[Senate Hearing 112-256]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-256
 
 THE HEALTH AND STATUS OF THE DEFENSE INDUSTRIAL BASE AND ITS SCIENCE 
                    AND TECHNOLOGY-RELATED ELEMENTS 

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

                                HEARING

                               before the

           SUBCOMMITTEE ON EMERGING THREATS AND CAPABILITIES

                                 of the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 3, 2011

                               __________

         Printed for the use of the Committee on Armed Services


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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

JOSEPH I. LIEBERMAN, Connecticut     JOHN McCAIN, Arizona
JACK REED, Rhode Island              JAMES M. INHOFE, Oklahoma
DANIEL K. AKAKA, Hawaii              JEFF SESSIONS, Alabama
E. BENJAMIN NELSON, Nebraska         SAXBY CHAMBLISS, Georgia
JIM WEBB, Virginia                   ROGER F. WICKER, Mississippi
CLAIRE McCASKILL, Missouri           SCOTT P. BROWN, Massachusetts
MARK UDALL, Colorado                 ROB PORTMAN, Ohio
KAY R. HAGAN, North Carolina         KELLY AYOTTE, New Hampshire
MARK BEGICH, Alaska                  SUSAN M. COLLINS, Maine
JOE MANCHIN III, West Virginia       LINDSEY GRAHAM, South Carolina
JEANNE SHAHEEN, New Hampshire        JOHN CORNYN, Texas
KIRSTEN E. GILLIBRAND, New York      DAVID VITTER, Louisiana
RICHARD BLUMENTHAL, Connecticut

                   Richard D. DeBobes, Staff Director

               David M. Morriss, Minority Staff Director

                                 ______

           Subcommittee on Emerging Threats and Capabilities

                 KAY R. HAGAN, North Carolina, Chairman

JACK REED, Rhode Island              ROB PORTMAN, Ohio
MARK UDALL, Colorado                 SAXBY CHAMBLISS, Georgia
JOE MANCHIN III, West Virginia       SCOTT P. BROWN, Massachusetts
JEANNE SHAHEEN, New Hampshire        LINDSEY GRAHAM, South Carolina
KIRSTEN E. GILLIBRAND, New York      JOHN CORNYN, Texas

                                  (ii)

  




















                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

 The Health and Status of the Defense Industrial Base and Its Science 
                    and Technology-Related Elements

                              may 3, 2011

                                                                   Page

Kendall, Hon. Frank, Principal Deputy Under Secretary of Defense 
  for Acquisition, Technology, and Logistics.....................     4
Lemnios, Hon. Zachary J., Assistant Secretary of Defense for 
  Research and Engineering.......................................    15
Lambert, Hon. Brett B., Deputy Assistant Secretary of Defense, 
  Manufacturing and Industrial Base Policy.......................    17
Augustine, Norman R., Retired Chairman and Chief Executive 
  Officer, Lockheed Martin Corporation...........................    30
Gansler, Jacques S., Ph.D., Director, Center for Public Policy 
  and Private Enterprise, University of Maryland School of Public 
  Policy.........................................................    37
Odeen, Philip A., Member, Defense Business Board, Task Group 
  Chair, Assessing the Defense Industrial Base...................    47

                                 (iii)


 THE HEALTH AND STATUS OF THE DEFENSE INDUSTRIAL BASE AND ITS SCIENCE 
                    AND TECHNOLOGY-RELATED ELEMENTS

                              ----------                              


                          TUESDAY, MAY 3, 2011

                           U.S. Senate,    
                   Subcommittee on Emerging
                          Threats and Capabilities,
                               Committee on Armed Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m. in 
room SD-562, Dirksen Senate Office Building, Senator Kay R. 
Hagan (chairman of the subcommittee) presiding.
    Committee members present: Senators Hagan, Reed, Udall, 
Shaheen, and Portman.
    Committee staff member present: Leah C. Brewer, nominations 
and hearings clerk.
    Majority staff members present: Richard W. Fieldhouse, 
professional staff member; Peter K. Levine, general counsel; 
and Robie I. Samanta Roy, professional staff member.
    Minority staff members present: John W. Heath, Jr., 
minority investigative counsel; and Michael J. Sistak, research 
assistant.
    Staff assistants present: Kathleen A. Kulenkampff, Brian F. 
Sebold, and Breon N. Wells.
    Committee members' assistants present: Carolyn Chuhta, 
assistant to Senator Reed; Casey Howard, assistant to Senator 
Udall; Roger Pena, assistant to Senator Hagan; and Chad 
Kreikemeier, assistant to Senator Shaheen.

      OPENING STATEMENT OF SENATOR KAY R. HAGAN, CHAIRMAN

    Senator Hagan. The Subcommittee on Emerging Threats and 
Capabilities will come to order, and I thank you for being 
here. I do want to say that a vote has been scheduled at 3:30 
today and, because of the nature of the vote, we have been 
asked to actually sit in our chairs at 3:30. So we'll adapt and 
see if the vote is on time. To be continued.
    But this afternoon the Emerging Threats and Capabilities 
Subcommittee meets to consider the health and status of the 
national defense industrial base and its related science and 
technology (S&T) elements. These have been the subject of 
growing concern and will continue to be so as the Department of 
Defense (DOD) faces increasing budgetary pressures on its 
acquisition investments in the future.
    Some of the key challenges include: the fragile nature of 
the supply chain and limited competition within a heavily 
consolidated defense industrial sector; growing global 
competition; a loss of skilled domestic expertise and 
manufacturing capability offshore; and the negative impacts 
from an outdated export control regime.
    In addition, there are challenges attracting and retaining 
the best and the brightest scientists, engineers, and 
technologists, who are key components of the science, 
technology, engineering, and math (STEM) workforce, not only in 
the industrial sector, but also within DOD as well.
    Overall, S&T is a key foundational basis for our national 
defense capabilities and the industrial base that produces 
them. Sustained research and development (R&D) over the last 
decades has allowed DOD, in close collaboration with the 
defense industrial sector, to develop unparalleled military 
systems from space to the depths of the oceans, and 
increasingly, in cyber space.
    It is essential to continue investment in R&D and to 
strengthen the defense industrial base to preserve our 
technological advantages on the battlefield. This priority has 
been discussed in recent high-level policy documents such as 
the National Security Strategy and the Quadrennial Defense 
Review (QDR), as well as in studies by industry groups such as 
the Defense Business Board.
    The subcommittee is interested in understanding how these 
policies and studies are translating into concrete strategies, 
plans, and programs within the DOD, how effective they are, and 
what actions Congress can take to assist in ensuring their 
success. While we rightfully acknowledge the sacrifices and 
service of our men and women in uniform engaged in operations 
around the world, we must also acknowledge the men and women 
who conceive, design, develop, and produce the extraordinary 
technology and equipment that allows our military to be the 
best in the world. They work in our diverse S&T, R&D, and 
manufacturing communities, both within the DOD and also in our 
universities, research laboratories, small businesses, and 
large corporations. They are essential partners in our national 
security, and we would not have had our remarkable military 
today without their brilliance, creativity, and innovation.
    This hearing will consist of two panels. The first panel 
will consist of DOD officials responsible for monitoring the 
status of and improving the health of the defense industrial 
base, including related research, engineering, and workforce 
activities. Mr. Frank Kendall is the Principal Deputy Under 
Secretary of Defense for Acquisition, Technology, and Logistics 
(AT&L). In this position, he supports Under Secretary Carter in 
all matters relating to the DOD acquisition system, including 
all research, development, test, and evaluation, as well as 
manufacturing and industrial base policy matters. The 
subcommittee looks forward to hearing about the DOD's 
overarching strategies, plans, and programs to address the 
challenges mentioned previously.
    Mr. Zack Lemnios is the Assistant Secretary of Defense for 
Research and Engineering. In this capacity, Mr. Lemnios has 
broad oversight of DOD's research portfolios, new initiatives 
in manufacturing, its STEM education and workforce efforts, and 
the DOD laboratories that interact with the defense industrial 
base.
    Mr. Brett Lambert is the Deputy Assistant Secretary of 
Defense for Manufacturing and Industrial Base Policy. This 
position was newly created by Congress to provide a strong 
focal point within DOD to deal with broad industrial policy 
issues. These include assessing the health of the various 
sectors of the defense industrial base, investing in new 
manufacturing and defense production technologies, and helping 
monitor independent R&D conducted by industry.
    Then our second panel will consist of individuals with a 
wealth of industrial and prior DOD experience. The subcommittee 
is looking forward to hearing their views on the challenges 
facing the defense industrial base and their assessments of 
current DOD plans, programs, and initiatives designed to 
address these challenges, as well as any additional ideas they 
may have for progress.
    Mr. Norm Augustine is the retired Chairman and CEO of 
Lockheed Martin. He has extensive experience in both the 
private sector and DOD and has been a keen observer of defense 
acquisition trends. He recently led a National Academy of 
Sciences report called ``The Gathering Storm'' that was 
instrumental in raising the visibility of the broader national 
challenges in S&T and our future STEM workforce.
    Dr. Jacques Gansler is currently the Director of the Center 
for Public Policy and Private Enterprise in the School of 
Public Affairs at the University of Maryland. His prior service 
with DOD included the position of Under Secretary of Defense 
for AT&L, and he has been a thought leader on the broad 
spectrum of topics we are going to be discussing today.
    Mr. Phil Odeen is currently a member of the Defense 
Business Board. He led a task force on the defense industrial 
base last year that laid out a number of recommendations to 
help the DOD sustain and improve the health of the defense 
industrial base. We look forward to hearing in further detail 
some of their recommendations and his assessment of how well 
DOD is pursuing them.
    We want to thank all of our witnesses for your service in 
the cause of our national security and we look forward to your 
testimony. In order for us to have adequate time to discuss a 
broad range of topics, I ask that the witnesses keep their 
opening remarks to no more than 5 minutes each.
    As soon as Senator Portman comes in, I will certainly ask 
our ranking member for his opening statement.
    Senator Reed.
    Senator Reed. Chairman Hagan, I'm going to be very brief. 
First of all, I think we're all fortunate to have your 
leadership on this important committee.
    Senator Hagan. Thank you.
    Senator Reed. Thank you so much. Your knowledge of these 
issues and your engagement in these issues are remarkable.
    I think my major task today is to admit that, despite his 
youthful appearance, Secretary Kendall is my classmate from 
West Point, and I'm jealous because he looks great and I--well, 
anyway.
    Mr. Kendall. I was going to say the same of you, Senator.
    Senator Reed. I thank you. Thank you very much, Mr. 
Secretary.
    But I think this panel and the succeeding panel is vitally 
important because, as Senator Hagan pointed out in her 
statement, we're losing our competitive edge, in terms of not 
just military technology, but so many technologies. We're not 
attracting to the defense establishments, both corporate and 
the government, the most talented individuals, as we once did 
in the 50s, 60s, and 70s. We have a whole new dimension of 
conflict, cyber conflict, which raises huge issues about not 
only competitiveness in that dimension, but also protecting 
what we have and thinking in an entirely new framework.
    In fact, I feel sometimes like our predecessors must have 
felt in 1920 about the airplane. They were born in 1845, they 
were comfortable with the telegraph. Electricity, aah. 
Airplanes? We have to deal with these issues.
    So we look to you gentlemen and the succeeding panel for 
the advice and the insights that are going to be absolutely 
critical. This could be the most important topic we consider 
long-term.
    Thank you, Chairman Hagan. I will have to excuse myself. 
Thank you.
    Senator Hagan. Thank you, Senator Reed. I agree, this is 
such an important topic, and I do thank all the witnesses for 
being here.
    Secretary Kendall.

