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




                         [H.A.S.C. No. 112-99]
 
                        DOING BUSINESS WITH DOD:

                   CONTRACTING AND REGULATORY ISSUES

                               __________

                                HEARING

                               BEFORE THE

                      PANEL ON BUSINESS CHALLENGES

                      WITHIN THE DEFENSE INDUSTRY

                                 OF THE

                      COMMITTEE ON ARMED SERVICE

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                            FEBRUARY 6, 2012

                                     
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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
                                  2012

                                                                   Page

Hearing:

Monday, February 6, 2012, Doing Business with DOD: Contracting 
  and Regulatory Issues..........................................     1

Appendix:

Monday, February 6, 2012.........................................    25
                              ----------                              

                        MONDAY, FEBRUARY 6, 2012
       DOING BUSINESS WITH DOD: CONTRACTING AND REGULATORY ISSUES
              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

Burman, Dr. Allan V., President, Jefferson Solutions.............     4
Johnson, Joel L., Former Vice President, International, Aerospace 
  Industries Association of America, Inc.........................     6

                                APPENDIX

Prepared Statements:

    Burman, Dr. Allan V..........................................    33
    Johnson, Joel L..............................................    46
    Larsen, Hon. Rick............................................    31
    Sharma, Raj, President, Federal Acquisition Innovation and 
      Reform (FAIR) Institute....................................    53
    Shuster, Hon. Bill...........................................    29

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    Mr. Larsen...................................................    67
       DOING BUSINESS WITH DOD: CONTRACTING AND REGULATORY ISSUES

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
  Panel on Business Challenges within the Defense Industry,
                          Washington, DC, Monday, February 6, 2012.
    The panel met, pursuant to call, at 3:00 p.m. in room 2212, 
Rayburn House Office Building, Hon. Bill Shuster (chairman of 
the panel) presiding.

 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. I first want 
to welcome our panelists here today.
    Thank you, and a little trivia, they are fraternity 
brothers from Wesleyan, and I was just trying to figure out who 
hazed who.
    Mr. Burman. He hazed me.
    Mr. Shuster. Okay. All right. So you are the younger?
    Mr. Burman. I am the younger.
    Mr. Shuster. Well, again, thank you very much for taking 
the time to be here today.
    As most of you know, the panel has traveled around the 
country over the past few months to hold roundtable discussions 
with companies that are trying to do business with the 
Department of Defense. No matter where we went or what sector 
of the industrial base we met with, we heard time and again 
that red tape and bureaucracy are getting in the way of 
innovation, efficiency, and jobs.
    In Rock Island, Illinois, we heard complaints that export 
controls are overly restrictive. Many of the businesses we 
spoke to highlighted that we currently take a one-size-fits-all 
approach to determining what is placed on the U.S. munitions 
list. There is no mechanism for items to smartly be moved off 
of that list as technology advances and specific items become 
readily available in the global market.
    In Santa Clarita, California, we heard from a gentleman who 
ran a company that was last audited by the Defense Contracting 
Audit Agency in 2005, and the audit was still open due to 
failures on the part of DCAA [Defense Contracting Audit 
Agency]. He estimated that having his open audit on the books 
has cost his company $3 to $4 million in lost business over the 
last 6 years.
    In Akron, Ohio, we heard that although programs like the 
Small Business Innovative Research program aid in technology 
development, the technology rarely goes anywhere because there 
is no mechanism to assist in completing the stringent military 
test requirements nor is there resourcing to get the technology 
into production.
    In Honolulu, Hawaii, we met with a small business owner who 
commented that small businesses are simply not equipped to deal 
with the bureaucracy of DOD [Department of Defense] acquisition 
system. And in San Diego, California, we heard from a 
businessman who felt that the large primes don't want small 
business to innovate and another who commented that anyone that 
wants to partner with a small business simply wants your 
technology. Both these gentlemen agreed that more needs to be 
done to protect the intellectual property of small businesses.
    Here is the thing, it isn't just one guy in Ohio or a CEO 
[Chief Executive Officer] in California or a small business 
owner in Illinois. These issues were consistently raised 
everywhere we went, from the shipyard workers in Hawaii to the 
nanotechnology developers in Ohio.
    Mr. Shuster. We invited three witnesses to meet with us 
today to explore those issues and provide us with 
recommendations to eliminate some of the red tape. 
Unfortunately, one of our witnesses, Mr. Raj Sharma, President 
of the FAIR [Federal Acquisition Innovation and Reform] 
Institute, needed a few more days to recover from surgery he 
had last week and will not be able to join us. He did provide 
us with written testimony and is standing by to respond to any 
questions we may have for him following the hearing. We wish 
him a speedy recovery and ask his written statement be entered 
into the record.
    [The prepared statement of Mr. Sharma can be found in the 
Appendix on page 53.]
    Mr. Shuster. Today with us are Dr. Allan Burman, President 
of the Jefferson Solutions, and Dr.--or, Mr. Joel Johnson, 
former Vice President of the Aerospace Industries Association 
of America. Both of these gentlemen bring a unique set of--
brings a unique set of experience and expertise to the table. I 
hope that we will have a fruitful exchange today and you will 
be able to assist this panel in formulating recommendations to 
improve the business environment out there.
    And with that, I will yield to Mr. Larsen if he has an 
opening statement.
    [The prepared statement of Mr. Shuster can be found in the 
Appendix on page 29.]

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

    Mr. Larsen. Thanks, Mr. Shuster, and I am pleased to be 
joining you and the other panel members today in what is the 
last hearing of the panel's first 6 months.
    Mr. Shuster. Is it?
    Mr. Larsen. The staff is confirming it is in fact our last 
hearing of the panel's first 6 months to look at the challenges 
of doing business with the Department of Defense.
    Since this panel kicked off, we have heard from countless 
large and small defense contractors, DOD officials, noted 
academics, and nonprofit and think tanks about doing business 
with the Department. While each individual had their own take 
on doing business with DOD, many common themes emerged. The 
Federal acquisition process consists of many onerous rules and 
regulations. There is not enough communication between industry 
and the Government buyer. The technology valley of death 
continues to grow. The accounting and auditing standards used 
by DOD agencies are antiquated and don't differentiate between 
large and small companies. There is a lack of skilled 
acquisition professionals. And Government export control 
policies hinder the sale of U.S. goods and services to foreign 
buyers.
    Today's hearing focuses on some of the most complex issues 
that negatively impact small businesses' ability to become and 
remain viable partners to the Department contracting and 
procurement processes as well as regulatory policies.
    While U.S. goods and services and the process in which the 
DOD buys them has repeatedly proven to be world class, it is 
not without limitations. For many companies, doing business 
with the DOD either the cost to enter the defense market or the 
cost to comply with defense regulations is prohibitive. This 
panel would benefit from hearing recommendations from our 
witnesses that might lead to DOD's contracting system becoming 
more flexible, allowing more entrants into the defense market. 
We would also like to hear your recommendations for ideas to 
bolster the existing defense industrial base while taking steps 
toward creating a 21st-century defense industrial base that is 
more diverse, more agile, and more able to respond to an array 
of potential threats.
    Shifting to a more agile 21st-century defense industrial 
base will mean making difficult choices about what we want our 
defense industrial base to look like and what goods and 
services we want it to provide.
    I would like to thank each of our witnesses for appearing 
before the panel this afternoon and ask that they offer the 
panel, this panel, their expert viewpoints on what they feel 
are some necessary steps needed to create a more flexible 
acquisition process. I am also interested in hearing about what 
steps DOD and industry can take to increase communication and 
transparency, not just at the top leadership levels but 
trickling down to the buying commands and program officers.
    Last, I am interested in hearing what our witnesses believe 
are the most significant challenges that DOD faces in buying 
goods and services, and briefly offer your thoughts on at least 
one significant barrier faced by the industry to remain a 
viable defense partner. For example, I can't help but recall a 
couple of export control challenges that were presented to the 
panel while we were conducting the roundtable discussion in 
Chairman McKeon's district a few weeks ago.
    One small business noted that on a particular contract to 
provide air conditioners for a weapons platform, that the basic 
air conditioner was required to be ITAR [International Traffic 
in Arms Regulations]-compliant simply because DOD wanted it to 
be painted similar to the platform it supported. Another 
participant who manufactures lithium ion batteries described 
how unnecessary ITAR restrictions impacts his, 
``competitiveness, not only in exporting but also how it 
impacted his domestic sales as well.''
    These are tough issues that fall largely outside the 
jurisdiction of this committee but nonetheless should be 
addressed if we as a nation seek to help our industrial base, 
particularly our small businesses, remain viable to defense and 
to our economy.
    So I want to thank Dr. Burman and Mr. Johnson for their 
participation this afternoon, and I look forward to hearing 
from each of you.
    And again thank you again, Mr. Chairman, and as well, Mr. 
Chairman, it looks like we, in fact, will have Representative 
Hanabusa's presence at this hearing, maintaining her stellar 
attendance.
    [The prepared statement of Mr. Larsen can be found in the 
Appendix on page 31.]
    Mr. Shuster. Thank goodness.
    I wouldn't know what to do if she wasn't here.
    Welcome.
    Welcome to all. We have a full house here today, so welcome 
all the Members to the hearing today.
    And with that, Dr. Burman, if you would proceed with your 
testimony.

