experts, so-called, that you allow. And they 
are the people with industry experience, and they would bring a 
lot more than the 1,000 interns. A thousand interns will be 
great in 15 years, but in terms of the near-term acquisition 
problem, we are not filling that gap as much as we ought to do, 
I think.
    Mr. Berteau. I think the record should show that for about 
the last 3 years, maybe 4 years, the Defense Department--
because I think it actually preceded the current 
administration--the Defense Department has put a considerable 
amount of energy into hiring and training and retaining the 
beginnings of that workforce. But it is going to take years to 
build it back up.
    Mr. Shuster. Is there any way that we can go to the private 
sector and get them to help in this--in outsourcing the 
acquisition people to come in?
    Dr. Gansler. As long as you avoid the conflict-of-interest 
issues. First of all, they shouldn't do work that is inherently 
governmental. You have to be very careful of that. Secondly, 
they should not be writing the requirements and then bidding on 
it.
    Mr. Shuster. Right. UPS [United Parcel Service]--they do 
business with the Government, but they are not bidding. But I 
am sure they are out there. I know they go out there and they 
acquire trucks and tires and all kinds of complicated systems. 
Is that in the realm of possibility, in your minds?
    Dr. Gansler. Well, that is what the highly qualified 
experts are. You hire someone from one of those companies to 
actually do the inherently governmental work and assist them 
with contractors to do analysis or data gathering or things 
like that, but not decisionmaking. That is inherently 
governmental.
    Mr. Shuster. When I think about that, I use UPS because I 
read in one of your testimonies of a logistic system, and there 
is a huge $200 billion in it.
    Dr. Gansler. It is not world class by any means in terms of 
reliability, in terms of responsiveness, in terms of cost, in 
terms of labor and so forth. That is an area we need to 
modernize.
    Mr. Shuster. FedEx or UPS could come in and turn it into 
what they do.
    Dr. Gansler. Or bring some of their senior people as highly 
qualified experts and then contract with them to do some of 
that work. But I would do it in a competitive fashion even, 
public-private competition.
    Mr. Berteau. But we need to keep in mind there that UPS is 
the distribution system, but they don't actually set the 
requirements. In other words, Walmart may rely on UPS and FedEx 
to make sure they get everything, but only the demand that 
comes out of Walmart is what sets the requirement. So it is 
really a marriage of UPS and Walmart, if you will.
    Dr. Gansler. Those companies today like UPS and FedEx, they 
don't think of themselves as transportation companies. They 
think of themselves as information companies. They do total 
asset tracking. We don't have total asset visibility in our 
system. That is shocking. We should have that.
    Mr. Shuster. Right.
    And could you comment on the impact of the failure to have 
a long-term reauthorization of the SBIR program?
    Dr. Gansler. It is shameful. That is my honest assessment. 
I mean, that program has been demonstrated to be successful. 
Why wouldn't you extend it?
    Mr. Berteau. I completely agree. I probably wouldn't use 
the adjective ``shameful,'' but my thesaurus runs dry right 
now.
    Mr. Shuster. Also a question, we have learned through these 
hearings and these roundtables, of a situation as Mr. Larsen 
pointed out, intellectual property rights are having to be 
given up to compete. But also when the auditing comes in, and 
you have got a company--and we heard in his district also--a 
company of five people, and when they come in, it is like they 
are dealing with Boeing. I mean, you have got five people.
    In your view and your experience, and I don't know how much 
experience you have with that part of the process, but how do 
we make it so that--there is almost a need to have a two-tiered 
approach. The big contractors are going to have a much more 
robust group coming in from the Department of Defense to audit 
them versus these small companies that virtually they are 
shutting down. They have to tell people to stop working and 
start doing compliance.
    So is there anything in your view that could change that, 
an idea to put forward?
    Dr. Gansler. Again, I think it is focusing on price, not 
cost. I talked to one semiconductor manufacturer who was a 
world-class commercial supplier. I said, why aren't you 
supplying to the Defense Department also? He said, because you 
care about accounting for every dollar against each part, and 
we care about reducing the price of our parts. And it is a very 
big difference in attitude. We should care about being 
competitive in terms of performance and cost; not just cheap, 
but performance and cost.
    Mr. Berteau. Mr. Shuster, we have actually taken an 
extensive look at the question of Defense Contract Audit Agency 
and its interaction both with industry and with contract 
administration. We haven't yet produced the results of that 
assessment, but I expect that we will have something coming out 
perhaps even before your 6-month window is closed, and I will 
be glad to share that with you when that is done.
    Mr. Shuster. That will be great.
    Let me put an idea out there. There are industries in this 
country that self-regulate. The financial industry has FINRA 
[Financial Industry Regulatory Authority]. The CPAs [Certified 
Public Accountants] in this country and the bar for the most 
part, they regulate themselves.
    Is there a potential to have a self-funded mechanism by 
defense contractors, especially the small and medium-sized 
ones, to go in and almost self-regulate themselves? Obviously 
with oversight of--you know, with FINRA, the SEC [U.S. 
Securities and Exchange Commission] is always looking over 
their shoulder. But is that something that has any merit to 
look at, or is that something that is completely out of the 
realm?
    Dr. Gansler. I think you do need oversight, but not more 
oversight than competence. You know, the problem that we have--