    STATEMENT OF HON. FRANK KENDALL, PRINCIPAL DEPUTY UNDER 
SECRETARY OF DEFENSE FOR ACQUISITION, TECHNOLOGY, AND LOGISTICS

    Mr. Kendall. Thank you, Chairman Hagan. I'd like to ask 
that my written testimony be entered into the record.
    The U.S. military's superior operational capabilities are 
enabled by the application of innovative technologies and 
products that assure our military dominance. These products are 
designed and built by our defense industrial base under the 
supervision of our government acquisition workforce. As Dr. 
Carter, the Under Secretary of Defense for AT&L, mentioned 
earlier this year, a strong, technologically vibrant, and 
financially successful defense industry is in the national 
interest.
    Today I would like to summarize for you how DOD is 
addressing the health and productivity of both the defense 
industrial base and the defense acquisition workforce. I am 
joined by Dr. Lemnios, Assistant Secretary of Defense for 
Research and Engineering, and Brett Lambert, Deputy Assistant 
Secretary of Defense for Manufacturing and Industrial Base 
Policy. Together we will discuss policies and processes adopted 
by DOD to actively engage with the source of innovation and 
technology. This includes the defense industry, but also 
commercial and for-profit industry, not-for-profit entities, 
including Federally Funded Research and Development Centers, as 
well as defense laboratories, academia, and university-
associated, affiliated research centers. These all sustain our 
technological superiority and a healthy acquisition workforce 
in both industry and government.
    Let me start by saying a few words about the industrial 
base. DOD relies on a robust and capable base to develop, 
field, and maintain the high-quality equipment that is required 
to meet our national security objectives. Our industrial base 
today relies primarily on U.S. companies, but is also more 
global, more commercial, and more financially complex than in 
the past.
    The defense industry, from prime contractors that work 
directly with the government to their subsystem and component 
suppliers, and even their raw material suppliers, is constantly 
changing, constantly adapting to DOD's requirements, and, as is 
to be expected, to the conditions in the marketplace.
    In what Dr. Carter has called a new era for the industrial 
base, that marketplace is changing, and DOD, like industry 
itself, must adapt. DOD is doing so, but it should be clear 
that, while we anticipate significant change from the 
environment of the last decade or so, the sky will not fall on 
our defense industry. The defense budget is no longer growing, 
as it has for the past decade, and the President has charged 
DOD to find additional savings over the next 12 years. 
Secretary Gates is starting a comprehensive effort to carry out 
that task. DOD has already undertaken an extensive review to 
find efficiencies and we will redouble our efforts.
    But at some point there is no alternative to reexamining 
fundamental missions and force structure. However, even given 
the reductions that the President has asked us to examine, we 
believe that there will still be large and fairly stable 
markets available for the defense industry. We do not foresee a 
precipitous decline like the one DOD and industry experienced 
at the end of the Cold War.
    Today, unlike the end of the Cold War, we are not seeing a 
fundamental change in the national security situation. We will 
continue to face threats that range from emerging powers and 
trans-national terrorists to rogue states. DOD's budget must 
respond to these enduring threats and we must rely on the 
defense industrial base to equip our forces.
    As we enter a new era where defense budgets cannot be 
expected to steadily increase, we do expect market forces to be 
the primary mechanism by which industry responds to this 
change. DOD will, however, be monitoring industry closely and 
may sometimes in rare exceptions have to step in to protect 
critical capabilities or to ensure competition.
    At the top tier of the industry, we do not believe 
additional consolidation would be in the interest of DOD or the 
Nation. At lower tiers, we will be watching for the 
anticompetitive situations or the loss of critical capability 
on a case-by-case basis and for cases where we can improve the 
acquisition strategy options available to DOD.
    To be vigilant in this period of change, DOD has 
significantly increased its efforts to address the potential 
adjustments in industry. To begin with, DOD incorporated 
industrial base considerations into the QDR that was released 
last year. This was the first time DOD had brought the 
industrial base into the QDR, its highest-level strategic 
planning document. The industrial base will also be a factor in 
the comprehensive review that the Secretary has now been asked 
to conduct.
    We have taken significant steps to address the changing 
environment under the umbrella of Secretary Gates' overall 
efficiency initiative. The Better Buying Power initiative that 
Dr. Carter was tasked to implement is the centerpiece of this 
effort. We engaged industry at the outset of this initiative 
and received over 500 separate specific recommendations, many 
of which were addressed. Better Buying Power began with 23 
specific policy changes, but it is in fact an ongoing 
continuous improvement program designed to increase acquisition 
efficiency. Better Buying Power is moving both government and 
industry into a new paradigm where financial incentives and 
productivity gains will continuously drive out unproductive 
costs.
    We are also pursuing multiple concurrent efforts to map and 
better understand the increasingly complex defense industrial 
base so that we can deal with any problems that may emerge as 
market players attempt to make adjustments. In contrast to 
previous assessments, which were largely program or end 
product-focused, we are assessing the industrial base sector by 
sector and tier by tier to develop the data we need as the 
basis for any needed interventions. Mr. Lambert will have more 
to say on the industrial base and the steps we are taking 
there.
    So let me turn next to the source of all our innovation, 
the Nation's scientific and engineering workforce in and out of 
government, and challenges that we face there. As the person 
responsible with Under Secretary Carter for the effectiveness 
of the defense acquisition system, if there is one thing that 
keeps me awake at night it is my concern for the capacity and 
capability of our collective industry and government scientific 
and engineering community, what Norm Augustine will refer to as 
``human capital'' when he testifies later today.
    As I review troubled program after troubled program and 
consider my own over 35 years of experience in defense 
acquisition, 16 years of which were in industry just prior to 
returning to government a year ago, I have to conclude that our 
capacity to deliver promised programs has atrophied to a 
disturbing degree. There are still plenty of capable people 
working in industry and in government, but the trends are not 
positive and I believe that many of the problems we are seeing 
in program management and execution are simply the result of 
lack of adequate numbers of properly educated, trained, and 
experienced professionals.
    At the end of the day, delivering the products our 
warfighters need is industry's responsibility, and in many 
cases industry is failing. I believe there are many reasons for 
this loss of capability: the drawdown after the Cold War, the 
perception for 2 decades that the United States does not and 
will not face a peer competitor, the shift in interest among 
young graduates from aerospace and defense work to fields like 
biotechnology and information technology, just to name a few.
    Mr. Odeen will testify that he believes this trend is being 
reversed, partly because of the current economy. I hope he's 
correct, but I'm skeptical. The government certainly must 
accept its share of the responsibility for this situation. 
Government people set requirements, dictate contracting 
strategies, impose cost and schedule constraints, and define 
acceptable performance by industry, all of which impact program 
performance. But industry has to design, build, and deliver the 
product.
    On the government workforce side, there was a dramatic 
drawdown in the late 1990s, which we are currently trying to 
redress through the Defense Acquisition Workforce Development 
Fund and other measures. This will bring our numbers up. But 
more has to be done to improve capability as well as quantity. 
As the space-age baby boomers like myself age out of the 
workforce, I fear this problem will only become more acute.
    What can we do about this challenge? On the government 
side, we can insist that our key acquisition professionals have 
the education, training, and experience they need to attain the 
level of proficiency needed for success. This is a business 
that requires professionals. Key acquisition leaders in 
program, technical, and contract management and their staffs 
must be prepared to do their jobs and then be rewarded for 
doing so successfully. On the industry side, we can provide 
incentives to our suppliers to link successful performance on 
contracts more tightly to financial rewards. This linkage of 
profit to performance is one of the central tenets of the 
Better Buying Power initiative.
    Dr. Lemnios will describe some of the programs we have put 
in place to encourage young people to enter science and 
engineering fields and some of the steps we are taking to 
support and encourage innovation in industry and government. We 
have a lot of work to do in this regard. Dr. Carter calls the 
acquisition workforce our number one program. It will be so for 
the foreseeable future.
    A competitive and robust industrial base gives America its 
crucial technological edge. To this end, DOD does have 
responsibilities for investing taxpayers' money, preserving 
healthy competition, and managing across portfolios of defense 
systems. DOD has no desire to replace industry's profit motive. 
In fact, we need to use that motive as a strong incentive for 
superior performance. We are in this for the long haul and we 
need our suppliers to be in it for the long haul also with us.
    The best strategy for all parties is to find win-win 
outcomes. DOD's initiatives like Better Buying Power, the 
sector-by-sector, tier-by-tier assessment of the industrial 
base, and programs to promote STEM programs, and reinvigorate 
defense R&D and the acquisition workforce in both industry and 
government are designed to achieve just that.
    Congress has been actively involved in shaping and 
supporting DOD's initiatives. Your support in funding, 
expedited hiring authority, workforce recognition and 
incentives, and other human capital legislation has been very 
important to our progress. Congress has also supported DOD's 
engagement with industry, affording DOD the tools necessary to 
maintain a healthy industrial base. We appreciate the support 
and look forward to continued partnership to best serve the 
taxpayers and our warfighters.
    [The joint prepared statement of Mr. Kendall, Mr. Lemnios, 
and Mr. Lambert follows:]
    Joint Prepared Statement by Hon. Frank Kendall, Hon. Zachary J. 
                     Lemnios, and Brett B. Lambert
                              introduction
    Chairman Hagan, Ranking Member Portman, members of the 
subcommittee, thank you for the opportunity to submit this written 
testimony on the U.S. Department of Defense's (DOD) commitment to 
maintain the health and productivity of the defense industrial base and 
the defense acquisition workforce.
    The Office of the Under Secretary of Defense for Acquisition, 
Technology, and Logistics is the principal staff element of the 
Secretary of Defense for all matters relating to DOD acquisition; 
research and development (R&D), advanced technology; developmental test 
and evaluation; production; logistics; equipment sustainment; 
installation management; military construction; procurement; 
environmental security; and nuclear, chemical, and biological matters.
    I am the Principal Deputy to the Under Secretary of Defense for 
Acquisition, Technology, and Logistics and I am joined today by The 
Honorable Zachary Lemnios, the Assistant Secretary of Defense for 
Research and Engineering and Mr. Brett Lambert, the Deputy Assistant 
Secretary of Defense for Manufacturing and Industrial Base Policy.
    Today, I will discuss the Department's activities to sustain the 
health, vibrancy, and efficiency of the U.S. defense industrial base. 
The U.S. military's superior operational capabilities are enabled by 
our industrial base. For decades the United States has commanded a 
decisive lead in the quality of defense-related research and 
engineering conducted globally and in the military capabilities of the 
products that flow from this work. However, the advantages, which have 
enabled American pre-eminence in defense technology, are not a 
birthright and they must be sustained. The U.S. defense industrial base 
is critical to equipping our military with superior capabilities, as 
recognized by Dr. Carter earlier this year: ``a strong, technologically 
vibrant, and financially successful defense industry is . . . in the 
national interest.''\1\
---------------------------------------------------------------------------
    \1\ Ashton B. Carter, ``The Defense Industry Enters a New Era,'' 
Remarks at the Cowen Investment Conference, New York, NY, February 9, 
2011.
---------------------------------------------------------------------------
    I will discuss the policies and processes adopted by the Department 
to actively strengthen the sources of science and technology--the 
industrial base, defense labs and academia--to sustain technological 
superiority, provide innovative capabilities and acquire dominant 
warfighting weapon systems for our soldiers, sailors, airmen, and 
marines.
                    the industrial base in a new era
    DOD relies on a robust and capable defense industry to develop, 
field, and maintain high quality equipment. America's industrial 
capacity and our capability enabled victory in World War II, maintained 
the technological edge against the Soviet Union, and today helps ensure 
that our military personnel in harm's way have the world's best 
equipment, supported by modern logistics and information systems. Our 
technological dominance is what enables us to accomplish our national 
security missions. To sustain this advantage, the Department must 
continuously sustain and strengthen the key sources of militarily 
relevant science and technology from its sources in the defense and 
non-defense industry, government laboratories, and academia.
    As the era of sustained growth in the defense budget comes to an 
end, the Pentagon's stewardship task becomes more challenging. The 
Department needs to adapt its industrial base considerations and 
actions to the emerging reality of relatively flat defense budgets. In 
the past 2 years, the Department has significantly increased its 
efforts to address the implications of the changes in the arc of the 
national security budget on our defense industry.
    Our base today is more global, more commercial, and more 
financially complex than it was in the past. The defense industry, from 
the prime contractors that work directly with the government to their 
subsystem and component suppliers and even their raw materials 
suppliers, is constantly changing, constantly adapting to the 
Department's requirements and to the conditions in the marketplace. 
This natural evolution in the base is inherent in a free enterprise 
system, but it can bring with it new challenges for a DOD that seeks to 
sustain and grow a strong defense industrial base even as budget growth 
declines.
    Those challenges posed by a relatively flat defense budget vary 
across the many sectors of the defense industrial base. The situation 
for companies that offer platforms like ships and tanks differs from 
the situation for companies in emerging sectors like unmanned vehicles 
and cyber-defense. The situation differs at various tiers and with the 
products produced. At some levels, a key supplier may make a truly 
defense-unique product, while other suppliers at other tiers are 
motivated primarily by their sales to commercial markets, offering 
innovative products to the defense supply chain as a sideline--a 
sideline for them, in terms of revenue, that may be vitally important 
for the Department, in terms of military capability or cost control. 
Understanding and reacting to this complexity in the industrial base, 
the Department must increasingly tailor its relationships and policies 
to specific circumstances. One area of particular concern is 
maintaining adequate product ``design teams'' for the key weapons 
systems product types that the Department procures. A long hiatus 
between new program starts in a given area can call into question the 
continued existence of experienced design teams and the body of 
knowledge they bring to development of certain types of products. Once 
lost, rebuilding this type of capability can take a generation or more 
and the Department must be particularly vigilant about situations where 
this can occur.
    To understand this increasing dynamism and complexity the 
Department is pursuing multiple, concurrent efforts to map and better 