    STATEMENT OF DR. ALLAN V. BURMAN, PRESIDENT, JEFFERSON 
                           SOLUTIONS

    Dr. Burman. Thank you very much, Mr. Chairman. Chairman 
Shuster, Ranking Member Larsen and Members of the committee, I 
am Allan Burman.
    Mr. Shuster. Your microphone, sir. Your microphone, you 
have to press the button.
    Dr. Burman. Now do you hear me? Sorry.
    And Members of the committee, I am Allan Burman, president 
of Jefferson Solutions, a woman-owned small business, and 
chairman of the Procurement Round Table. I am also a former 
administrator for Federal procurement policy of the United 
States and served in that post under Presidents Reagan, Bush, 
and Clinton. I appreciate the opportunity to testify on 
challenges facing companies doing business with the Department 
of Defense, and I would ask that my statement be submitted for 
the record, and I will summarize its main points.
    Jefferson has done many acquisition reviews across the 
Government, and the same issues tend to come up again and 
again. Contracting officers are often overworked and 
underequipped. Collaboration between program and contract staff 
is poor. And there is a lot of confusion on what Government can 
say to industry and when. Some of these problems come from the 
mismatched growth of dollars and staff. If you look at DOD's 
contract obligations from fiscal year 1999 to fiscal year 2010, 
they went from $165 billion to $366 billion, an increase of 122 
percent. However, if you take a look at staffing over that same 
time frame, contract staffing, you are seeing a growth of about 
20 percent. The fix to a lot of these kinds of problems tends 
to be additional layers of policy and regulation, and what ends 
up is added complexity, burden, and cost, and costs 
particularly for small businesses.
    I think the committee recognizes and those who are in this 
profession looking at acquisition, the acquisition community, 
agree that we need to strike some kind of balance between 
workload and staffing, efficiency and risk, and regulation and 
cost.
    Today I would like to speak to four major topics of concern 
and challenges: Communications between Government and industry; 
the imbalance between Federal contracting workload and 
staffing; the risks involved with the improper use of Lowest 
Price Technically Acceptable contracting techniques; and the 
costs of increasing use of regulation.
    With regard to communications, as I mentioned, there seems 
to be a lot of confusion and misinformation on the level and 
timing of communication between Government and industry, and 
people are hesitant to talk. Dan Gordon, as procurement 
administrator, the most recent administrator who just recently 
resigned, came up with a Mythbusters Top 10 list, and here are 
some things to do: When requests for information go out, 
Government should follow up with meetings to perform market 
research. One-on-one meetings help both sides in understanding 
capabilities and needs. And debriefs should be as thorough as 
possible to help small businesses better compete and to reduce 
protests. When we first started, when Solutions started in the 
mid-1990s, we went through a lot of procurements where it 
definitely helped us to come in and find what we had done wrong 
to be able to correct those kinds of things. We ended up doing 
a lot better as a result. So more communication and more 
understanding of how the other side operates I think is a great 
benefit for both.
    With regard to staffing, we find overworked and 
understaffed personnel. They don't have the time to get the 
training, development, and refreshers they need, and you see 
low morale and high turnover. Procurements are delayed and 
customer service suffers, and staff are not developing the 
competencies they need. As a result of this, agencies are 
looking to use less complicated evaluation schemes 
inappropriately, such as Lowest Price Technically Acceptable 
ones, as a way to sidestep the inability of staff to perform a 
best value analysis effectively. Even with reduced budgets--and 
we see this coming--the agency must invest in the necessary 
support training and staffing of its workforce.
    Now, I mentioned Lowest Price Technically Acceptable and 
the risks associated with it. This really is a focus on price, 
and it results in big risks for the Department because it 
drives innovation off the table. Competitors only show enough 
qualification to get by. Evaluations start at prices, and if 
the low cost offer is technically acceptable, then they win, 
and no one else's proposal can be even seen or is even seen. So 
small businesses that can't offer incredibly low bids are 
forced out of the process. I know this is an issue that has 
already been raised before this committee.
    The end result is Government gets unrealistically low bids 
and firms can't do the work. A former--Jacques Gansler, a 
former Under Secretary of Defense, cited this as something that 
the NRO [National Reconnaissance Office] was using as a 
contracting technique for buying security services. He called 
it a failure waiting to happen. I see the same thing happening 
now with the Navy going down the path for its highly 
sophisticated multibillion dollar next-generation enterprise 
network contract. By essentially denying the best products, 
services, and ideas, LPTA [Lowest Price Technically Acceptable] 
sends a message that subpar work is good enough for Government.
    With regard to small business goals, I know the Department 
is behind on its goals and missed some of its goals in 2010. 
There is a common complaint that the agency tends to favor 
large businesses. This isn't a new complaint. When I was 
procurement administrator, I had to arbitrate between the SBA 
[Small Business Administration] and the Department to get the 
Department to raise its goals, and for a department with large 
sophisticated procurements, it is hard to hit these numbers. 
Certain categories of activities that lend themselves to small 
business participation, like construction or base repair work, 
they tend to bear the brunt, and larger businesses in these 
fields then see themselves as being treated unfairly. The goals 
will not be met without the strongest possible leadership in 
the Department. I know that Secretary Panetta has mentioned 
this a number of times; it is a key issue for him.
    Then the increased tendency toward regulation. This creates 
the same types of costs and process delays that the regulations 
are meant to remedy. For example, the Department of Labor's 
final rule on nondisplacement of qualified workers under 
service contracts ends up creating new hurdles for getting rid 
of poor performing incumbent contractors, even after the 
company employing them loses the work. The most comprehensive 
assessment of this regulatory constraint is the 1994 Coopers & 
Lybrand study for Bill Perry. It was a major effort, a thousand 
interviews. They came up with a result of 18 percent cost 
differential for firms doing business with DOD. Maybe it is 
time to look at this again, and it may be time to redo this 
study.
    I hope the points I have raised have been helpful to the 
committee. I strongly support the work of this committee to 
address the issues that make it hard for firms to do business 
and to provide meaningful support to the Department.
    Mr. Chairman, Ranking Member Larsen, committee Members, 
this concludes my prepared remarks. Thank you for the 
opportunity to testify, and I would be pleased to answer any 
questions you or other committee Members may have.
    Mr. Shuster. Thank you very much, Dr. Burman.
    [The prepared statement of Dr. Burman can be found in the 
Appendix on page 33.]
    Mr. Shuster. And with that, Mr. Johnson, if you would 
proceed.

     STATEMENT OF JOEL L. JOHNSON, FORMER VICE PRESIDENT, 
  INTERNATIONAL, AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, 
                              INC.