I found in Iraq and Afghanistan we had more auditors than we 
had people writing contracts, and yet we had a large number of 
contractors, a larger number than military people over there.
    I do think that the best regulation is the market. Through 
competition you are going to get--if you focus on performance 
and cost, not just cheap, that using the market as your 
regulator through competition, you will get higher performance 
at lower cost without having to audit it.
    Mr. Shuster. With that being said, do you also believe, as 
a number of people have testified, and I don't know if you have 
read it or wrote it in your studies, but this is not a free 
market--our defense industry base is not a traditional free 
market?
    Dr. Gansler. No. But you can create a market. It is not a 
free and open--in fact, there is an argument and a lot of data 
to show that free and open is less effective than effective 
competition, even limited competition to those who are 
qualified. Now, that does eliminate a lot of the small 
businesses, so you have to figure out some way to get them into 
it as well. You don't want to just have people who have done it 
before. But, on the other hand, for the larger programs or the 
fast response, prior experience matters as well.
    Mr. Berteau. Across the Government and in the Defense 
Department, we have a surprisingly high percentage of contracts 
that are listed as competitive, but only have one bidder. Now, 
that merits some further investigation, in my opinion. 
Something like 20 percent of contracts are competitive 
contracts with only one bidder.
    Now, either that means there really is only one legitimate 
bidder, and we are only putting up the illusion of competition 
so that we that don't have to write a justification for a sole-
source contract, or we are not doing a good enough job of 
making sure that we are soliciting input from legitimate 
competitors.
    Mr. Shuster. What about the idea that I said about the 
self-regulation, setting it up, like a FINRA with the SEC 
overseeing it, and letting the Defense Auditing Agency take 
care of the Boeings and the Lockheeds, but have this 
organization that understands small business, but yet has 
strict regulatory--the rules are in place and the oversight is 
there?
    Dr. Gansler. The industry has been proposing to do more of 
self-regulation ever since the Packard Commission. That was one 
of the things that they proposed at that time to us. And I 
think certainly self-control, if you remove some of the current 
regulation, but adding more external regulation and then 
expecting the cost of that, you know, it is going to be 
forgotten or ignored. Because I remember years ago when a 
detailed study was done by Coopers & Lybrand comparing the same 
item being built in a defense plant and in a commercial plant, 
and then the difference was an added 17 percent. Today it is 
even greater because of regulation.
    Mr. Berteau. Mr. Chairman, I don't think I would support 
self-regulation in the sense that you described there, but I 
think there are a couple elements of that idea that merit very 
serious attention. One is one that we have tried in the past 
and abandoned for a variety of reasons, historical, GAO 
[Government Accountability Office] has written about this, and 
that is that what contract auditors would do is certify the 
system, and then the results of the system would essentially be 
accepted as valid, so that instead of verifying and validating 
and auditing every single data element, you certify the process 
and the results of that process. That is an element of what 
would be essential to self-regulation, and I think that is an 
element that merits attention, if you will.
    The second is, in fact, the idea that not every potential 
problem is of equal value and importance. Actually if we have a 
limited number of resources and a limited number of contract 
auditors, and we do, we ought to focus their attention on the 
things where the risk is the highest and the pay-off is the 
greatest.
    Contract auditors measure their success by the numbers of 
costs that are questioned and the amount of those questioned 
costs that are sustained. What they really ought to measure 
their success by is the timeliness and value of the ultimate 
delivery of the results of those contracts. They are 
independent and separate from that. And in that sense, that is 
where the market issue has to come back into play.
    Mr. Shuster. Thank you.
    Does anybody have any further questions?
    Thank you both very much. This was a very enlightening and 
an excellent hearing. I appreciate your insights and look 
forward to seeing the results of that study you are doing on 
the Defense Auditing Agency. That is what it is focused on. You 
anticipate in the next month or two?
    Mr. Berteau. Our ability to predict the future is actually 
no better than DOD.
    Mr. Shuster. Is that because you have been working with 
them for so long, you have caught that cold?
    Mr. Berteau. We do reflect the reality that we operate in, 
I am sorry to say.
    No, I don't have a specific timetable, but knowing the 
interests of this panel, I will go back and take a look at that 
and let you know.
    Mr. Shuster. As I said earlier to you, you know, and I 
think you confirmed this, we are chartered for 6 months, but as 
one of you said, at the end of 6 months, you might just be 
starting to ask the right questions, which I fully believe that 
this is going to be a multiple-year project to be able to 
really drill down in, get the right answers, and come forward 
with significant policy directives to change the culture over 
across the river.
    So, again, thank you all very, very much for being here. I 
just remind the Members December the 9th in New Jersey. We can 
take the train up. It should be pretty easy, and everybody can 
fly out of Philadelphia. And also take a look at that January 
8th to the 13th. I would like to get confirmations or denials 
right after we get back from Thanksgiving.
    So, again, I thank everybody for being here. I thank you 
for spending this time with us. Thanks.
    [Whereupon, at 10:40 a.m., the panel was adjourned.]