understand the defense industrial base. This approach is in contrast 
with other more traditional narrow program-focused and product-focused 
assessments. The Department will replace intuitive judgments about the 
impacts of changing domestic demand, globalization, commercial-military 
integration, emerging sources of innovation, and other issues with 
data-driven industrial base evaluations. By continuously assessing the 
industrial base on a sector-by-sector, tier-by-tier basis, the 
Department will develop a reservoir of critical and actionable 
information.
    Looking ahead, this deeper understanding will be increasingly 
important as the changing budget environment prevents the Department 
from readily addressing program management and industrial base 
challenges with the simple antidote of increasing expenditures. For the 
fifth time since the Second World War, DOD is facing a significant 
defense budget transition, in this case from a decade of rapid year-on-
year growth. Nevertheless, we do not expect the base defense budget to 
fall precipitously, like it did in the post-Cold War transition. The 
Department will still be a significant market for the industrial base, 
will still support an innovative science and technology base, and with 
appropriate attention will still maintain our technological advantages.
    That said, we do need to manage our investments more effectively to 
ensure a healthy industrial base. A decade of rapid budget growth 
driven by pressing operational needs has fostered an environment in 
which cost discipline has lost ground to the urgency of operational 
needs and projections of rapidly evolving threats, both in government 
and in industry. Greater efficiency is one answer. Secretary Gates' 
efficiency initiative, which includes Under Secretary Carter's Better 
Buying Power Initiative addressing the contracted expenditures of the 
Department, is already helping adapt both the Department and our 
industrial base to the new fiscal realities; but efficiency is only one 
part of the solution set to the challenges we face.
                       a healthy industrial base
    The industrial base equips our war-fighters. Industry makes the 
products that our service men and women depend upon. America relies on 
a defense industry that is healthy, robust, and innovative. A healthy 
industry is one that on the whole makes a competitive profit. Companies 
exist to make money, and without that potential no one would be 
competing to win defense contracts. As a whole, most corporations in 
our base fare well, particularly in comparison with other relatively 
mature industrial sectors. In addition, our primes typically have the 
advantage of strong backlogs and significant visibility into plans and 
programs in the markets they serve. DOD will not deny the businesses it 
deals with the opportunity to make a reasonable profit. Individual 
companies, however, if they do not provide the government with quality 
products that meet the Department's requirements on time and at 
reasonable cost, should expect to make reduced or no profits. In the 
high budget environments of the past many companies have grown to 
expect high margins independent of the quality of their performance. As 
budgets shrink this practice must stop.
    A healthy industrial base is not just profitable. Being healthy 
also includes being fit, or if you will, lean. Competition, disciplined 
cost negotiations, and well structured contract incentives are the key 
motivators the government can employ to ensure that our industrial base 
is lean. Competition is one of the key drivers of productivity and 
value in all sectors of the economy, including defense. Sometimes 
competition is provided by having two or more providers of the same 
thing go head-to-head, but where this is not possible we can still 
harness this power through a wide variety of other competitive 
strategies that create a competitive environment where companies are 
not complacent about the work they will receive.
    Contract incentives must provide rewards for good performance and 
consequences for poor performance. Achieving this balance is a key goal 
of the Department's Better Buying Power effort. As such, the Department 
is pursuing initiatives to reward contractors for successful supply 
chain and indirect expense management, such as increasing the use of 
Fixed-Price Incentive Fee contracts where it makes sense, but not where 
it puts unreasonable risks on industry.
    As the budget environment changes, we expect companies to adapt to 
this new era through both organic efficiencies and inorganic growth and 
realignment. Successful companies are constantly trying to anticipate 
market shifts and position themselves to be more competitive and to 
achieve greater growth and profitability. In general this is a healthy 
process. So readjustment to new technologies, priorities, and defense 
budgets is likely to involve a normal course of realignment as 
companies move to position themselves for growth, competitiveness, and 
efficiency improvement.
    The Department is very conscious that the top tiers of the defense 
industry have already consolidated significantly, and we do not 
anticipate it to be in the best interest of the warfighter or taxpayer 
to see additional merger activity among the top prime contractors. But 
we do expect some increased activity at the middle and lower tiers, 
activity that we will monitor closely. We will be particularly 
attentive and vigilant to vertical integration, especially when such 
combinations capture key suppliers or technologies that may restrict 
the availability of components and subsystems to multiple players on a 
competitive basis. We have some tools to influence these activities, 
such as the Department's roles in the Hart-Scott-Rodino and the 
Committee on Foreign Investment in the United States processes, along 
with some Defense Federal Acquisition Regulation Supplement regulations 
concerning matters such as organizational conflicts of interest. In 
this new era it is critical that the Department communicate clearly, 
openly, and consistently about our concerns as early as possible. We 
don't want industry wasting its time and effort on unacceptable 
combinations or in pursuit of business arrangements that the government 
will ultimately find objectionable. The Department understands that we 
need to be transparent and consistent and avoid reversing direction 
whenever possible.
    Toward that end, we have publicly described our expectations, or 
``guideposts,'' for any future industry rationalization and 
consolidation. Dr. Carter laid out these guideposts publicly in a 
speech he delivered in New York in February 2011. Well aware that each 
suggested transaction must be examined on its own individual merits, we 
have laid out the overall environment in which we expect this industry 
to operate. From the Department's perspective, we need firms and 
suppliers interested, as we are, in a long-term commitment to the base, 
not short-term financial gains which may ultimately erode the viability 
and vibrancy of our suppliers. In this respect, our viewpoint is 
similar to long-term investors who pursue a balanced portfolio and 
expect positive returns over time. This is a message we convey both 
publicly and privately in our interactions with both industry and Wall 
Street.
    While working with our traditional suppliers as they reshape their 
business models and practices, the Department also encourages new 
sources of competition in the form of new entrants into our market. New 
entrants renew and refresh the technology base and ensure that defense 
is benefitting from the main currents of emerging technology, 
particularly commercial technology and technology originating in small 
businesses. We must redouble our efforts to lower the barriers to 
entry. We are addressing many of these barriers--such as needless or 
time-consuming paperwork--again as part of the Better Buying Power 
Initiative, not just because they impose unnecessary costs but also 
because we want to make it easier for companies to do business with us.
    Our efforts to encourage competition in the industrial base build 
on our commitment to gain insight about the state of the base's health 
before dictating oversight--insight that the Department has 
historically lacked, especially about the companies at the lower tiers 
of the industrial base. We have undertaken an aggressive effort to map 
and assess the industrial base sector-by-sector, tier-by-tier (S2T2). 
The goal is to understand the gross anatomy of the industrial base. 
Just as doctors do not seek to understand the functioning of every 
individual neuron in the central nervous system, the Department does 
not seek to know the exact details and reasoning behind every supplier 
relationship. But we do need to better understand the industrial base's 
nervous system, circulatory system, and bone structure.
    Improved understanding of the structure of the defense industry 
aligns with the Better Buying Power Initiatives. For example, the 
Department expects to reward prime contractors for successful supply 
chain management, efforts that add value to DOD by reducing the costs 
of the components integrated further up the product stream. 
Understanding subtier-level connections between the Department's 
programs will improve our own supply chain management, helping the 
Department's efforts to maintain economical and stable production rates 
at multiple tiers. A better baseline of industrial base data will 
assist programs' market-research efforts, including in the area of 
contracted services, where market research needs particular attention 
and where the Department tends to pay rates above commercial rates. 
Comprehensive information about industry's deeper structure will help 
program managers develop strategies to increase competition, as 
directed under the Better Buying Power Initiative.
    As the budget environment changes we expect that some niche firms 
will have trouble staying in business due to temporarily decreased 
demand. We expect these firms to be proactive about their concerns, but 
the Department will be proactive also. We will attempt to identify 
early warning signs of particular product niches that may get into 
financial trouble due to temporarily decreased demand despite the fact 
that they offer truly critical, unique and necessary capabilities. 
While we anticipate these cases to be exceptions, we must nonetheless 
be prepared on occasion to tailor our investment policies to preserve 
essential capabilities. We need sufficient insight to make these 
strategic investment choices.
    The new S2T2 repository of industrial base data will also serve as 
a jumping off point for future assessments by all Defense components, 
ensuring that data collection and analysis cumulates, thereby 
increasing the value of all industrial base assessment efforts. Having 
one office in the Department leading this effort will prevent 
duplication of effort that wastes the Department's resources and 
harasses overworked program offices and contractors with multiple, 
redundant requests. Sustaining and strengthening the data over time 
will also contribute required insight to the Department's merger, 
acquisition, and divestiture reviews and other industrial base 
policies.
    While the Department certainly needs more systematic insight into 
the industrial base, we are already aware of the important outlines of 
major changes, and we are implementing policies to address the new 
realities. During the Cold War our industrial base consisted primarily 
of US-owned and -operated private firms building defense-unique 
products almost exclusively for the Department. This is clearly no 
longer the case. We now find ourselves buying products from 
international commercial and mixed defense and non-defense companies 
that service many customers--both within and outside of defense 
markets.
    The Department has found that this shift from defense-unique to 
commercial companies is typically in the best interest of the 
warfighter and the taxpayer. Buying from commercial sources and taking 
advantage of commercial technology in areas like information technology 
incorporates more innovative products into the military's arsenal, and 
it does so at a lower cost to the taxpayer. It also injects more 
competition into our buying processes and allows for quicker 
integration of technology improvements into weapons systems.
    But buying commercial goods and services is not without risks and 
complications as well as rewards. The commercial base has become 
increasingly global in nature. It maintains global supply chains, gets 
financing from global investors, and employs a global workforce. 
Globalization poses numerous advantages and challenges. Foreign 
competition pushes our domestic base to continue producing innovative, 
cutting-edge products that can compete with new international entrants, 
fomenting competition in price and capabilities throughout the vender 
base. It allows the Department to benefit from a broader base of R&D 
and capital investments, augmenting our own investments that draw on 
the U.S. Government budget. Sharing technologies and processes among 
allies also helps ensure that when we engage around the world, our 
systems are interoperable to the greatest extent possible.
    On the other hand, the benefits of globalization are tempered by 
potential risks. Some foreign nations and non-state actors are 
constantly trawling global supply chains, trying to gain access to 
critical U.S. technologies and information on U.S. defense systems. 
Similarly, the United States needs to address risks that counterfeit 
parts or even components intentionally designed to subvert crucial 
defense systems could slip in through the increasingly complex, global 
supply chain. The Department is strongly committed to rigorous systems 
testing and to our anti-counterfeit and program protection plan 
initiatives. We also cooperate closely with other parts of the 
government on some of these responses to globalization.
    As a key example of the whole-of-government response to 
globalization, DOD--along with the NSC and the Departments of State, 
Treasury, and Commerce--is currently developing reforms to our export 
control process to protect our most valuable technologies--our ``Crown 
Jewels''--while also streamlining the process to make it easier for 
companies to export parts or systems that are not critical defense 
capabilities. Improving the U.S. defense industry's ability to export 
is the necessary and expected flip side to our own increased openness 
to globalization of the defense supply chain: as foreign firms inject 
competition into the U.S. market, U.S. firms should gain equivalent 
advantages in overseas markets.
    Globalization also poses unique risks of supply chain disruptions. 
Natural disasters can happen anywhere in the world, and even an 
entirely domestic defense supply chain could face disruptions. But if a 
disruption occurs at a domestic supplier, the Department can use 
Defense Priorities and Allocation authorities under the Defense 
Production Act to compel U.S. industry to prioritize DOD critical 
orders. Those authorities do not extend overseas, so when disruptions 
occur at foreign suppliers, the Department may have a more difficult 
time adjusting. We are working to alleviate this challenge by 
increasing the use of bilateral defense trade agreements and security 
of supply agreements with our allies.
    Finally in order to have a healthy industrial base the Department 
must have an acquisition system that avoids false starts--programs that 
are canceled after substantial investments, but before serial 
production. We want our industrial base to produce high-quality systems 
that are delivered to the Department and that serve our warfighters' 
needs. The Department has a long history of beginning programs that we 
ultimately discover are unaffordable to produce. This certainly doesn't 
benefit the Department or the taxpayer and it doesn't benefit our 
industrial base. For these reasons the Better Buying Power Initiative 
stresses affordability as a key parameter of the defense acquisition 
process. We are now forcing planners in the Department to confront 
affordability constraints at the beginning of programs when 
requirements are formulated and we are putting cost caps on all new 
starts that we will enforce over the life of the program.
    We must leverage creative innovation and turn it into real 
products, meaning that we need to continue our efforts to strengthen 
the focus on technology transition and manufacturing process 
development. As a 2006 Defense Science Board Task Force study led by 
Dr. Jacques Gansler concluded, use of immature manufacturing technology 
and processes, particularly among lower tier suppliers, substantially 
increases the cost of new weapon systems. The National Defense 
Authorization Act for Fiscal Year 2011 presented new opportunities to 
align assessments of subtier capabilities with programs like Title III 
of the Defense Production Act, the Manufacturing Technology Program, 
and the Industrial Base Innovation Fund that are geared specifically 
toward addressing these manufacturing readiness concerns. Congress has 
long championed these important programs, and we look forward to 
continuing our partnership to support the warfighter at the best value 
for the taxpayer.
sources of innovation in industry, academia, defense laboratories, and 