    Mr. Johnson. Thank you, Mr. Chairman and Members of the 
panel.
    I, too, am pleased to be here. I am testifying on my own 
behalf, although as you noticed, I am unsuccessfully retired 
from 20 years in the trade association world and a few more 
years in the Government, including 2 years--3 years on the 
other body across the way here.
    I was particularly interested in reading the summaries of 
your industry roundtables. My experience when I was at AIA 
[Aerospace Industries Association] was certainly that you never 
were in doubt as to what the large primes wanted. They made 
sure you knew. But for small guys, you really needed to go out 
to them because they weren't set up in Washington to express 
what their concerns were, and they didn't particularly want to 
necessarily express them in front of primes or DOD. So you had 
to go to them.
    I think this is going to be a very challenging time for the 
small guys, as the procurement budget shrinks. Not only does 
the procurement budget shrink but the primes pull work in 
house, so it is double jeopardy for the small guys and that 
means that people who aren't in the defense arena are going to 
be even more hesitant to get into it when they look at the 
newspapers. So we need to work to get them involved.
    The big thing about small companies is they are small. They 
don't have contracting and accounting experience or 
capabilities that the big guys have. In the private world, they 
basically focus on inventing and manufacturing and marketing 
their product for a price. They don't deal in a world where 
contracting, accounting, and even lobbying are comparative 
advantages, which they are in the world we deal here in 
Washington. They are also handicapped by the fact that it is 
probably easier for DOD to deal with a prime than it is with 
those guys, and that means the primes have the--the primes are 
better able to search out capability and to use commercial 
market prices to buy stuff.
    On the other hand, this risks the small companies losing 
their technology to the primes, and of course, the primes are 
going to take a percentage as they work with DOD. So bottom 
line, if DOD is going to directly seek out and take advantage 
of innovation that maybe in the small business sector, it has 
to go out of its way to do so.
    There are several suggestions I would have, most of which 
you are familiar with, use FAR [Federal Acquisition Regulation] 
Part 12 commercial contracting where you can; raise the 
threshold for TINA [Truth in Negotiations Act] maybe to a 
million, possibly 2 million; make sure that you have extended 
SBIR [Small Business Innovation Research] and STTR [Small 
Business Technology Transfer] programs if they are funded; 
assure small companies they won't have their intellectual 
property hijacked either by DOD or the primes; develop good 
outreach programs so that the small guys actually know what is 
available to them and the DOD really ``honest injun'' is 
interested to them.
    Finally, because I spent much of my professional career 
tilting at export controls, I noted the subject consistently 
came up in your roundtables, and both of you mentioned it this 
morning. I would be happy to discuss, if there is anything more 
mysterious than FAR and DFARS [Defense Federal Acquisition 
Regulation Supplement], it is ITAR. And if there is anything 
that small companies know less about than FAR and DFARS, it is 
ITAR. And if there is a valley of death, this is the kiss of 
death very often if you want to get into the export world or 
even in terms of what you have to do on your own shop floor in 
protecting your technology from your own engineer, for example, 
who happens to be Indian born and on an H-2 visa. In any case, 
I appreciate the opportunity to talk with you all, and over to 
you.
    [The prepared statement of Mr. Johnson can be found in the 
Appendix on page 46.]
    Mr. Shuster. Thank you very much, Mr. Johnson.
    With that, we will open it up for questions. I am going to 
start, change it up here a little bit, start down with Mr. West 
for the first round.
    Mr. West. Thank you, Mr. Chairman and also Mr. Ranking 
Member, and thanks for the panel for being here today.
    I think one of the things that are really causing us to 
bust budgets in the military is the acquisition process and 
system, the special weapons system development, I mean, 10, 15, 
20 years. So when I read and I look at, we have the Acquisition 
Systems Reform Act of 2009, I would like to get an assessment 
from you two gentlemen, how do you see this act in its early 
stages? Have we seen any changes moving toward a betterment and 
a streamlining of this acquisition process?
    Dr. Burman. I think, clearly, the act is meant to try to 
improve how these major systems are acquired, but frankly, I 
think it is too early to really get any sense with new systems 
to see whether things have really improved, so I would say it 
is a wait-and-see kind of an effort. I think the policies are 
in place to try to improve the process, but I don't think we 
see much at this point.
    Mr. Johnson. I couldn't disagree with that. Or let's put it 
this way, I would agree with that. The policies are just 
getting underway. I think some of the basic notions are, you 
know, do 80-, 85-, 90-percent solutions, but don't push the 
state of the art to the point where you wind up procuring 
forever but not getting a product at the end of the day, which 
has been an Army problem, obviously, over the last few years.
    Mr. West. Yeah, I know that well.
    Mr. Johnson. You design for the absolute best and 
ultimately don't wind up with a product----
    Mr. West. So my question then, when is the first maybe 
evaluation point that you all would recommend? I mean, I don't 
want to see us, you know, go 5, 6 or 7 years down the road and 
no one asks the question about, okay, have we seen anything? I 
mean, is there some type of, you know, measuring of 
effectiveness that we have at a 2-year, 3-year point?
    Dr. Burman. I don't think anything has been set up in terms 
of doing that. My recommendation would be to have a GAO 
[Government Accountability Office] investigation, a GAO report 
and review, but wait 3 or 4 years, pick the systems that you 
want to look at, and see what has been going on in terms of 
dealing with this question of are you asking for everything or 
are you actually trying to deal with these issues? I know the 
same complaint has been made about the new fighter plane in 
terms of how long that is gone through an acquisition process. 
I mean, people are talking 30 years or so in terms of the time 
frame. It is sort of incredible. And then when you think about 
the technology development that occurs in an 18-month 
timeframe, you can see why dealing with the integration issues 
and the other kinds of issues, it becomes almost an impossible 
job to get that resolved and to bring anything in under price, 
you know, and on schedule, given these kinds of problems. So I 
would say that would be the suggestion I would recommend, and 
clearly, the GAO is well accustomed to doing those kinds of 
reviews.
    Mr. Johnson. I think I would add, at risk of offending some 
of my former employers, but there is a problem when the colonel 
or the general says, I want to do this, the contractor says 
yes, sir; no one asks, what will it cost and is it worth it? 
And you add on, you add on, you add on. That is what happened 
to the President's helicopter. I mean, you start out with a 
perfectly serviceable helicopter that had 100,000 hours of 
combat experience, and first the Navy wanted to do it the Navy 
way, and so you start dismantling a helicopter that is supposed 
to be off the shelf, and then you keep adding electronics, and 
everybody says, yes, sir, we can do that, and you wind up with 
Air Force One with a rotor. And somehow the system somewhere, 
whether it be in the Pentagon or even on the Hill has to say, 
well, what does that cost and what percentage improvement is it 
going to give me? And somehow that doesn't happen.
    Mr. West. Next question. Last week, I sat down with 
Brigadier General Avieli, who is the Israeli one-star general, 
head of their Israeli Defense Export and Cooperation 
Department. Question, can we do a better job, do you think, 
when it comes to our acquisition process of working with our 
allies to, you know, look at how we can have common operating 
systems and maybe getting more commercial off-the-shelf 
technology instead of going through these long, exorbitant 
procurement processes that we have here in America?
    Mr. Johnson. Well, now you are starting to get into the old 
ITAR issue among other things that is very difficult to talk to 
some of our allies, even our closest allies, at least at the 
company level, as to what do you do, what do I do, and we 
played around with these notions of different kinds of 
licenses; which by and large, State has never been terribly 
enthused about. We had a--you go all the way back to Clinton-
Bush, the so-called ITSI initiatives, they were a set of 
initiatives where, one, they were going to issue a program 
license where, say, two companies could get together and 
brainstorm, and if they came up with something, then they will 
tell you, come back and get a license, but at least let the 
engineers talk to each other about what each of them could do. 
It was used once for a Raytheon-Talus program, you know, at the 
big think level. It has never been used again. Somehow you have 
to--we need to find ways, I know engineers always talk too 
much, and they all want to solve the problem, but, you know, 
that is the only way two companies can find out what they know. 
They don't know what they don't know until they talk about it, 
and again, this is an area where I think we could be much more 
imaginative in how we work export controls, especially at the 
pre-think level.
    Mr. West. Okay.
    Thank you, Mr. Chairman, I yield back.
    Mr. Shuster. Was there a reason why they never used it 
again or just--I mean, just did it and said, ah, enough of 
that?
    Mr. Johnson. I think basically State never liked the whole 
idea. I mean, there were several approaches to this, and 
basically you had to trust people to do, work within 
parameters, and the system would much rather define very 
carefully exactly what you can and can't do. Well, the problem 
is you don't know what that is until you have had a chance to 
talk, and talk about that a little, I will give you an anecdote 
later if we are still on ITAR.
    Mr. Shuster. Yeah, I am sure we will be.
    With that, Mr. Larsen.
    Mr. Larsen. Well, don't let me stop you. Let's get on with 
ITAR. I know that there has been legislation introduced in 
Congress to look at the export control policies of the 
Government, and efforts started under Secretary Gates and 
continued under Mr. Panetta along with the other relevant 
departments to rework the munitions list. What specific reforms 
do you think would be most helpful that this panel should be 
promoting with regards to export control and ITAR?
    Mr. Johnson. Well, I realize it is not your jurisdiction, 
but as I pointed out in my testimony, most export control 
legislation in the last 10 years has been done in Armed 
Services bills, not--in fact, SFRC [Senate Foreign Relations 
Committee] sometimes have problems getting their bills done and 
out. One thing one might want to look at, for example, is 250--
DOD has chaired all of the interagency review panels to argue, 
try to figure out, what do we want to keep on the munitions 
list and what can go over to the commerce list that is easier, 
of less interest, which has never been done before. I mean, 
people think of the munitions list, as if there is actually a 
list there. It is a list of tanks and guns, and then down 
below, it says, and anything designed or modified for anything 
above is on the munitions list, so this is what kills the small 
guy.
    He has got a machine shop. In theory, if he has ever worked 
for a defense contractor, he should be registered with the 
State Department at 2750, 1750 the first year and X amount. 
Even if it is never exported, the law says he should be 
registered. Most of them, of course, aren't because they never 
heard of the ITAR.
    One of the things at a minimum that was done is DOD 
ultimately identified a bunch of stuff they thought, we don't 
care at all about this stuff: this radiator hoses, hydraulic 
hoses, engine mounts, with all due deference; in the Air Force, 
piddle bags. I mean, all of these are on the munitions list, 
and they said, no, no, no, no, this is commercial stuff; we 
don't care. It has been identified. Someone should ask the 
Administration, at least send that, do their 38 E--38 F 
notification to Congress and see what Congress says. Congress 
will probably say, fine put it over here, and when it is over 
here, we are not going to even--we are not worrying about it. A 
whole lot of small companies suddenly then are completely free 
of this business. They don't know anything about ITAR. They 
will never have to know about ITAR because what they are 
building isn't that kind of stuff and that is not the kind of 
stuff you are terribly interested in, but at least it would 
solve an immediate problem. It may be that one might want to 
look at legislation that would say, when you are exploring a 
technology with a small company, maybe DOD decides upfront 
whether this is something they want to control as a military 
item or not. And I go back to one of my first field trips 25 
years ago, and nothing has changed. I was at a university, and 
the Army was putting some money into a program where, this is 
all, of course, pre-Nooks and pre-all kinds of things, this is 
30 years ago. They wanted a flexible display sheet, just 
something like a piece of paper that you could fold up, but 
when you got to a table, you could open it up, plug it into 
your computer, and out would be a whole map, and the Army was 
so afraid of talking, of getting this stuff caught up in the 
ITAR that they didn't dare talk to the people they were giving 
the money to as to what they wanted. It had to go circuitously, 
because as soon as it was built to a military spec, it became 
an ITAR item, and the Army knew that if it had been an ITAR 
item, they could never afford it. They had to get it out into 
the commercial world. That is what they wanted to do, make, you 
know, gazillions of them, and we will ruggedize it, and that 
can be on the ITAR, but don't get the immediate technology on 
ITAR or this company is never going to have a market.
    And so that might be one thing one could look at is when 
you start putting money into the technology, you decide upfront 
whether you would like to see this commercialized or not, and 