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                            A P P E N D I X

                           November 18, 2011

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                           November 18, 2011

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                     Statement of Hon. Bill Shuster

    Chairman, House Panel on Business Challenges within the Defense 
                                Industry

                               Hearing on

                Creating a 21st Century Defense Industry

                           November 18, 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. Today we are hearing from two experts 
on the defense industrial base, and both these gentlemen have 
extensive expertise in the issues associated with maintaining 
an effective industrial base:

         LThe Honorable Jacques S. Gansler, professor 
        and Roger C. Lipitz Chair, and Director for the Center 
        for Public Policy and Private Enterprise at the 
        University of Maryland; and

         LMr. David J. Berteau, senior vice president 
        and Director of the International Security Program at 
        the Center for Strategic and International Studies.

    Dr. Gansler's recently released book, Democracy's Arsenal: 
Creating a Twenty-First-Century Defense Industry, as well as 
Mr. Berteau's work at the Center for Strategic and 
International Studies on the defense industries initiative lend 
great knowledge and insight into these extremely complex 
issues.
    In our hearings on this issue, we have heard from a variety 
of witnesses in the field and in the Department of Defense 
about the current challenges and future projections regarding 
the United States defense industrial base. The conversation 
thus far has been very informative as each and every person we 
meet with brings a unique perspective about how to learn from 
our past failures and establish stability in the industrial 
base. Today we continue that dialogue by focusing on the future 
and in doing so we are asking some very basic questions 
regarding this very complex subject matter:

         LWhat can we do to adapt the current 
        environment to meet the needs of a 21st-century 
        security strategy?

         LWhat can we learn from other nations who are 
        implementing strategies to deal with this critical 
        issue?

         LWhat changes are necessary in our workforce 
        and acquisition policies to meet this vision?

    This panel has the opportunity to highlight the challenges 
and successes of the defense industrial base as we examine 
challenges to doing business with the Department of Defense. 
Our defense industry today continues to have 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. I'd like 
to take a moment to recommend that all the Members of the panel 
review a recent RAND report on Small Business and Defense 
Acquisitions. Each of the Members has a hard copy of the report 
in their packet of hearing materials. This report reviews 
federal policy regarding small businesses and the implications 
for future DOD policies and practices. Not only does it provide 
a primer on basic historical background on Federal small 
business policy, but it also examines trends in DOD contracting 
practices and small business utilization. I think it will be a 
useful reference for the panel as we continue our work in this 
area.

                     Statement of Hon. Rick Larsen

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

                               Hearing on

                Creating a 21st Century Defense Industry

                           November 18, 2011

    This panel is charged with looking at ways DOD can improve 
its business practices, not only for the benefit of the DOD 
budget, but also for the benefit of local companies who want to 
provide services and goods. Over the past month, through 
hearings and district visits, we've gained valuable insight 
from industry and the Department on the challenges our 
industrial partners face with doing business with the 
Department of Defense.
    In due time, I'm confident that this panel will offer a few 
recommendations to the full committee that would improve on 
some of those challenges; however, an important part of this 
task is understanding how the current defense industrial base 
operates. I hope the witnesses offer the panel a brief history 
of the events and factors that have shaped the current 
industrial base.
    I believe we are all aware of the key role our industrial 
complex has played with providing capabilities throughout the 
years in support of our national security. They have risen to 
each challenge from World War II to responding to 9/11. I would 
appreciate hearing from you on how our industrial partners must 
evolve to meet the current economic constraints and 21st-
century threats, to include global competition.
    Earlier this month, the panel heard from Brett Lambert, the 
Deputy Assistant Secretary of Defense for Manufacturing and 
Industrial Base Policy. Mr. Lambert made the point that 
references to ``the'' defense industrial base that imply a 
monolithic entity are inaccurate. The defense industrial base 
includes companies of all shapes and sizes resourced all around 
the world. This will provide us and the Department a much 
better picture of what currently exists today, and perhaps 
provide some clarity on how to move forward.
    The 2008 Defense Science Board's Task Force on Defense 
Industrial Structure for Transformation chaired by Dr. Gansler 
noted that ``the nation currently has a consolidated 20th 
century defense industry, not the required and transformed 21st 
century National Security Industrial Base it needs for the 
future.'' I look forward to hearing from Dr. Gansler and Dr. 
Berteau today on what steps must be taken to establish a 21st-
century defense industrial base.




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                   DOCUMENTS SUBMITTED FOR THE RECORD

                           November 18, 2011

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