 federally funded research and development centers (ffrdcs)/university 
          affiliated research and development centers (uarcs)
    The technologies that provide the basis for all our weapons systems 
are created through a variety of mechanisms in industry, academia, and 
defense laboratories. The Department maintains a strong relationship 
with industry through a variety of programs designed to foster 
collaboration and encourage innovation--Industry Independent Research 
and Development (IR&D) programs; the Small Business Innovation Research 
(SBIR) program; and Cooperative Research and Development Agreements 
(CRADA). The Department's IR&D program encourages firms to pursue 
innovative technological solutions to the most challenging operational 
problems, both for near-term missions and to prepare a vibrant tech 
base for an uncertain future. DOD reimburses approximately 1,200 firms 
in the industrial base for IR&D efforts, thus providing opportunities 
for innovation to both the large primes and the smaller mid and lower-
tier firms. The IR&D funding is critical to ensure a healthy talent 
base in industry and to keep industrial design team skills sharp over 
the long term.
    The Department has recently launched initiatives to increase 
communication with industry regarding technology needs and operational 
requirements to ensure maximum return on industry's IR&D efforts, which 
the Department reimburses as an allowable cost. For example, the 
Department is preparing Vendor Communication Plans which provide clear 
guidance and encourage communication between industry and government 
about requirements and technology objectives. The Department is also 
reaching out to industry to find new ways to collaborate through 
sharing of detailed information about their IR&D projects and the 
Department's technology roadmaps. We believe efforts like these will 
encourage Industry to continue to invest in high-quality R&D projects, 
and also help them identify the technical talent they will need for the 
near and long term to be a successful source of innovative technology 
for DOD.
    The Department also uses its SBIR program to fund S&T talent at 
small businesses. In fiscal year 2010 the Department issued 
approximately 2,000 SBIR Phase 1 awards and approximately 900 Phase 2 
awards. The Department also concluded approximately 2,500 CRADAs across 
a broad industrial base. SBIR projects and CRADAs leverage the 
innovation created by the industrial base talent to bring new ideas 
into the Department. These vehicles provide support to small businesses 
which are the greatest engines for innovation and growth in our 
economy.
    The Department's basic research program, primarily with 
Universities, paves the way for our technological future--the 
scientific discoveries it yields today provide the foundation for 
tomorrow's capabilities. Given the increased global emphasis on R&D, 
the United States cannot assume an assured technological superiority on 
the battlefield: to do so it must remain on the scientific cutting 
edge. The President's commitment to an appropriately funded basic 
research program is reflected in the Department's fiscal year 2012 
budget request. The budget requests increases the Department's basic 
research accounts by $79 million to $2.078 billion, or 2.2 percent real 
growth from the fiscal year 2011 President's budget request.
    The Department also supports an extensive program to shepherd 
discoveries into solutions to today's problems and to develop the next 
generation of research leaders who will set the vision and exploit 
opportunities. In order to increase the effectiveness and value of the 
Department's basic research program, the research and engineering 
enterprise has redoubled efforts that: attract and inspire the best 
scientists to engage problems of defense importance, and to enable 
those scientists to better interact with developers and users; improve 
management practices and policies to enhance productivity and enable 
scientists to better communicate and collaborate; identify emerging 
areas of science with the potential for significance to defense 
capabilities; and focus DOD basic research on specific domains of 
defense interest, and on transformational scientific opportunities.
    Basic Research is fundamentally about creating knowledge, and 
innovation occurs when that knowledge is used in creative ways. The 
Department believes sharing basic research information helps advance 
the progress of knowledge and attracts the best talent. Last year the 
Department reaffirmed and extended its policy towards removing 
restrictions on publication of fundamental research results. We believe 
this will encourage researchers to work in areas important to the 
Department.
    Another key source of technological innovation is the Department's 
laboratories. The laboratories serve as the technical core of the 
Department and encompass an important pool of talent and resources. 
This footprint includes 67 DOD laboratories dispersed across 22 States 
with a total workforce of 60,000 employees; 35,400 of whom are degreed 
scientists and engineers who conduct DOD-relevant research leading to 
key technology demonstrations and publish thousands of reports and 
peer-reviewed technical papers. In many cases, this community defines a 
technical field with seminal work and leads the industrial base in 
their respective areas.
    This highly skilled workforce and associated unique infrastructure 
perform state-of-the-art basic and applied research; respond to rapid 
need requests (prototyping, equipment modifications, etc.), support 
acquisition programs and the deployed forces. The defense industrial 
base looks to the DOD labs for new ideas and concepts for next 
generation weapon systems while academia works closely with the labs to 
transition new concepts into the military technical community.
    Through special direct hiring authority granted by Congress, we 
have the ability to rapidly hire new graduates in emerging critical 
areas for the Department.\2\ As a result of this authority lab 
directors have latitude to implement personnel policies to hire, 
reward, and train the talent necessary for them to execute their 
respective missions.
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    \2\ Science and Technology Reinvention Laboratory (STRL, also known 
as ``Demonstration Labs'')
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    This authority has enabled lab directors to replace engineering 
staff lost through attrition and quickly respond to changing technology 
requirements. In fiscal year 2010 the labs used this authority to hire 
114 qualified staff.
    A source of unique capabilities in many areas where the government 
cannot attract and retain personnel in sufficient depth and numbers is 
the FFRDCs. FFRDCs operate in the public interest, free from 
organizational conflicts of interest, and can therefore assist DOD in 
ways that industry and for-profit contractors cannot. Our FFRDCs 
maintain long-term capability in core competencies in domains that 
continue to be of great importance to the Department, such as analysis, 
engineering, acquisition support, and R&D. I view them as a vital 
component of the overall acquisition workforce.
    UARCs provide an effective conduit for capturing diverse 
university-based engineering and technology capabilities that are 
essential to the DOD. They advance DOD operations via application of 
leading edge research, development or engineering in specific domains 
and maintain core competencies in those domains for the benefit of all 
DOD components and Agencies.
          strengthening the government's acquisition workforce
    The Department is committed to a strong acquisition workforce in 
industry and government. Competitive pressure is used to motivate 
industry to increase its scientific and engineering capabilities. DOD, 
with assistance from Congress, is in the midst of rebuilding its own 
scientific and engineering workforce. Without a strong professional 
technical workforce the government cannot effectively define, evaluate, 
and manage the defense contractors who develop products for the 
Department. This workforce was downsized dramatically during the 90s 
and we are in a rebuilding phase that needs to continue. While we have 
made progress in restoring the workforce size, our single greatest 
concern is building the human capital available to DOD inside and 
outside the government. Talent matters! We need people with the right 
ability, training, and experience to take on major responsibilities for 
stewardship of the taxpayers' investments in a broad range of national 
security systems. We are concerned about our program management, 
engineering management, and contract management capabilities. Our 
industry partners share identical challenges. We must actively attract 
talent (enrich the pipeline) and then support the newly hired 
acquisition workforce--build on their talent with key experience and 
training--engage, motivate, and retain. We must help the mid-career 
workforce prepare to lead the 21st century DOD acquisition mission as 
the ``space age'' workforce enters retirement.
    This mid-career workforce is one fifth the size of the senior 
experienced workforce. We must deliberately provide opportunities to 
them to get the experience they need to take on major responsibilities 
and lead into the future.
    In authorizing the Defense Acquisition Workforce Development Fund, 
Congress recognized the importance of training and developing the 
acquisition workforce. Anticipating the recruiting of new talent and 
the need to improve training, we have added faculty to the Defense 
Acquisition University, particularly in contracting, but also in the 
management and engineering disciplines. The training will equip the 
workforce to apply their skills and energies to managing their programs 
and the contractual efforts that deliver goods and services in support 
of national defense, to do so efficiently and effectively, and to 
eliminate wasteful effort which is spent, in effect, on managing the 
internal bureaucracy.
    Strengthening the Department's Systems Engineering Workforce
    A key focus within the Department's research and engineering 
enterprise is to ensure that the Department's engineering workforce is 
trained and experienced enough to meet the needs of complex systems 
engineering efforts, test and evaluation efforts, and ensure a future 
supply of talent, both for the Department and the industrial base. To 
ensure we are on the right path, the Department has launched a 
comprehensive survey of the Department's Systems Planning, Research, 
Development and Engineering-certified engineering workforce. This 
survey will assess the current competencies and identify any skills 
gaps that may exist between the workforce's current capabilities and 
those needed to meet current and future mission requirements. This 
assessment and resultant gap analysis will help shape future workforce 
development and human capital planning initiatives.
    We have established several engineering workforce development 
initiatives to address the growing department and industry challenge of 
attracting and retaining the most qualified systems engineering 
technical leaders to address defense acquisition challenges. These 
initiatives include implementation of the engineering portion of the 
Key Leader Professional Development program, working with the defense 
industry and engineering professional organizations on education and 
training initiatives, and conducting national and international 
workshops that explore lessons learned in systems engineering 
education, training and experience development. One such initiative is 
the Systems Engineering Capstone pilot program, which is designed to 
increase systems engineering skills in engineering students, and 
increase the pipeline of systems engineers available to DOD. The 
program inspires students to solve the types of system engineering 
challenges evident among DOD programs. Three hundred undergraduate and 
graduate students at 14 educational institutions, including Service 
Academies and graduate schools, currently participate in this program.
    Future Science and Engineering Talent; Science, Technology, 
Engineering, and Math (STEM) Programs
    The Department's STEM Programs are focused on growing the pool of 
talent to replace the aging workforce. The Department requires specific 
expertise in established and developing disciplines. We continue to 
foster a strong relationship with future scientists and engineers.
    In May 2010, the Department submitted to Congress its STEM 
Education and Outreach Strategic Plan. This plan, developed by 27 
senior leaders from across the DOD, lays out our vision to develop a 
diverse, world-class STEM talent base by. The implementation strategy 
strengthens our STEM education and outreach portfolio and provides for 
specific processes and measurement criteria. The strategy includes a 
STEM governance architecture consisting of a DOD Executive Board, and 
links to the newly formed National Science and Technology Committee 
(NSTC) on Education and a defense industry forum. The STEM Board of 
Directors will meet later this spring to discuss the Implementation 
Strategy.
    Core to the strategy is the National Defense Education Program 
(NDEP). NDEP invests in inspiring, developing, and attracting the 
current and new generation of STEM talent. NDEP also enhances students 
and world-class researchers' interest in DOD by offering opportunities 
for direct engagement with DOD labs and Component technical staff.
    NDEP's K-12 program enhances STEM education through public-private 
engagement between DOD and local schools and organizations. DOD 
research and engineering professionals serve as direct conduits for 
inspiring students to learn STEM and, in the process, motivate many to 
pursue STEM careers. Currently, 1,750 DOD scientists and engineers in 
26 States have engaged 180,000 students and 8,000 teachers.
    The Science, Mathematics and Research for Transformation (SMART) 
program funds 670 undergraduate, graduate, and doctoral students in 19 
DOD-relevant fields of study. SMART is a scholarship-for-service 
program--participants commit to 1 year of DOD employment for each year 
of academic support received. Since 2006, nearly 300 students have 
transitioned into the DOD workforce. The program is popular--we 
received 2,800 applications earlier this year and selections will be 
made soon.
    The National Security Science and Engineering Faculty Fellowship 
(NSSEFF) focuses on distinguished scholars and graduate students. The 
program awarded long-term funding to 29 distinguished university 
faculty members to conduct basic research on topics essential to 
national security. Connections to the faculty enable the program to 
leverage more than 150 students and postdoctoral scholars serving on 
research teams. The NSSEFF enables partnerships between the faculty and 
their research assistants with scientists and engineers in the DOD 
laboratories, providing us opportunities to identify and recruit top 
talent.
                               conclusion
    We do not have, nor do we desire, an arsenal system. Today, a 
competitive and robust industry makes the weapons and support systems 
that give the U.S. military its crucial technological edge. Companies 
use their understanding of technology and business to choose 
investments, key technical talent, the best supplier networks, and 
other business strategies, and they can earn respectable profits from 
reliably delivering high-quality products. The Department has no desire 
to replace or reduce industry's profit motive, a strong incentive for 
good performance of which we intend to take more effective advantage.
    The Department has its own key roles: responsibly investing 
taxpayers' money, preserving healthy competition, and managing across 
portfolios of defense systems where individual contractors cannot know 
how progress on one system will affect industrial capability to support 
another system. Fortunately, leaders in both the DOD and the defense 
industry widely recognize their coincident long-term interests in 
supporting the warfighter and protecting American national security.
    But the leaders also recognize the key differences in their 
interests, too. We are buyers, they are sellers, and we both hope to 
negotiate good deals in our self, and collective, interests. The best 
outcome is to find win-win strategies, where contractors earn profits 
for superior performance and the Department gets quality products for a 
fair price. The Department's initiatives like Better Buying Power, the 
sector-by-sector, tier-by-tier assessment of the industrial base, and 
programs to promote STEM and reinvigorate defense R&D should position 
us all to find more win-win situations in the future.
    Congress has been actively involved in shaping and supporting the 
Department's initiatives. Your support in funding, expedited hiring 
authority, workforce recognition and incentives, and other human 
capital legislation has been very important for our current success. 
Congress has also supported the Department's engagement with industry, 
affording the Department the tools necessary to maintain a healthy 
industrial base. Complete success will not be achieved overnight. As 
Secretary Gates has stated, ``there are no silver bullets.'' Dr. Carter 
and I appreciate this support and look forward to continued partnership 
to best serve the taxpayer.