then we will pick the cherry off the tree when it does, and now 
I can afford it because in the electronics world, the stuff 
that is most affordable is the stuff that you can buy at Best 
Buy, and then you can ruggedize it, but don't start out with it 
as a military item upfront, or you are in this morass. It is 
not the valley of death; again, it is the kiss of death. So 
there is a couple of thoughts.
    Mr. Larsen. Dr. Burman, do you have some thoughts on this?
    Dr. Burman. I would say the same thing, it is very 
analogous to the kinds of issues that we were dealing with on 
the acquisition front, and back in the early 1990s, just trying 
to get someone to move away from putting specifications, 
military specifications on everything was just a tremendous, 
tremendous problem, and you couldn't get people to want to 
participate because of all of these kinds of constraints. 
Ultimately Bill Perry, Secretary of Defense at the time, put in 
a requirement that said that people had to justify it if they 
were going to put military specifications for commercial type 
items, and we had legislation passed that encouraged people to 
buy commercially.
    I mean, one of the problems that I tended to deal with is 
the community, the acquisition community tends to be a very 
risk-averse community, and so people, even from Congress, would 
say to me, well, you know, they can do these things, they can 
buy that stuff, they don't need to do all of that. But when 
push came to shove, unless there was something there that 
really gave people an opportunity to see that, yeah, they 
weren't going to get in trouble by going down that path, they 
weren't going to do it. And so ultimately, we had legislation 
passed--this committee certainly supported that legislation--to 
try to make it clear that we were looking down this commercial 
product path and commercial services path and reduce, trying to 
reduce the burdens for people and small businesses doing 
business with the Government. It was a major accomplishment. It 
was a bipartisan accomplishment, but it took a lot of work to 
get there.
    Mr. Larsen. I yield back.
    Mr. Shuster. Mr. Schilling.
    Mr. Schilling. Thank you, Chairman, Ranking Member.
    Thank you, gentlemen, for being here. I am going to start 
with Mr. Johnson. Your statement also touched on ways for the 
DOD to reach out into the communities to encourage small 
businesses to do contracts with the DOD. Are public-private 
partnerships like those under 4544 with organic industrial 
bases, are those a good way to bring in the very small 
businesses and get them used to doing work with the DOD?
    Mr. Johnson. I mean, anything that gets their feet wet, as 
long as it doesn't discourage them in the process. I mean, I 
was also thinking about everything from--most States have 
economic development offices, if you want to reach out to 
those. A number of States, like Florida, I am trying to think 
of--you usually see at least seven States trying to attract 
aerospace at the Paris Air Show and at the Farm Bureau Air 
Show. Those are States that obviously are interested in the 
subject. They must have outreach. Could the military or DOD 
work with some of these State organizations that are economic 
development operations or, more specifically, aerospace because 
that is where an awful lot of the technology is.
    But the little guys don't necessarily, you know, read the 
daily Federal Register or they don't read the--they don't know 
what they don't know. So I think you need to find some 
intermediaries that do know how to touch these folk, not just 
from Washington but from--again, probably the States are the 
best instruments, although some big cities have these kind of 
things also, where they do know who is out there and who is 
looking for money and who is looking for expansion. Some of 
the--another place you might want to look to again are some of 
the university communities.
    Obviously, universities know this stuff. But, again, they 
are terrified of O5 P (?) and they are terrified of ITAR. What, 
40, 50 percent of all engineering graduate students are foreign 
born. So what they don't want to do is if the touch of the 
military touches them, suddenly half their students are 
inaccessible for this work. So, I mean, again, one needs to be 
a little careful as to when do you militarize and when do you--
or what kind of arm's length can you have so you can stir up 
the animals that you want to stir up and pick the right time to 
intervene as this style becomes an interesting defense issue. 
Going back to my Army analogy, how do you get this stuff going 
that you know you want going without crossing the line to when 
now you are doing mil specs or you are doing a specific 
military contract, getting a little distance between you before 
you close the door?
    Mr. Schilling. Very good. Thank you for that.
    You mentioned in your statement that the DOD should be able 
to interact with the private sector in a way the private sector 
is used to doing business, a more open and interactive forum. 
How do we restructure--you kind of answered a little bit of 
that there with maybe talking with the universities, so on and 
so forth, but how do we restructure DOD acquisitions and 
procurement offices to address this, or do we need to focus 
more on changing the culture within the DOD?
    Mr. Johnson. Allan is smarter on this than I am, but I will 
just come back to the point he talked about, you know, whether 
it be in acquisition or in export controls, the incentives are 
all, never make a mistake. The incentives aren't, do really 
great, find the golden chalice. The incentives are never make a 
mistake so I don't get in trouble, and I don't know how you 
turn that around. I mean, procurement guys in the private 
companies do get rewarded when they find good technology at 
good prices. They also may get cashiered if they screw up, but 
there is a rewards incentive, and there is not much of that 
within the Government community.
    Similar, the export controllers have really no, there is no 
incentive to make the thing go out, which is why those of us in 
industry are terrified at the idea of a standalone export 
control agency because their only incentive is to make sure 
nothing goes out that shouldn't go out. There is no incentive 
to say we have to do cooperative programs with our allies or we 
have to do cooperative research with our allies. They are 
saying, if I never let anything out, I will never be in 
trouble. How do you incentivize people to go the other way 
around? But Allan knows.
    Dr. Burman. And I think you are right, it is a cultural 
issue, and there are consequences. If you are a procurement 
person and somehow it looks like you are giving special 
treatment to somebody, you can get in a lot of trouble; the 
company can get in a lot of trouble. So the more that you can 
get information from the leadership of all of these 
organizations that deal with this to demonstrate that it is in 
the Government's interests and it is in their interests to have 
this kind of communication, and clearly you have to put in 
enough constraints so that somebody's not providing sensitive 
information or proprietary information to someone, but that can 
be easily worked out, but people have to understand that this 
is the way the Government wants to go because this is the way 
that you are going to bring more people into the Government 
marketplace, more companies into the marketplace.
    Mr. Schilling. Very good. Thank you, gentlemen.
    Mr. Shuster. Ms. Sutton.
    Ms. Sutton. Thank you, Mr. Chairman.
    What are your thoughts on the other transactions authority 
as a means to increase opportunities for small businesses?
    Dr. Burman. Well, I think it provides an innovative way to 
allow companies to be able to participate where there is a lot 
of flexibility in exactly how do you structure things. So I 
would say this authority, it was actually something that I 
understood was put in place many years ago with NASA [National 
Aeronautics and Space Administration] with Paul Dembling, who 
was a member of the Procurement Round Table, trying to come up 
with a way to figure out how to invite some issues where you 
don't really know what the answer is or the approach should be, 
and offer an opportunity and some flexibility to do that. 
Anything that offers openness, flexibility, another approach to 
be able to encourage businesses to come into the Government I 
think is a good thing.
    Ms. Sutton. Okay. What can be done, and certainly you have 
talked about this some, what can be done to reduce the risk-
averse culture in DOD so that contracting officers are more 
inclined to contract with small businesses?
    Dr. Burman. Yeah, that is the--yeah, no, that would be 
great to have that solution.
    Ms. Sutton. I am counting on you.
    Dr. Burman. I have been plugging away at trying to do that 
for a long time to, again, make it clear that the approach is 
something that is in the best interests of the Government and 
something you are not going to be held accountable for, but the 
community itself tends to be very risk averse.
    Frankly, when I was doing that, I needed congressional 
action to get people to feel they could do something, or many 
people said you can do it anyway; the rules allow you to do it. 
So I don't know if you need more emphasis from this body to try 
to make that point. Clearly, my successor at OFPP [Office of 
Federal Procurement Policy], Dan Gordon, who just left to go 
over to GW, had a major effort to try to get that kind of word 
out, encourage people to have conversations, better 
communications, and I think that is clearly a benefit to the 
Government and to the industry because if both sides know what 
the other wants, you are going to get a better deal ultimately. 
But the more, at least, the leadership of the organization will 
back you up on doing these kind of things, then I think the 
better chance you have of people being willing to stick their 
necks out a bit. But it is a community that doesn't like to do 
that.
    Ms. Sutton. Mr. Johnson.
    Mr. Johnson. Again, you know, maybe you need some 
appropriate threshold under which you don't have to--I have had 
these experiences as a consultant personally where DOD said 
yeah, I would like to do this study, but, gee, I would have to 
competitive bid it for $100,000. I am not going to do that. It 
is too much trouble, so go find somebody that has a task order 
that you can attach yourself to. And we will funnel the money 
through. And of course, 10 percent goes off the top. Somebody 
writes 12 checks, and they are happy, and I have seen this 
happen, but maybe there ought to be some authority at some 
level to say you have the authority to do this.
    And similarly, on the private sector side, I mean, back at 
AIA days, when somebody, one of our guys screwed up, you would 
say, just, please God, don't write another reg, put them in 
jail. White collar workers hate jail, you know. The word gets 
around, but don't write another reg. I mean, that is when you 
get FARs and DARs [Defense Acquisition Regulation] like this. I 
remember a friend of mine, board of administrations, would say, 
only bottle common sense, you know. We would solve a lot of our 
problems. But I think you can't ring every possible thing with 
a regulation. You have got to have some ability for human 
beings to make some decisions, and occasionally they will make 
a wrong one, but as long as they are not doing it because they 
are lining their own pocket, in which case they should go to 
jail, there ought to be some flexibility for people, at least 
at the small level, to do things that aren't necessarily 
competitive bid. The guy has a really bright idea, and yeah, 
that is worth 100,000 bucks for me to figure out whether it is 
really a good idea. How do we do that?
    Dr. Burman. Just another example in that whole area was the 
use of purchase cards. I mean, purchase cards were a tremendous 
advantage in terms of reducing some of the burden on 
contracting people, giving program people more authority, but 
then all of a sudden, people are, you know, buying Christmas 
gifts and Jeeps and other kinds of things, and pretty soon, 
where did the purchase cards go? Well, there's a tremendous 
savings by getting people to use that as opposed to paper and 
pencil and having the acquisition community doing that job. So 
here is a case where you need the balance, you know. You 
recognize somebody is going to do bad things, you want to do 
something about those people doing bad things, be able to 
monitor it, know it, but don't take away the ability for 95, 99 
percent of the people to use a device that we are all very 
familiar with and that most people are going to use 
successfully.
    Ms. Sutton. Thank you.
    Mr. Shuster. Mr. Runyan.
    Mr. Runyan. Thank you, Chairman.
    And I always love the word common sense because we lack a 
lot of it around here.
    But just talking about, and really to both of you, how 
changes in procurement acquisition regulations and that, and we 
see this happen throughout our economy, our tax structure. What 
are the rules of the game? How much of that are we creating 
ourselves on a yearly basis?
    Mr. Johnson. I mean, again, every time one adds another 
regulation, one, you are almost guaranteeing somebody is going 
to foul up because nobody can possibly know all the 
regulations, and again there needs to be some way to just have 
a little bit of human discretion with a little penalty. If you 
do wrong, wrong is not the same as making a mistake. If you 
take a lot of your exploring technologies, you often learn the 
most from when something blows up in my world or it falls down. 
That is not necessarily somebody doing evil, it is somebody 
exploring the boundaries of science.
    If somebody does wrong, then they should be punished, but, 
again, no more--not another batch of regs. Maybe we need more 
recognition for people in the procurement world when they do do 
something innovative so that there are some positive upsides. I 
don't know how much. I know there is a few----
    Dr. Burman. That generally doesn't hit the Washington Post. 
It is kind of the other side that you read about in the 
newspapers unfortunately. So you are not seeing a lot of gold 
stars for folks. But I agree with Joel, if you can try to do 
that, that would be a great way to at least try to deal with 
the cultural issues that Mr. Schilling talked about.
    Mr. Runyan. And that is obviously rewarding people for that 
and also taking chances I think a lot of times. You admit that 
that is where your cutting-edge stuff is going to come from, 
and we can't be afraid to go out and ask people to take those 
risks sometimes. I think not only there, I think dealing on the 
small business aspect of it. You know, they are not either 
fiscally or just even in their heart of hearts, they don't want 
to go out and take those risks, and I think, you know, not only 
from a regulatory aspect of it to, obviously, I use the term 
all the time, why are we always changing the rules of the game 
when we are in the middle of the game, and I think that weighs 
on the small guy a tremendous lot.
    Dr. Burman. And there are a lot of rules.
    Mr. Runyan. Yes, and I thank you guys for your insight.
    Chairman, I will yield back.
    Mr. Shuster. Thank you.
    With that, Ms. Hanabusa.
    Ms. Hanabusa. Thank you, Mr. Chairman.
    Dr. Burman, in reading your testimony, I am curious about 
this Procurement Round Table that you are chair of that was 
chartered in 1984. What does the Procurement Round Table do?
    Dr. Burman. Yes, I am glad you asked that question. Elmer 
Staats actually was the first chairman of the Procurement Round 
Table and chairman for many years and one of the founders of 
the organization. We are a group that is limited to 50 people. 
Virtually all of us have had senior level positions in the 
Federal Government. We are now serving pro bono. We are all in 
the private sector at this point, and our goal is to try to 
help improve the acquisition process. We have meetings and talk 
to senior leadership in agencies and try to provide help and 
expertise to them. We provide an award to a young acquisition 
professional to recognize them and recognize their work and to 
try to promote good acquisition processes.
    Ms. Hanabusa. In the ending part of your testimony, you 
give a kind of a frightening percentage, and this is when then-
Defense Secretary William Perry actually did this major study, 
and he said DOD paid a cost premium of 18 percent as a result 
of the regulatory constraints, and I assumed that was sometime 
in 1994.
    Dr. Burman. It was. This is the----
    Ms. Hanabusa. So today----
    Dr. Burman. This is the heavy document.
    Ms. Hanabusa. So today 17-plus years later, I mean, what do 
you think that cost premium is that DOD--and I assume that is 
18 percent above.
    Dr. Burman. It is.
    Ms. Hanabusa. So what is the cost premium?
    Dr. Burman. And, again, nobody has really done that kind of 
a detailed analysis. There has been lots of reviews about 
regulations and the impact of regulations, but a lot of the 
issues are the kinds of things that you have been hearing from 
the committee, anecdotal concerns about how it makes it more 
difficult for somebody to do something. This was an effort to 
try to put a rigorous evaluation scheme together. They had 10 
companies that were looked at in depth. There was something 
like a thousand people interviewed, and they looked at cost 
drivers and what were the differences. And frequently the 
companies, they had companies that were doing both Government 
work and private sector work, like Motorola, at the time, and 
you could then see what was the cost differential, and that was 
the value-added cost, excluding materials.
    You know, I would bet, even given all of the kinds of 
concerns that we have had to try to improve things, just given 
Joel's comments about the growth of regulation and how people 
continually see ways to address these problems through more 
regulations, I wouldn't be surprised if we are seeing a similar 
number, even when that was put in place back then, and we had 
the Federal Acquisition Streamlining Act or FASA to try to 
address many of these kinds of issues.
    Ms. Hanabusa. So, Dr. Burman, you sit on a special 
roundtable of 50 people with exemplary experience, and you have 
been offering free advice to Government basically, and we are 
not doing any better than what we know we were doing in 1994, 
and I think Mr. Johnson made a point about, you know, I think 
what he was trying to say is that maybe there is just a 
percentage of people who are going to do bad things, and maybe 
we should calculate that in instead of overregulating and 
instead of overpolicing and overregulating. Maybe we should 
just have it like a loss leader in inventory that some 
companies do and say, we lose that much, it is within the 
margin. I mean, nobody wants to accept that, but is that 
something that all of you experts, 50 of you, have you ever 
thought of that, the cost of monitoring, the cost of doing 
this? You know, we have DCAA, we have all these people who do 
pre-, almost pre-application processing. Is that a 
consideration, that maybe we should just, you know, pack it up?
    Dr. Burman. I think one of our views are to see if for 
particularly lower-cost items, of which there are many, and if 
you look under a simplified acquisition threshold of $150,000, 
there are ways which you could try to make the process work 
more smoothly and simply. The issue becomes, even if it is only 
a couple of things, you know, we have all seen what happens 
when somebody does something that is a bad thing or a silly 
thing, the muffin business, all of a sudden that tars everybody 
who is doing the job with that kind of a complaint, and so it 
is awfully hard to do that and be willing to sit back and 
accept that because it then becomes a reflection of how the 
Government does its business, and none of us like to be accused 
of doing bad things.
    Ms. Hanabusa. Whatever happened to debarment? I mean, don't 
we have any kind of teeth with that? I mean, what happened to 
the good old days----
    Dr. Burman. I think that there is----
    Ms. Hanabusa [continuing]. That people were afraid of being 
debarred and the shame that went with it? It has no value 
today?
    Dr. Burman. And there has been a serious effort to do that, 
and I think many of the companies have, in fact, been suspended 
over time because of these kinds of issues, but debarment was 
meant to be a tool to protect the Government from bad actors, 
and agencies use that, some more than others. I think in many 
respects Defense probably is more effective in using this tool 
than many of the civilian agencies, so it is certainly not 
ignored and agencies have been focusing on it, but you still 
are faced with the issue of if somebody does something bad, 
that is the Washington Post story.
    Ms. Hanabusa. Thank you.
    Mr. Johnson. And it is hard. I mean, debarment, the problem 
with debarment is you are dealing with somebody that is too big 
to fail, just as it is too big--you can't debar Lockheed Martin 
because some guy makes a mistake somewhere in one of the 
subsidiaries. You have to be able to reach down and nail that 
particular--I remember Norm Augustine once in one of our very 
many scandals maybe 20 years ago saying, you know, I have 
120,000 employees, show me a town in the United States of 
120,000 that doesn't have a jail. He said, somewhere out there, 
someone is doing something wrong at any given time, but, you 
know, we do our best to make that not happen, but you have got 
to find a way to reach out and debar or do whatever you are 
going to do that is of appropriate scale.
    When you have huge companies, you can't--you simply can't 
debar any of these large companies. You have got to find 
measures that sort of fit the crime, and I think that is one of 
the problems on some of these cases; the Government doesn't 
know what to do because it doesn't know what the mechanism is 
to get at that guy over there.
    Ms. Hanabusa. Mr. Chairman, my time is up.
    But I did want to say too big to fail is not really a nice 
word around here anymore. Thank you.
    Thank you, Mr. Chair.
    Mr. Johnson. I chose it specifically.
    Mr. Shuster. Again, we have talked about a lot of things 
that we have heard before, about the Government not talking to 
business. How much of that is driven by the regulations, and 
how much of that is driven by the culture of I am not talking 
to them because I don't want to get in trouble? I mean, I am 
sure that because of the regulations, they are doing that, but 
I mean how much of it is perceived and how much of it is 
reality that is going to be, can you quantify that at all?
    Dr. Burman. It is hard to say. Clearly, when you have got 
an actual procurement on the street, when a procurement is out, 
then that changes the picture because there you do have to be 
particularly careful about not giving somebody an unfair 
advantage. So that changes the equation. But prior to that 
procurement coming out on the street, there should be many 
opportunities to have these kinds of conversations. Sometimes 
it is workload; you don't have the time. Sometimes it is 
perhaps people aren't really seeing down in the long run what 
the benefits are of doing it so it becomes a burden. Again, it 
becomes a cultural issue more than a regulatory issue when you 
are dealing with those kinds of problems, Mr. Chairman.
    Mr. Shuster. Right. That is occurring with the large primes 
as well as the small guys?
    Mr. Johnson. Well, what I mean, again----
    Mr. Shuster. Or significantly.
    Mr. Johnson [continuing]. This is your one-size-fits-all 
problem in that it is one thing when you are dealing with a 
large procurement, you have got three or four big guys 
competing for it; yeah, there's all kinds of rules and regs 
that should be there, that no one should be given an advantage. 
And they have the overhead to deal with what a procurement 
requires, and DOD has the overhead to deal with what 
procurement requires. It is when you get down to the small 
guys, where you are talking $100,000 or half a million dollars, 
then trying to run it the way you would run a large procurement 
may simply not be in the cards.
    Mr. Shuster. Right.
    Mr. Johnson. I mean, particularly if you are dealing with 
someone that has got a unique something, that is the whole 
reason you are wanting to reach out to him is we think he has 
got a unique innovation, then how do you deal with that, you 
know, that entity in a way that doesn't get you all caught up 
in acquisition regulations because there isn't another one out 
there right now? And all I want is a little bit of seed money 
to go do something and see what happens.
    Mr. Shuster. Right. And we talked, you mentioned about 
Congress, and I think we have done some of this to try to go in 
and change the regs, but it seems every time we change regs, we 
just pile more on top and make it more and more difficult, and 
so trying over the past 6 months to listen and hearing these 
things, you are trying to think how do you go and change the 
culture over there, how do you--you mentioned that small 
businesses don't have contracting or even the accounting 
department to be able to deal with DOD. Nobody is really doing 
a lot of cost-benefit analysis on some of this technology, and 
you talked about intermediaries, being able to reach out to the 
small guys to help them. So as I am thinking through this, how 
do you--and Ms. Hanabusa talked about being debarred, and that 
brings up, I think to myself, we have got different segments of 
different professions out there, different industries that 
self-regulate. Lawyers debar themselves. Accountants throw 
themselves, I mean, they debar them, whatever they call 
debarring an accountant, we have got an agency, a self-funding 
agency, FINRA [Financial Industry Regulatory Authority], that 
regulates the, a lot of the securities and exchange industry. 
So is it possible to change the culture over there, or do we 
have to do something dramatic and maybe pull it out and let the 
industry self-regulate itself, especially when you are dealing 
with these smaller and medium-sized companies. Is that 
something that even in your mind, is it in the realm of 
possibility, or am I out of my mind?
    Dr. Burman. No, but I think one of the things that is done 
in the acquisition world is one company can complain about the 
other company when the other company has done something that 
they perceive to be incorrect or improper or the Government has 
done something through the protest process. So, in some 
respects, there is a way to redress these kinds of problems by 
protesting to the GAO and/or the Court of Claims or going back 
to the agency to complain that the process hasn't worked right 
or they have been unfairly treated. So you do have a mechanism 
that the industry more or less works itself that then still 
comes back to the Government. But, again, then, you have got a 
regulatory process with the Government to try to deal with 
that.
    Mr. Shuster. You say there is a regulatory? Because that 
didn't happen on our tanker program.
    Dr. Burman. Yeah, I mean----
    Mr. Shuster. Where does that occur out there?
    Dr. Burman. I mean, it can become a very complicated 
process, but I mean, one of the reasons for having a protest 
system in place is to try to allow firms an opportunity to go 
to somebody to complain.
    Mr. Shuster. But does that happen? You say that happens out 
there?
    Dr. Burman. And it does happen out there.
    Mr. Shuster. Within the DOD or outside?
    Dr. Burman. I think the Government-wide numbers, I mean, 
they are not huge, I think the Government-wide numbers in terms 
of protest for the GAO is around 4,000 something. There is 
about 70 cases before the Court of Claims. A significant number 
of those, though, get turned around one way or another. The 
suspension rate isn't that high, but the agencies do make some 
changes. So it is one means to try to offer a way other than 
the regulations themselves to try to make sure the process 
works fairly.
    Mr. Shuster. Mr. Johnson.
    Mr. Johnson. Again, it is one thing to have--you mentioned 
the tanker program, one of the all-time largest acquisitions in 
history as opposed to some little guy that you want to do 
100,000 bucks worth of business or 500,000.
    Mr. Shuster. Right.
    Mr. Johnson. And there to pick up on Congresswoman 
Hanabusa's comment, I mean, the price of perfection is very 
high. It is a lot cheaper to have 99 percent perfection, and it 
is even cheaper to have 95 percent perfection. One of the 
questions is sort of, what is the pain tolerance level or the 
political tolerance level that one can put up with? I 
remember--and this town is pretty awful for that. I remember in 
Desert Storm when, with all due deference to someone from GAO 
who may be in here, if the only thing you had ever read about 
Army equipment was in GAO reports and some other press reports, 
you would have been astonished to know that the M1A1s ran, that 
Bradleys ran, that A-10s ran, all this stuff worked, amazing, 
in really miserable, rotten conditions, but, you know, during 
the time you are fielding this stuff, bad things happen. Until 