    Senator Hagan. Thank you, Secretary Kendall.
    Secretary Lemnios, and due to time constraints, if you 
could limit it to about 5 minutes. Thank you.

 STATEMENT OF HON. ZACHARY J. LEMNIOS, ASSISTANT SECRETARY OF 
              DEFENSE FOR RESEARCH AND ENGINEERING

    Mr. Lemnios. Chairman Hagan, Ranking Member Portman, 
members of the subcommittee, thank you for this opportunity to 
discuss DOD's research and engineering activities that foster 
innovation and our progress in growing our engineering 
workforce.
    The defense industrial base, our defense laboratories, and 
our Nation's research universities are the envy of the world. 
They have consistently provided DOD with a wealth of ideas, 
research and engineering resources, and capabilities that give 
our men and women in uniform a decisive tactical edge. DOD 
maintains a strong relationship with the defense industrial 
base through programs designed to deliver capabilities and 
foster collaboration and encourage innovation.
    The industry's Independent Research and Development (IR&D) 
investments, which DOD reimburses to over 1,200 firms at a 
total of approximately $4 billion annually, has resulted in 
acceleration of capabilities breakthrough in a number of 
tactical areas. We're also relying on our small business 
community to provide additional avenues of innovation. Our 
small business innovation research program and DOD's 
cooperative R&D agreements with industry have a successful 
track record of driving innovation and transitioning concepts 
to capabilities.
    In fiscal year 2010, DOD awarded approximately 2,000 phase 
one and 900 phase two Small Business Innovative Research (SBIR) 
awards and has over 3,200 contract R&D agreements with small 
businesses across this Nation. This provides an entire avenue 
of critical technology capabilities.
    DOD's laboratories are another source of innovation and 
they serve as the technical core of DOD. This enterprise 
includes 67 laboratories across 22 States, with 60,000 
employees, of which 35,000 hold degrees in science and 
engineering. These laboratories provide a unique opportunity 
for academia and industry to develop and test new ideas, new 
concepts, in operationally relevant environments.
    DOD's basic research program has a strong coupling with 
academia and with industry and paves the way for the future. 
Today's scientific discoveries provide tomorrow's capabilities. 
The President's fiscal year 2010 budget request for basic 
research funding is just over $2 billion for precisely that 
reason.
    But in the light of this current environment, characterized 
by global R&D, reverse talent flow, and economic pressures, our 
challenge is to realign this tremendous research base to better 
meet the current and future needs of DOD. We must add depth and 
capacity to the acquisition workforce. We must communicate 
effectively with the S&T workforce to ensure that their 
products align with DOD's needs, and we must incentivize the 
defense industrial base. All of these topics you will hear 
about today.
    The health of these three sources of innovation--the 
defense industrial base, the defense laboratories, and our 
universities--relies primarily on the talent they employ and 
those they can access. In each of these domains, talent 
matters. Our acquisition workforce is in the early stages of a 
revitalization. This is where we need immediate depth and 
understanding to develop and execute programs that deliver 
capabilities for DOD on schedule and within budget.
    In authorizing the Defense Acquisition Workforce 
Development Fund, Congress recognized the importance of 
training and development. This last year we added 484 key staff 
in each of these areas to our Department's workforce.
    We've also added faculty at our Defense Acquisition 
University to provide DOD with a workforce of continuing 
education and opportunities for many. In fiscal year 2010, 
Defense Acquisition University trained 46,000 classroom 
students, 193,000 web students, and delivered over 2 million 
hours of online content.
    We've established several engineering workforce development 
initiatives, including systems engineering capstone courses. 
This has allowed us to connect with leading systems engineering 
universities to train an entirely new cadre of systems 
engineers for DOD and eventually for the defense industrial 
base.
    Congress has granted our laboratories special authority to 
rapidly hire new graduates to replace the scientists retiring 
from their work in critical areas for DOD. In fiscal year 2010 
we used this authority to hire 114 first-rate staff in 
critically significant areas across our defense laboratories.
    Our STEM programs are focused on growing the research and 
engineering talent for DOD's future. Our national defense 
education program is targeted to attract and develop new STEM 
talent. Through this program, 1,750 DOD scientists and 
engineers in 26 States have engaged 180,000 students across the 
Nation and 8,000 teachers to inspire young students to join the 
ranks of the defense industrial base in DOD's key mission 
areas.
    Our science, mathematics, and research for transformation 
program, our SMART program, funds currently 670 undergraduates, 
graduates, and doctoral students.
    Senator Hagan. Mr. Lemnios, if you could wrap up in about a 
minute.
    Mr. Lemnios. Absolutely.
    The key point here is that with DOD's investments in these 
STEM initiatives driving new areas for work in critical 
technology areas, we're strengthening the work of DOD, we're 
building the defense industrial base that's structured in new 
technical areas, and we're driving new concepts that will 
eventually find their way to support the programs within DOD.
    We recognize that we're early in many of these phases. It's 
an effort that requires alignment across the defense structure 
and the private sector and this is something that we're 
absolutely committed to.
    I thank you very much for the opportunity to address you 
this afternoon.
    Senator Hagan. Thank you.
    Secretary Lambert.

STATEMENT OF HON. BRETT B. LAMBERT, DEPUTY ASSISTANT SECRETARY 
      OF DEFENSE, MANUFACTURING AND INDUSTRIAL BASE POLICY

    Mr. Lambert. Chairman Hagan, Ranking Member Portman, thank 
you for the opportunity to be here today.
    As Mr. Kendall noted, DOD is reliant on having a robust and 
capable defense industry. The base does not exist in abstract. 
It's comprised of thousands of highly skilled workers pursuing 
advanced technologies, some of which are seemingly 
unimaginable, all in support of the warfighters.
    What's often overlooked is that the goods and services that 
DOD relies upon reach far deeper into the overall U.S. economy 
than most appreciate. In many cases, such as the price of oil, 
steel, or the increasing cost of health care, DOD's challenges 
mirror that of the overall U.S. economy. In short, we don't 
operate in an economic vacuum. While there are unique items 
produced solely for DOD and other Federal agencies, even these 
items often rely upon a complex supply chain of product 
providers which, if restricted at the second, third, or even 
fourth tiers, would jeopardize seemingly pure industrial 
players' ability to support the warfighter on an ongoing basis.
    Understanding these structures and tiers, their 
interdependence to one another and the programs they serve is 
central to pursuing an effective and sustainable industrial 
policy. Toward this end, we believe it is essential to gain 
insight into our base before dictating any oversight. Combing 
through the industrial base sector by sector, tier by tier, 
under the Security Standards Transition Team (S2T2) initiative 
outlined by Mr. Kendall will help us develop a reservoir of 
critical and actionable knowledge.
    The improved understanding of the structure of the base 
aligns nicely with DOD's Better Buying Power initiatives. For 
example, DOD plans to reward contractors for successful supply 
chain management. The incentive can be informed by the 
examination now under way.
    Likewise, understanding the sub-tier level connections 
among DOD's programs and across the Services will improve our 
program management and help DOD's efforts to maintain 
economical and stable rates of production.
    The new S2T2 repository of industrial base data can also 
serve as a jumping-off point for future assessments of all 
defense components, ensuring that the data collection and 
analysis cumulates over time and thereby increasing the value 
of all industrial base assessments as we move forward.
    Sustaining and strengthening the data over time will 
contribute to the required insight to DOD's merger, 
acquisition, and divestiture reviews, as well as other 
industrial base policies. Greater depth and breath 
understanding of our entire base will increasingly be important 
as the changing budget environment prevents DOD from readily 
addressing program management and industrial base problems with 
the simple salve of additional resources. That solution is 
simply no longer an option as the double-digit year over year 
growth that characterized the past decade is gone for the 
foreseeable future.
    Greater efficiency is one answer in the new budget reality 
and DOD's efficiency initiative, including the Better Buying 
Power, is already helping adapt both DOD and our industrial 
base to the new fiscal realities. But efficiency through 
process improvements is only one part of the solution. We must 
also examine how the structure of our industrial base can 
impact costs without sacrificing critical capabilities. As Mr. 
Kendall stated, DOD is very conscious that the top tiers of the 
defense industry have already consolidated significantly. That 
said, we do expect more activity at the mid and lower tiers, 
activity which we will monitor closely. We will be particularly 
attentive and vigilant to vertical integration, especially when 
such combinations affect key suppliers or technologies that 
could be denied to other potential competitors or where lower-
tier firms would be denied opportunities to offer their 
components or subsystems to multiple players on a competitive 
basis.
    In addition to guarding against constraints on competition 
within the existing base, DOD also encourages new sources of 
competition and new entrants to our market. New entrants renew 
and refresh technology and ensure that the defense is 
benefiting from the main currents of emerging technologies. We 
must redouble our efforts to lower the barriers to such entry.
    We're addressing many of these barriers, such as needless 
and time-consuming paperwork, not just because they improve--
they impose unnecessary costs, which are ultimately passed on 
to the taxpayer, but also because we simply must make it easier 
for innovative companies, particularly advanced technology 
companies, to do business with DOD.
    We must also better leverage creative innovation and turn 
it into products, meaning that we need to redouble our focus on 
what in the commercial environment is referred to with 
``bringing product to market.'' This requires technology 
transition and manufacturing capacity development. Use of 
immature manufacturing technologies and processes, particularly 
among the lower tier suppliers, brings with it a multitude of 
inefficiencies and substantially increases the cost of new 
weapons systems.
    The National Defense Authorization Act for Fiscal Year 2011 
offered new opportunities to focus on sub-tier suppliers as 
well as manufacturing capabilities. Congress has long 
championed these important efforts and we look forward to 
continuing our partnership in these matters.
    Thank you for the opportunity and I look forward to your 
questions.
    Senator Hagan. Thank you, and thank you for all of your 
testimony.
    Ranking Member Portman, if you have an opening statement.