you put something in the hands of 21-year-olds, you really 
don't know what you have got----
    Mr. Shuster. Right, right.
    Mr. Johnson [continuing]. No matter what you do at 
Aberdeen, and so you have to have some risk tolerance, and it 
seems to me the risk tolerance should go up the smaller the 
program is, and somebody is always going to find out that 
somebody's Uncle Todd got the $100,000 program from somebody 
who was in DOD. Well, okay, fine, it is going to happen. But 99 
percent of the time the guys are going to try to do the best 
job they can, and they may find some little nuggets out there 
if they have the flexibility to take a little risk. Some of 
them aren't going to pan out. Some of the--but, again, how do 
you--what we are talking about, if you are looking for 
innovation in the small guys, how do you take risks, how do 
you----
    Mr. Shuster. Well, that is the idea, you want it taken out 
of DOD, again, not the large contracts, but the smaller guys. 
Let it, like FINRA, for 70 years, they have self-regulated, and 
the industry pays in. They go to these people at FINRA. They do 
protests. They regulate them. They tell them things that they 
can do, can't do, and it just seems to me, I can't imagine we 
are ever going to change the culture over there unless we do 
something dramatic because there is some reporter sitting down 
at the Washington Post looking to get somebody so they can 
write a story on, you know, Uncle Todd getting that contract.
    So, again, back to my original question, am I completely 
out of my mind even to think that there is something out there 
that exists today, a model for how we can--again, maybe it is 
just DCAA or maybe it is, you know, regulating small contracts.
    Dr. Burman. Again, Mr. Chairman, there is a--there is 
something called the Defense Industry Initiative. I don't know 
if the committee is familiar with that operation, but it is 
something that one of the former procurement administrators, 
Angela Styles, is now the chief person working with, but this 
was an effort by the industry, and this is largely large 
businesses in the industry. It has a very robust system for 
identifying what you can and can't do and trying to get the 
word out and providing training and that sort of thing as a 
way, again, to try to ensure that their staff are doing things 
appropriately, and this is not something that is done or forced 
by the Government. It is something that is, again, a self-
regulated effort.
    Mr. Shuster. What is it called, the defense industry----
    Dr. Burman. The Defense Industry Initiative.
    Dr. Burman. And that may be something that the committee 
might want to look at. Again, the problem is when you have 
small businesses, I mean, small businesses, sometimes they 
don't--they don't even know who to talk to in the Government. I 
mean, just the basic question of, you know, you don't talk to a 
contracting officer. They are not going to know what the 
program is that you are going to try to deal with. You need to 
talk to the program official. Well, that is very elementary 
information, but if you are not doing business with the 
Government, how do you know this? So you need somebody to help 
you to know these kinds of things.
    Mr. Shuster. I am way over my time, but I wanted to ask you 
another question about--before you decide that you are going to 
do something with DOT [Department of Transportation], maybe you 
decide you want to commercialize it. Some things I know are 
going to be simple. In your experience, how difficult is that 
to look at something and say--is it pretty straightforward, you 
can look at something and say, we need thousands of this, so we 
need to have them produced by the millions to be able to drive 
down the cost? In most cases is it going to be smaller 
projects, or the things that are going to be larger?
    Mr. Johnson. I guess it will depend.
    Mr. Shuster. Yeah.
    Mr. Johnson. I mean, it certainly--if you can commercialize 
something, you are bound to drive the price way down.
    Mr. Shuster. Right.
    Mr. Johnson. I mean, if you can produce--you know, if you 
go back 30 years, if I remember correctly, you know, the 
military was 85, 90 percent of all microchips, and today they 
are about 1 percent, 2 percent. I mean, the commercial world 
drives electronics. So if it is something that has commercial 
applicability, that is what you want. You know, you have to 
weigh the probability that, okay, this is commercialized, then 
all the bad guys can go buy it off the shelf, too. They all 
have cell phones, and they use garage door openers for IEDs 
[Improvised Explosive Devices], and you are stuck with that, 
and you have to make that call. But by and large, if you can 
commercialize--because the other thing is going to be very 
unique stuff that only DOD would be interested in, and that is 
going to be high unit cost.
    Mr. Shuster. So do a cost/benefit analysis on that, and 
say, is it worth commercializing and letting bad guys----
    Mr. Johnson. The trouble is you don't know until you--you 
know, Steve Jobs invents things that nobody knew they needed. 
And so, that is one of the hard parts in electronics is----
    Mr. Shuster. Right?
    Mr. Johnson. You don't know what you don't know.
    But getting back to your point, you know, maybe--and I will 
probably have some of the audience that is going to tell me 
this is already the case, and what can I say? You may need 
particular offices in the Army or the Air Force or the Navy, 
but you have some guys that just do this. That is their thing 
is going and looking.
    Mr. Shuster. Right.
    Mr. Johnson. And they are familiar with the top 
technologies you guys are interested in, and they are empowered 
to make some decisions, and they are told, go take some risks. 
And if you pan out 1 out of 10 times, you are going to make 
colonel.
    Dr. Burman. And I think the system does, in fact, react at 
times to meeting needs and helping agencies meet needs. There 
was a major transformation in the late 1980s, early 1990s to 
shift to a best-value procurement process, evaluation process. 
And essentially, one of the reasons for going down that path 
was you had all of these IT [Information Technology] companies 
who weren't interested in doing business with the Government. 
And, you know, they weren't interested in somebody saying the 
requirements, and this is how you are going to do the job. So 
the only way that the Government could get them to come in was 
to say, okay, we will evaluate you. This is a solution we want. 
You show us how to get there, and we will have to measure 
apples and oranges and come up with the best result for the 
Government.
    So, I mean, the system does adapt, it seems to me, when you 
have these kinds of major needs. And again, you have to have 
somebody say, yeah, this is what we want to do, and we will 
take the risk of going to best value, and we will take the risk 
of actually paying more for somebody than the low-price offer 
because it is good for the Government to do that. So, I mean, 
there are certain things that are of benefit in how the 
Government does its business as well.
    Mr. Shuster. Let me mention, a skunk works for procurement 
in the development. Let us go out there, and----
    Mr. Johnson. Or three or four of them, wherever you want to 
put them.
    Dr. Burman. Yes, and DOD has used that kind of technique.
    Mr. Johnson. So think small.
    Mr. Shuster. Right.
    Mr. Johnson. And think radical and be unleashed a bit.
    Mr. Shuster. Right. Does anyone else have--yes, Mr. Larsen.
    Mr. Larsen. Mr. Johnson, back to ITAR. Do you have any 
specific examples that you can think of, maybe give us a couple 
of examples for the panel to consider about the impact ITAR has 
had on the U.S. companies maybe with regard to Europe, losing 
business to European companies?
    Mr. Johnson. I mean, when you read in the paper that--I 
mean, you can read in Defense News this week Northrop Grumman 
is developing an ITAR-free DIRCM [Directional Infrared Counter 
Measures] in Europe. Northrop Grumman. So even U.S. companies 
are inventing ITAR-free products overseas to avoid our system. 
This doesn't help our industrial base any. It helps large 
companies, and more power to them.
    I mean, Lockheed Martin is doing an ITAR-free--if I 
remember correctly, it is a fire-control system for a Canadian 
frigate, and they are going to do all of the development 
offshore so that they are not constrained. They don't have to 
go through what they have to go through.
    As you all know, I mean, you know, Alenia advertises ITAR-
free satellites, I mean, a U.S. satellite, and it is the 
component guys that really get nailed on this. It is not the 
end item. I mean, in the satellite issue, you know, Lockheed or 
Boeing can get a license to sell a satellite to pretty much 
anybody as long as they don't launch it on a Chinese launcher. 
But when you are in Europe and you are buying in bulk so that 
you are going to make a standard satellite, and you are going 
to have a minimum of 10 buses----
    Mr. Larsen. Right.
    Mr. Johnson. The basic satellite. I want to be able to buy 
the same thing for all 10 for economies of scale. Now, one of 
those may turn out to have a Chinese buyer, or one of them may 
turn out to be launched on a Chinese rocket. I can't pull an 
American--one American component out and have to--have to 
requalify my satellite, so the best thing I can do is not have 
any American content in my satellite, because they are all 
ITAR-controlled, as you know, thanks to the law that was passed 
about 10 years ago.
    And so it is the component makers, it is the guys that make 
thrusters, it is the guys that make actuators, it is the guys 
who make stuff that goes on a satellite bus. They have now lost 
that entire market, and, of course, the Europeans can sell back 
to Boeing and Lockheed Martin because they don't have any 
constraints on selling into our market.
    So it is those kinds of things that, you know, that is part 
of what the Administration is trying to deal with by moving 
stuff over to the export control is where you at least have de 
minimises. If it only has less than 10 percent American 
content, we don't try to control it. There is no de minimis 
when you are an ITAR product. If there is one American-made 
screw on an end item made in the U.K. or in France, they have 
to come back and say, ``Mother, may I,'' to State Department to 
sell it to anybody, including, you know, Belgium, or the 
Netherlands. They still have to come back and say, ``Mother, 
may I?'' So you have a major disincentive to include the 
American components. And as I say, primary in that works 
against are the component makers.
    Mr. Larsen. They tend to be smaller businesses, suppliers.
    Mr. Johnson. Yeah, and item makers; the airframers, the 
tank makers. Okay, they are going to have to get a license to 
sell a tank to anybody, but it is the little guys who are 
selling to people who don't at the time know who they are going 
to sell to, what we would call in the aerospace industry 
``white tails''; that is, you are building on spec. In the case 
of satellites, you do build on spec, or you buy on spec in 
terms of, I am going to buy 10 ship sets of this, and I know 
who the first 5 are going to. I don't know who the last 5 are 
going to.
    Mr. Larsen. Yes.
    Mr. Johnson. I would just say in passing--more than you 
ever wanted to know--I mean, there is a couple of bills kicking 
around now that in order to get cosponsors, not only do they 
keep the China exclusion, they have added an exclusion for 
terrorist-supporting nations. Well, that is all well, it sounds 
good, but that means you couldn't sell a satellite to ArabSat, 
or to IntelSat or to AsiaSat because they all have--Syria or 
Iran have little bits and pieces. They never see these 
satellites. They are up there. They are delivered on orbit, 
but, you know, if you spread that tentacle around without being 
really sure what you are doing, now you are suddenly knocking 
our guys off of even more things that you really didn't intend 
to, but it looked good. And again, that is part of the problem 
on export control. Things that look good aren't necessarily 
very good when you start to see the unintended consequences of 
what you have accomplished.
    Mr. Larsen. Yeah. Dr. Burman, on Federal workforce, in your 
testimony, page 3, you mention in your oral about the amount of 
dollars, that we have seen an increase in contract obligations 
of 122 percent, but staffing is about 20 percent. I don't think 
you are making an argument that staffing should be 122 percent. 
It shouldn't be one-for-one.
    Dr. Burman. No, I am definitely not.
    Mr. Larsen. And I am not sure you are arguing for a 
formula. However, can you enlighten us a little bit more about 
what you mean for the Federal acquisition workforce?
    Dr. Burman. Well, one of the issues that results from that 
is--and we--I was a member of this SARA [Services Acquisition 
Reform Act] panel that was set up by Congress as well, and my 
report was produced in 2007, to look at services contracting. 
And we were looking at how do you do services contracting more 
effectively. And it turns out that there is the--I am sorry, 
the workforce was spending all of its time trying to get to 
award, doing proposals, getting solicitations out, and so you 
end up with an issue where there is no time to do the 
monitoring, the contract management, the contract 
administration. So you end up with a system where because 
people want to get those solicitations out, but you don't have 
enough people looking at the back side of the process to see 
how you are getting what you need, are they doing it well, and 
that kind of thing.
    I think it is those sorts of issues that come to play here 
when you put so much pressure on people to do the front end of 
the process. You don't think as much, or worry as much, or pay 
as much attention to the back end of the process. And that is a 
common complaint I find across the Government, and so having 
more resources to be able to do that, I think, would be a real 
benefit.
    Mr. Larsen. Okay. I see. Thanks.
    Mr. Johnson. Or needing less resources up front. I mean----
    Dr. Burman. Either way, maybe easier to do it on the front 
end, less complicated----
    Mr. Johnson. Or spending less time on the back.
    Mr. Larsen. Thank you.
    Mr. Shuster. Anybody else have any questions?
    Okay. Well, thank you very much for being here today, and I 
appreciate your testimony. It was excellent, and hopefully if 
we have further questions, we can ask you in writing. Again, 
thank you all very much, and the hearing is adjourned.
    [Whereupon, at 4:09 p.m., the panel was adjourned.]