                STATEMENT OF SENATOR ROB PORTMAN

    Senator Portman. Thank you, Chairman Hagan, and I 
appreciate my colleagues being here. What I'd like to do is 
make a brief opening statement and then forego my questions 
until after the other members have had a chance, including you, 
to ask questions, because I have a lot of them. I thank you for 
holding the hearing today and I thank our panel and I look 
forward to the second panel as well.
    I'm sure you did this at the outset already, but I just 
want to start, as we must today, congratulating your 
colleagues, the men and women in uniform who performed so 
admirably over the weekend, and of course our intelligence 
services. We are so grateful to them. This is a moment we've 
long awaited.
    It also doesn't mean that al Qaeda and its affiliates are 
not going to continue to create enormous difficulties for us as 
a country and for the world. They were not dependent on one man 
and so we must remain vigilant.
    We also have to be cognizant of the fact that we are in a 
difficult time around the world in so many respects. I just got 
back from a trip to Asia, Korea and India, and military growth 
by states in Asia and the Pacific continues to alter the 
regional balance of power, and certainly what's happened in the 
Mideast with the Arab spring has altered the way we look at the 
Middle East and North Africa. We are still engaged in this 
battle with so many extremist groups that want to kill 
Americans by any means possible in places like Iraq and 
Afghanistan, but all around the world.
    We have great challenges. As we've heard from the panel 
today, Chairman Hagan, we remain a dominant military force, the 
dominant military force, but we also have big challenges being 
able to maintain our superiority, our qualitative technological 
superiority, without driving our Nation further into debt and 
without depriving DOD with necessary funds in other areas that 
would compromise our security.
    This is going to be a difficult process going forward and 
we appreciate your input. Having a robust defense industrial 
base is going to be critical to have the tools to do the job. I 
also believe that having an industrial base that has some 
diversity is critical to be able to maintain competition. One 
of the concerns I have with the consolidation that you, 
Secretary Lambert, were just talking about. Of course, our 
military base, our industrial base, hasn't been immune to 
everything else that's been happening in the economy and we do 
have a changing defense marketplace.
    I recently read that the Chief of Naval Operations said he 
believes the defense industrial base today is as fragile as 
it's ever been. That's a pretty strong statement. Certainly you 
talked about the consolidation, the exodus of some companies 
from the sector, and the international marketplace being 
incredibly competitive these days.
    Our workforce is aging in the industry, as you all know. 
Some of our brightest minds are exiting the stage. We still 
have too few students entering into the STEM disciplines, which 
are so critical to our national security. I know we're going to 
talk more about that in the questions, I hope. Of course, we 
have students from overseas still taking advantage of our 
superior educational opportunities here, but increasingly 
they're returning home. Some of the data I saw in preparation 
for this hearing, Chairman Hagan, about the degree to which 
Indian and Chinese students believe they have a better chance 
creating and starting a company and pursuing their dream back 
in India and China is concerning for the U.S. industrial base.
    We have challenges we need to address. We need to ensure 
our competitive advantage is not reduced at this critical time. 
I realize some of these are going to take time to solve and I 
appreciate the remarks already and look forward to questions on 
that topic.
    I will now defer to you, Chairman Hagan, and other members, 
and come back for my questions.
    Senator Hagan. Thank you.
    I did want to update. I said earlier there was going to be 
a 3:30 vote. Now it looks like it's been postponed to 3:45.
    I wanted to ask a question to you about the future 
scientists and engineers that we're all concerned about for DOD 
and the defense industry, following up on what you also said, 
that the majority of graduates from our universities with 
advanced degrees in the STEM fields are now, many of them, non-
U.S. citizens. In the past, many would remain in the United 
States to pursue their careers in their fields of study. But, 
however, increasingly they are now returning to their home 
countries.
    Mr. Lemnios, do you believe that it would be in our 
national security interest for DOD and the defense industrial 
base to have access to this talent pool, and is it in our best 
interest to develop a pool of highly educated scientists and 
engineers who will then go back to their home countries and 
actually end up competing against us?
    Mr. Lemnios. Chairman Hagan, that's one of the things that 
keeps me up at night. At the end of the day, we need the best 
minds and we need the best ideas. As I look--and I've visited 
many universities. In fact, just last week I was at a Big Ten 
conference of university provosts to discuss exactly that 
issue.
    There are really two parts of that discussion. The first is 
where do the ideas actually reside. They reside in the 
departments that exist within our universities, and so we have 
programs and efforts in place to really bolster those concepts. 
But they also reside in the students. In that area, we have--we 
are in fact funding U.S. students and foreign students in our 
basic research program, and we have very few avenues to correct 
the issues that you discussed.
    So I'm concerned about it. We're using the avenues that we 
have, and the connection between our universities and our 
service laboratories provides one avenue to get those ideas out 
of the university into another organization that allows those 
transitions to occur.
    Senator Hagan. What sort of authorization would we need to 
employ non-U.S. citizens with advanced degrees? Could the 
current military accessions vital to the national interest 
program that targets non-U.S. citizens with critical foreign 
language and medical skills also be applied to STEM-related 
fields and for DOD civilians? Feel free, all three of you, to 
please comment on this.
    Mr. Kendall. Chairman Hagan, I think there is some real 
potential there. I went to graduate school at Caltech in the 
1970s and about a third of the students with me in graduate 
school in aerospace engineering were foreign students. Almost 
all of them stayed in the United States. Many of them got jobs 
in the defense industry or something related to the space 
program and so on. Today that's not happening.
    It's not happening for a variety of reasons. One is the 
economic opportunities that they now have at home, which is 
understandable. But we're also not making it easy for those 
people to stay here. We're not making it attractive.
    The United States is a very attractive place to live. Once 
you've come here and gone to grad school, it shouldn't be that 
hard to convince people that this is a place they would want to 
stay. But we need to remove some of the barriers to that. So I 
would be very much in favor of a program that allowed us to do 
that.
    Senator Hagan. How about the suggestion to staple a green 
card or a certificate of citizenship to the doctoral diploma of 
a graduating non-U.S. citizen who has studied in a field that's 
of importance from a national security perspective and is 
willing to commit to a certain time period in employment in the 
defense industrial sector or the DOD? Obviously, security 
clearance issues would also come up.
    Mr. Kendall. I'm not sure of the exact mechanism because I 
haven't really looked into this or the options carefully, but 
in general I think that's an attractive proposition.
    Senator Hagan. I will comment that one of my daughters also 
graduated from Caltech. Good school.
    Mr. Kendall. Great.
    Senator Hagan. What we're going to do is take a round of 6-
minute questions. Let me ask one more and then we'll move on. 
The secrecy that was essential to the success of the 
counterterrorism operation that killed Osama bin Laden 
highlights the critical requirement for our information 
technology and telecommunications network to be well protected. 
According to a report last year by the Defense Business Board's 
task group on assessing the defense industrial base, the 
services sector has grown rapidly over the past 15 years, with 
the number of companies involved nearly tripling and the dollar 
value of contracts more than doubling to over $80 billion per 
year.
    Two of the key sectors are information technology, 
telecommunications, and the intelligence, cyber area. Given the 
rapid growth in IT networks and companies involved in their 
operation, how is DOD ensuring that its network operations are 
secure and, with the DOD's recent efforts to in-source various 
activities, what do you think's the right balance in the 
information technology sector between in-sourcing and out-
sourcing?
    Mr. Kendall. There are a large number of activities ongoing 
right now about cyber security. Dr. Lemnios and I are involved 
in several of them. We are looking at consolidating some of our 
IT. Our new CIO, Teri Takai, is working on that. We're trying 
to impose standards that are stronger across DOD. Because of 
the size of our enterprise, it's very hard to get everything 
under control, if you will. But we're making positive steps in 
that direction.
    We're also trying to do a lot more on the S&T side of the 
house so we stay ahead of the threats. CYBERCOM, as I think you 
know, Cyber Command, has been stood up and is taking some 
strong actions in this regard as well. So DOD is addressing 
this on a number of fronts. We recognize it is certainly a 
major problem. Bringing in talent here is as important as 
anywhere. This is where--people my age generally do not 
understand this problem very well, very deeply, and we need 
people who are much younger and much more experienced in this 
world to come in and help us out. We're trying to get those 
people on board.
    Mr. Lemnios. I would add that, again, there's a near-term 
operational challenge, which is the one that you have 
mentioned, but then there's a long-term challenge of what are 
the new ideas that would help us protect future networks? How 
do we think about the protection of large quantities of 
information? Certainly in the university environment 
information technology is one of those few areas that really 
attracts young minds. The other one, of course, is robotics.
    But when you look at--when I visited first-rate schools, I 
spend time in the computer science departments, I spend time in 
the robotics departments. We have a set of challenges that DOD 
poses to these schools. We're attracting first-rate students, 
but it's going to take some time to build that cadre of 
engineers.
    The K through 12 programs that we have are doing just that. 
They're doing that in partnership with the private sector. The 
undergraduate and graduate funded efforts are starting to show 
some light as we're graduating first-year students in those 
areas.
    Senator Hagan. Thank you. Senator Udall.
    Senator Udall. Thank you, Chairman Hagan. Thank you for 
holding this important hearing today. Before I direct some 
questions to the panelists, because the schedule is a bit up in 
the air, I wanted to acknowledge a native Coloradan, Norm 
Augustine, who's here and will testify on the next panel. He's 
an exemplary American when you look at his service record, both 
in DOD and in the private sector.
    I'd also like to associate myself with the remarks that 
Senator Portman made in the context of the war on terror and 
recommend to all of us that we look at the Hart-Rudman report 
one more time, on which Mr. Augustine served. It was a seminal 
work. It was a prescient work. It predicted the events of 
September 11, not the exact events, but the threat that we 
faced.
    Norm, if I remember, I think you made five recommendations, 
which hold today and are appropriate to the hearing we're 
having. I think you said for America to prevail we needed to 
invest in a comprehensive energy policy, that was an all-of-
the-above approach; that our diplomatic efforts, number two, 
needed to be more people-to-people-based than embassy-to-
embassy based; that our national security policy, third, had to 
be focused on what we now call counterterrorism and 
counterinsurgency, CT and COIN; and that in the end we needed 
to be tough and smart.
    The fourth recommendation was to invest in our 
infrastructure, which I take to mean including our 
manufacturing base; and then fifth, that we needed to focus in 
a targeted way on R&D and STEM.
    I think those recommendations all hold fast today and we 
would be well served as we face this continuing threat that 
Senator Portman outlined, to re-engage with all those 
recommendations.
    Thank you for that important work and thank you for your 
continued involvement in keeping our country great.
    Gentlemen, let me turn to you and start with the 
International Traffic in Arms Regulations (ITAR), which I think 
ties to the fourth and fifth recommendations that the Hart-
Rudman Commission made. I've heard about it for the 12 years 
I've served in Congress. I'm increasingly frustrated. There's a 
crazy quilt of oversight. I think it puts us at a competitive 
disadvantage with nations like India, China, and France. I 
think that our efforts, well intended as they are, to prevent 
sensitive technology from falling into the hands of people who 
would do us harm are actually too complicated and they're 
actually hindering technological progress, and therefore we're 
falling behind in the very cause that we have, which is to be 
as smart as we possibly can about our national security needs.
    So, I'd like to hear from each of you briefly, if I could, 
about ITAR, how we could improve this and do it as quickly as 
possible, because I think the sand is really running out of the 
hourglass.
    Mr. Lambert. I can speak from the industrial perspective; 
you're absolutely right. We are losing opportunities not just 
for exports of our products, but for increased competition 
domestically. If you have two weak competitors because both of 
them are unable to export, it makes their capability to service 
DOD as a whole much less attractive for DOD.
    There has been a lot of activity. I think for the first 
time that I've been following it for 15 or so years as well, we 
have somewhat of a perfect storm in that there's a lot of 
motivation both within DOD at the Secretary's level as well as 
the Secretary of State and the administration, at the White 
House. So there has been a lot of activity.
    We're making progress on the four firsts that you may have 
heard of. I don't know exactly where that stands now. It's 
being worked in the policy area. But I know in my 
communications with industry that is one of the major areas of 
concern that they raise. In our organization, we tend to work 
on a case-by-case basis, but it needs a comprehensive solution. 
I'm hopeful that, at least in certain areas, you'll start to 
see progress maybe as early as this summer in terms of 
recommendations from DOD.
    Mr. Kendall. Let me just add that there is a lot going on 
right now. Secretary Gates has taken a leadership role in this 
area, particularly in export control. The four firsts are all 
still being actively worked. I think the single licensing 
agency is moving forward; single-pallet possibility as well as 
some others.
    We're also taking some steps to relieve the burden or the 
time at least that it takes to clear things for export. We've 
recently reorganized or added some additional streamlining, if 
you will, to the way we do that in DOD for the reviews that we 
conduct for security clearance. So that should have an 
immediate impact in terms of the time lines that people have to 
wait for approval for export from DOD for the things that we 
watch.
    Mr. Lemnios. I would simply add that export control is one 
part of the issue. I think there's a bigger issue, and that is 
how do we address globalization of a whole range of 
technologies. So while we talk about export control at the 
system level, we've all seen examples of foreign-produced 
components that are very much on par with the best in class 
components we have in this country.
    So we also have a challenge of producing the best in terms 
of performance and competing really at the global scale.
    This is something that is indeed troubling. Again back to 
what do we see in our research community, driving our research 
community to build new capabilities that are unmatched globally 
is really where we need to be. You see a few examples of that. 
You see some of those examples in nanotechnology. You see some 
of those examples in microelectronics in selected fields. You 
see some of those examples in imager technology, where we have 
capabilities that are really second to none.
    So rather than making sure we have a perimeter defense 
around a class of capabilities that we want to protect, we also 
need to couple that with making sure we excel in areas where we 
really do have leadership.
    Senator Udall. Thank you for those insights. I can't again 
overemphasize the sense of urgency I feel and my commitment to 
doing everything possible to change what's in effect is an 
internal intra-government set of regulations that hamstrings us 
from all of the potential advances in national security and 
products and services and economic growth that would come from 
a liberalization of ITAR.
    Thank you.
    Senator Hagan. Senator Shaheen.
    Senator Shaheen. Thank you, Chairman Hagan, and thank you 
for holding the hearing today.
    Thank you all very much for being here to testify. I would 
like to follow up on Senator Udall's comments about ITAR and 
our export control system in general, because I met not too 
long ago with New Hampshire's High Technology Council and one 
of the things I heard from the members was their frustration 
with ITAR and their inability to compete with companies in 
other parts of the world.
    You have talked about your commitment to address this. I 
know the administration's committed to addressing it. I know 
that there's some work going on. But why are we continuing to 
see obstacles to moving forward? I guess that's my first 
question.
    Second is, what are we doing to solicit feedback from 
companies who are frustrated about the current system, who 
would like to weigh in and have ideas about how to streamline 
it? I'll throw it up to whoever would like to answer that.
    Mr. Kendall. I'll take the first half and ask Mr. Lambert 
to take the second half. On the streamlining side, from DOD's 
perspective what we're doing is trying to get greater control 
over the many different areas of technical review that we have 
to do, so that we can control that process and not have a 
system of a product going through one review and then discover 
we have to take it through another review in sequence.
    So we identify early the cases that may be difficult and we 
get them into the right streams to review as quickly as 
possible and then we force them through in a timely way, so 
that there's some predictability and a reasonable span of time 
there for industry. We have heard industry loud and clear on 
that and we're reacting to that.
    I'll turn it over to Brett to talk about the other effort.
    Mr. Lambert. To Mr. Lemnios' point, from an industrial base 
perspective, we have to realize that globalization isn't really 
an option; it's a reality. The more we try to wall ourselves 
off from the rest of the world, the more we hurt our own 
companies' innovation, but as well as we in essence are giving 
passive support to foreign companies that can compete 
internationally when we can't.
    Having been involved in many of the meetings about the 
reform, I would have to say that, since this hearing is largely 
about people, this is largely a people issue. It's inertia, 
it's the way we've done things in the past. So when you're 
asked to protect the crown jewels, the definition of ``crown 
jewels'' sometimes becomes animal, vegetable, and mineral, and 
you can't start with that.
    So I think this has been a leadership question, and I've 
seen more movement in the last 12 months from the leadership of 
all of the involved departments, not necessarily the 
departments themselves but the leadership, than I've seen in 15 
years. So I'm optimistic on this front.
    Senator Shaheen. Well, that's encouraging. If there are 
ways that I or I'm sure this committee can help, we would very 
much like to do that.
    Mr. Lemnios, I was very pleased to hear you talking about 
the importance of robotics as you were talking about STEM 
education. I have some legislation that would encourage robotic 
competitions and other kinds of extracurricular ways to get 
young people involved in the STEM subjects, recognizing that, 
as you pointed out, that there are a lot of students who don't 
learn by the traditional methods and therefore don't get 
excited about those subjects.
    So I'd be very happy to have the endorsement of you or any 
of the members of DOD for that legislation and to talk about 
how we can promote it through policy means. That's just a 
little commercial there.
    Under Secretary of Defense Carter recently stated in an 
interview with Bloomberg that small and medium-sized companies 
are centrally important in a healthy nuclear base. So how much 
would you say that the defense industrial base in this country 
relies on those small and medium-sized companies?
    Mr. Kendall. Senator Shaheen, we rely on them extensively. 
Approximately 22 percent of the work that we contract goes to 
small businesses. That's direct contracting out. That does not 
include all the small business work that's done by 
subcontracting, which is another very large fraction of what we 
do.
    We're very actively engaged in promoting small businesses 
right now. Dr. Carter, as you mentioned, was just in Detroit 
for a day-long session with small businesses out there. I think 
there were hundreds of businesses that actually came to that 
event. We're doing a lot of outreach to small businesses. We're 
encouraging it very much throughout our acquisition system.
    These businesses are the source of a great deal of our 
innovation. Programs like the small business innovative 
research project and so on contribute a great deal to the 
Department. So we're doing everything we can to involve them.
    Senator Shaheen. I was really pleased to hear you mention 
SBIR because that's a program that I have heard from so many 
companies in New Hampshire that they've benefited from and it's 
resulted in the development of new technological advances, new 
products that have been very important, not just to the 
military but also for commercial use.
    What would happen if Congress is not able to get SBIR 
authorized, reauthorized in this session? How much of an impact 
would that have on those small and medium-sized companies that 
you are looking to to produce the technological innovation of 
the future?
    Mr. Kendall. It would have a substantial impact. Those 
early awards through small business innovative research 
programs are really very important to startups. I've worked 
with startups in my previous life, and they give you a cachet 
that you've been recognized by the government as having a 
technology that might be of interest. The initial money isn't 
very large, but the subsequent rounds can be very critical to a 
company that's just starting to get going.
    It's a competitive process and there's some recognition for 
that for those who make it through that successfully. We're 
trying to streamline it a little bit because it takes a little 
bit longer than we would like. But we think it would have a 
very negative impact on small businesses if that program went 
away.
    Senator Shaheen. Thank you.
    Mr. Lemnios. I absolutely agree. My experience with the 
small business community is there's innovation you see there, 
where there are companies who are willing to take some risk in 
areas where larger companies just, for whatever reason, just 
don't. You mentioned robotics, I mentioned robotics. I spent a 
day at Deka and I spent a day with Dean Kamen, and----
    Senator Shaheen. Who is a New Hampshire resident.
    Mr. Lambert. Who happens to be from New Hampshire.
    But you know, you spend a day with a small business like 
that and your mind explodes with new ideas. I don't see that in 
lots of companies. I see it in a select few, and protecting 
that and finding ways to transition that innovation into the 
large-scale is really the challenge that we have. So this is 
something that we absolutely need.
    Senator Shaheen. Thank you all very much.
    Senator Hagan. Ranking Member Portman.
    Senator Portman. Thank you, Chairman Hagan.
    Again, gentlemen, thanks for your testimony today. I'm 
going to go quickly here because there is so much to go over 
and so little time. But first is on the direct hire issue. 
Congress has to reauthorize, because it sunsets in 2013. So I 
would ask you, given the challenges we've heard about the DOD 
laboratories with regard to hiring, a shortage of engineers and 
scientists in particular, do you think that the direct hire 
authority has helped to be able to waive some time-consuming 
restrictions or not? If you think it has helped, are you 
supportive of its reauthorization and do you have any 
suggestions for improvement?
    Mr. Lemnios. So it has helped. There's no other way to say 
it. We've hired 114 staff as a result of that authority. It 
probably could go faster. I'm not sure what the barriers are. 
But you've given us the authority. We're starting to use it.
    We had a similar situation with the other transaction 
authorities that DOD has. There were few agencies that 
understood the value of other transaction authorities and once 
we sort of figured it out that's now being used broadly. So 
this is something I think is critically important.
    Senator Portman. Any other comments? Secretary Kendall?
    Mr. Kendall. I'd just like to add that anything that gives 
us flexibility to bring talent into the workforce is good. Mr. 
Augustine once worked in the Secretary of Defense's office, my 
former office before my time there actually, where he was the 
director, I think, for land systems, if I recall correctly. It 
was the tactical warfare programs office. He was able to come 
in as an expert, work there for a relatively short period of 
time--I think 2 years, or 3.
    Mr. Augustine. 4 years.
    Mr. Kendall.--4 years, and then go back out to industry. 
Having that kind of talent available to come into the workforce 
and then go out again is enormously beneficial to DOD, and it 
rarely happens today.
    Senator Portman. Mr. Augustine, are you ready to suit up 
again? Udall needs you. [Laughter.]
    Senator Portman. Secretary Lambert.
    Mr. Lambert. The ability--we find it in the workforce just 
in our small office, but the ability to bring in talent from 
outside quickly to tackle some of the challenges we have, 
especially at the lower tiers, is essential, and without these 
authorities it's difficult.
    Senator Portman. Would you please in writing--and maybe, 
Secretary Lemnios, maybe you're the right one, according to 
this. Just give us any suggestions on improvements, as it 
sunsets in 2013. My understanding is the House is working on 
this already and the Senate needs to get busy on it. We'd love 
to have your input on the subcommittee.
    [The information referred to follows:]