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                           A P P E N D I X

                            February 6, 2012

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


              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                            February 6, 2012

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

      
                     Statement of Hon. Bill Shuster

    Chairman, House Panel on Business Challenges within the Defense 
                                Industry

                               Hearing on

                        Doing Business with DOD:
                   Contracting and Regulatory Issues

                            February 6, 2012

    Good afternoon. As most of you know, this panel has 
traveled around the country over the past few months to hold 
roundtable discussions with companies that are trying to do 
business with the Department of Defense. No matter where we 
went, or what sector of the industrial base we met with, we 
heard time and again that red tape and bureaucracy are getting 
in the way of innovation, efficiency and jobs.
    In Rock Island, Illinois, we heard complaints that export 
controls are overly restrictive. Many of the businesses we 
spoke to highlighted that we currently take a ``one-size-fits-
all'' approach to determining what is placed on the U.S. 
Munitions List; there is no mechanism for items to smartly be 
moved off the list as technology advances and specific items 
become readily available on the global market.
    In Santa Clarita, California, we heard from a gentleman who 
owned a company that was last audited by the Defense Contract 
Audit Agency in 2005 and the audit was still open due failures 
on the part of DCAA. He estimated that having this open audit 
on the books had cost his company $3 to $4 million in lost 
business over the last 6 years.
    In Akron, Ohio, we heard that although programs like the 
Small Business Innovative Research Program aid in technology 
development, the technology rarely goes anywhere because there 
is no mechanism to assist in completing the stringent military 
test requirements, nor is there resourcing to get the 
technology into
production.
    In Honolulu, Hawaii, we met with a small business owner who 
commented that small businesses are simply not equipped to deal 
with the bureaucracy of the DOD acquisition system. In San 
Diego, California, we heard from a businessman who felt that 
the large primes don't want small businesses to innovate and 
another who commented that anyone that wants to partner with a 
small business simply wants your technology. Both of these 
gentlemen agreed that more needs to be done to protect the 
intellectual property of small businesses.
    Here's the thing: It wasn't just one guy in Ohio, or a CEO 
in California or a small business owner in Illinois. These 
issues were consistently raised everywhere we went--from the 
shipyard workers in Hawaii to the nanotechnology developers in 
Ohio.
    We invited three witnesses to be with us today to explore 
these issues and provide us with recommendations to eliminate 
some of this red tape. Unfortunately, one of our witnesses, Mr. 
Raj Sharma, President of the FAIR Institute, needed a few more 
days to recover from a surgery he had last week and he will not 
be able to join us today. He did provide us with a written 
statement and is standing by to respond to any questions we may 
have for him following the hearing. We wish him a speedy 
recovery and I ask that his written statement be entered in the 
record. With us today are:

         LDr. Allan V. Burman, President of Jefferson 
        Solutions

         LMr. Joel L. Johnson, Former Vice President of 
        the Aerospace Industries Association of America

    Gentlemen, each of you brings a unique set of experience 
and expertise to the table. I hope that we will have a fruitful 
exchange today and that you will be able to assist this panel 
in formulating recommendations to improve the business 
environment out there.

                     Statement of Hon. Rick Larsen

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

                               Hearing on

                        Doing Business with DOD:
                   Contracting and Regulatory Issues

                            February 6, 2012

    Mr. Chairman, I'm pleased to be joining you and the other 
panel members here today on what is the last hearing of the 
panel's first 6 months to look at challenges of doing business 
with the Department of Defense.
    Since this panel kicked off, we have heard from countless 
large and small defense contractors, DOD officials, noted 
academics, and non-profit and think tanks about doing business 
with the Department of Defense. While each individual had their 
own take on doing business with DOD, many common themes 
emerged:

         LThe Federal acquisition process consists of 
        many onerous rules and regulations;

         LThere is not enough communication between 
        industry and the Government buyer;

         LThe technology ``Valley of Death'' continues 
        to grow;

         LThe accounting and auditing standards used by 
        DOD agencies are antiquated and don't differentiate 
        between large and small companies;

         LThere is a lack of skilled acquisition 
        professionals; and

         LGovernment export control policies hinder the 
        sale of U.S. goods and services to foreign buyers.

    Today's hearing focuses on some of the most complex issues 
that negatively impact small business' ability to become and 
remain viable partners to the Department: contracting and 
procurement processes as well as regulatory policies.
    While U.S. goods and services, and the process in which DOD 
buys goods and services, has repeatedly proven to be world-
class, it is not without limitations. For many companies doing 
business with DOD, either the cost to enter the defense market, 
or the cost to comply with defense regulations, is prohibitive. 
This panel would benefit from hearing recommendations from our 
witnesses that might lead to DOD's contracting system becoming 
more flexible, allowing more entrants into the defense market. 
We would also like to hear your recommendations for ideas to 
bolster the existing defense industrial base, while taking 
steps towards creating a 21st-century defense industrial base 
that is more diverse, more agile, and more able to respond to 
an array of potential threats.
    Shifting to a more agile 21st-century defense industrial 
base will mean making hard choices about what we want our 
defense industrial base to look like, and what goods and 
services we want them to provide.
    I would like to thank each of our witnesses for appearing 
before the panel this afternoon and ask that they offer the 
panel their expert viewpoints on what they feel are some 
necessary steps needed to create a more flexible acquisition 
process. I am also interested in hearing about what steps DOD 
and industry can take to increase communication and 
transparency--not just at top leadership levels, but trickling 
down to the buying commands and program
officers. 
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?

      
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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                            February 6, 2012

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

      
                   QUESTIONS SUBMITTED BY MR. LARSEN

    Mr. Larsen. What is/should be DOD's strategy for transitioning 
innovations developed at small businesses to the battlefield when such 
companies and the PM offices often lack the proper funding to pay for 
the qualification effort which can cost many times the development 
costs?
    Dr. Burman. [The information was not available at the time of 
printing.]
    Mr. Larsen. How can the DOD better facilitate communication between 
PM offices where the technology needs are vetted and small businesses 
which often lack access to PM offices which tend to be dominated by big 
Primes?
    Dr. Burman. [The information was not available at the time of 
printing.]
    Mr. Larsen. U.S. allies typically bar use of ITAR restricted items 
for space and military applications, marketing these capabilities as 
``ITAR-Free.'' I understand that State is investigating these ``ITAR-
Free'' claims. Nonetheless, manufacturers in those same countries, 
however, do not face similar restrictions when selling their product to 
the U.S. primes working on USG programs. And those same companies 
leverage the experience they have gained in their home country where 
U.S. companies were not allowed to ``compete'' to outcompete U.S. 
companies on U.S. programs, touting their qualification and field 
experience gained in their home country. How does the DOD plan to 
``level the playing field'' in this environment? Can the DOD impose a 
``domestic preference'' or would it require some sort of legislation to 
allow it to do so?
    Dr. Burman. [The information was not available at the time of 
printing.]

    Mr. Larsen. What is/should be DOD's strategy for transitioning 
innovations developed at small businesses to the battlefield when such 
companies and the PM offices often lack the proper funding to pay for 
the qualification effort which can cost many times the development 
costs?
    Mr. Johnson. There are at least two major impediments to DOD 
supporting efforts to test and qualify innovations for use on the 
battlefield--a dependable and flexible fund that can be used for such 
purposes, and the ability to act and think small and hence affordable. 
There are examples of such programs that might be examined for both 
positive and negative experiences. The Foreign Comparative Testing 
(FCT) program, run by AT&L, provides a structure and funds for DOD to 
test existing foreign developed hardware for applicability to U.S. 
requirements. The Joint Improvised Explosive Device Defeat Organization 
(JIEDDO) was created to identify and test equipment to defeat IEDs. 
Congress might examine the strengths and weaknesses of such programs to 
see whether an additional fund to transition successful Phase II Small 
Business Innovation Research (SBIR) projects might be possible. Such a 
fund and its administration should be kept ``lean and mean'', avoiding 
the excesses of the JIEDDO program in terms of staffing and testing. It 
should be possible for the services to test design mock-ups in existing 
testing and training facilities to see if basic concepts show promise 
before making a decision to package and ``ruggedize'' a technology, 
thus keeping costs down. Such testing should allow for feedback and 
interchange between service testing personnel and the small company 
engineers to allow for improvements and modifications. If such a 
testing program indicated an innovative technology showed real promise, 
at that point additional funds might be made available for assisting a 
small company to move into a manufacturing stage for the technology. 
Such assistance might include funding that could be reimbursable if the 
program moved forward, or involve an advance purchase contract that 
would allow the company to obtain financing from the private sector to 
gear up for manufacturing. Another option might be to have DARPA and/or 
the services institute an office where smaller companies could outline 
their ideas and provide funds for testing technologies in the field, 
while they are still in the experimental stage.
    Mr. Larsen. How can the DOD better facilitate communication between 
PM offices where the technology needs are vetted and small businesses 
which often lack access to PM offices which tend to be dominated by big 
Primes?
    Mr. Johnson. My understanding is that communications between PMs 
and defense companies, both large and small, seem to have declined in 
recent years. There appears to be a fear of perceived conflicts of 
interest and any perception of favoring any one company that might draw 
a protest down the road. With small companies this problem is 
compounded by not having the personnel that can interact with PM 
offices on a constant basis. Re-invigorating the competition advocate 
and giving them this function, or establishing a technology advocate 
that could serve as a point of access for companies to call attention 
to potentially useful technologies might help resolve the issue. Such 
points of contact should encourage companies, large and small, to 
present technology that may resolve, or to use the current buzz-word, 
resolve 80% of a problem at a much lower cost.
    Mr. Larsen. U.S. allies typically bar use of ITAR restricted items 
for space and military applications, marketing these capabilities as 
``ITAR-Free.'' I understand that State is investigating these ``ITAR-
Free'' claims. Nonetheless, manufacturers in those same countries, 
however, do not face similar restrictions when selling their product to 
the U.S. primes working on USG programs. And those same companies 
leverage the experience they have gained in their home country where 
U.S. companies were not allowed to ``compete'' to outcompete U.S. 
companies on U.S. programs, touting their qualification and field 
experience gained in their home country. How does the DOD plan to 
``level the playing field'' in this environment? Can the DOD impose a 
``domestic preference'' or would it require some sort of legislation to 
allow it to do so?
    Mr. Johnson. The ITAR-Free problem is based on the fact that under 
the current ITAR, if a part or component that is considered to be on 
the U.S. Munitions List (USML) is exported from the U.S. and 
incorporated into an end-item produced by a foreign country, that 
country must obtain permission to export the end item to any other 
country. This is true if the part or component is no more than a 
trivial item such as a bolt, hydraulic hose, or shock absorber. In 
complex systems, such as the Swedish Grippen jet or the European A-400M 
or Eurofighter, there are large amounts of American content and the 
Europeans simply live with the ITAR rules. For end-items where U.S. 
content is not necessary, it is easier for bookkeeping and for foreign 
policy flexibility to simply keep out any U.S. content. Much of this 
problem would be eliminated, especially for many small business, if 
items that were not of major security interest were removed from the 
USML and either transferred to the Commerce Control List (CCL), or 
uncontrolled altogether. This is essentially the approach taken by the 
administration's proposed Export Control Reform initiative. It is also 
true that if the U.S. has confidence in our allies export control 
policies with respect to what end items they sell to what countries; 
the U.S. should in turn be able to reduce concern as to the components 
we sell to our allies. That is the position most countries take with 
respect to the U.S. In general, countries selling components to U.S. 
companies for military products do not impose third-country transfer 
controls, as they assume the U.S. will not allow exports to countries 
they would refuse to export to themselves. Space, and particularly 
satellites, is a more complicated problem, as without a change in the 
law, the executive branch cannot move components from the munitions 
list to the CCL. The law not only requires essentially all satellite 
parts and components to be treated as USML items, it also bans any USML 
item from being sold to China or launched on a Chinese launcher. 
European satellite makers prefer to purchase components for satellite 
buses and payloads in quantity as a way to drive down prices. At the 
time of contracting for such components, it is not necessarily known if 
one of the satellite purchasers may include Chinese companies or 
shareholders, or if a satellite might be launched on a Chinese rocket. 
European satellite manufacturers therefore have tried to eliminate U.S. 
components altogether--hence ITAR-free satellites. Of course European 
countries do not attempt to impose such restrictions on U.S. exports of 
satellites with European components, and hence there is no incentive 
for companies such as Boeing or Lockheed Martin to European components. 
Again, European countries are generally comfortable that the U.S. will 
protect their technology when exporting U.S. satellites. The way to 
avoid the ITAR-free satellite problem would be to change the law to 
allow the executive branch to determine, with Congressional review, 
what components are so sensitive they should remain on the USML, and 
which might be transferred to the CCL (without a Chinese exception) so 
that foreign satellite makers could incorporate U.S. content without 
fear of losing satellite sales or having to strip out U.S. components 
and re-qualify a satellite. As for ``domestic preferences'', the U.S. 
has reciprocal procurement memorandum of understandings (MOUs) with 
most NATO countries and other close allies that guarantees the U.S. 
will not discriminate against their producers in DoD acquisition 
policy. Furthermore, as the U.S. still exports far more defense items 
and components than it imports, the U.S. and its companies have more to 
lose than to gain from any policies that encourage ``buy-national'' 
policies. It makes far more sense to harmonize export policies with 
respect to end-items with our allies, while reducing barriers to 
exports of parts and components to each other.

                                  
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