    The Services are effectively utilizing the Demo Lab authorities 
within the established limits of Title 5 statutes. My assessment is 
that these authorities provide the necessary flexibility to develop and 
preserve our technical workforce within the labs. The pay for 
performance system is a significant contributor to retaining our 
talented technical personnel and the direct hire authority ensures our 
labs can rapidly target and hire talented graduates as they enter the 
job market. Within the Department, the Under Secretary of Defense for 
Personnel and Readiness governs personnel policy, instructions, and 
directives and maintains an ongoing dialogue with the Services, 
specifically the labs, to ensure authorities are implemented and 
exercised to their potential.

    Senator Portman. I wanted to ask a little bit about 
competition. I talked earlier about what I believe is an 
important need to have a robust industrial base, not just to 
have consolidated strong companies, but to have enough 
companies that they compete with one another, both on the 
operational side and the qualitative side and on the cost side. 
Do you have thoughts about that in general? Where are we in 
terms of real competition in our industrial base?
    Mr. Kendall. Senator, one of the central tenets, as I think 
I mentioned, of Better Buying Power, Dr. Carter's initiative, 
is creating and maintaining a competitive environment for 
industry any way that we can. There is absolutely nothing more 
effective in motivating industry than competition, absolutely 
nothing.
    We can rarely have real competition in terms of two sources 
of a product throughout the entire life cycle of a product. One 
of the things that John Young, who was the predecessor to Dr. 
Carter, did was to change the system a little bit to allow 
competition to go further into the design process, to 
preliminary design review. That allows us to very cheaply carry 
competitors further and get more mature designs and reduce risk 
before we go into the rest of design for production and 
production.
    That's a good thing, but it only gets us so far. We want to 
do things beyond that. We want to do things where people are 
always looking over their shoulder a little bit at the guy 
who's going to come take their business away. You can do that 
with alternative types of systems. You can do it sometimes at 
the component level or the subsystem level. There are varieties 
of ways to try to get competition into programs. We are 
actively driving all of our program managers and program 
executive officers to try to find ways to do that in our 
programs across DOD right now.
    Senator Portman. Mr. Lambert?
    Mr. Lambert. I would just add that in the industrial policy 
world we try to broaden a bit the definition of competition. 
There's a tendency to think of it in terms of pure peer-to-peer 
competition, one ship and two suppliers, or something of that 
nature, when the fact that it's much--you have a lot of other 
tools at your disposal. You have portfolio competition, a 
system to compete against a different system that can do the 
same thing. Our program managers have to be educated to think 
in terms of a portfolio competitive system.
    Then even when you get down to a single supplier, you have 
other levers, as some have learned, where we're not necessarily 
hostage. You always have termination and looking at another 
portfolio, or you have, as I think Dr. Gansler has pointed out 
repeatedly, you have the competition for recompetes in 
contracts, particularly in the services sector, and that's an 
effective lever that can be used.
    Senator Portman. I will say, Secretary Lambert, it's tough 
to have termination or recompetes that are really effective 
when there is not again an alternative out there. It maybe 
won't surprise you, but I have strong feelings on this in terms 
of the second engine on the Joint Strike Fighter (JSF). I am 
distraught by the fact that we are going into a 30-year program 
with one manufacturer, as good as they might be, for the very 
reasons Secretary Kendall talked about: Quoting him here, 
``There's nothing that motivates private sector people more 
than competition, someone looking over their shoulder.'' This 
notion that you could terminate or recompete when there's no 
base there to do it is distressing to me, and I wish the 
Secretary and DOD would relook at that issue, because it's such 
a huge part of what we'll be doing over the next 30 years in 
terms of our weapons systems, hundreds of billions of dollars, 
and the opportunity to have multiple domestic producers it 
seems to me is critical.
    But I won't ask you to comment on it because I don't want 
to get you in trouble, because I know you agree with me.
    How about on the--how about on the tracked vehicles? Your 
report in 2010, Mr. Kendall, Mr. Lambert, the annual industrial 
capabilities report, says that the ground vehicle sector--your 
summary there said that, with the exception of the 
Expeditionary Fighting Vehicle (EFV), there are no major 
tracked vehicle programs under development or production. 
However, the industry maintains a significant amount of tracked 
vehicle overhaul work now. Your assessment concludes that the 
health of the industrial base for this critical military 
capacity depends significantly on EFV and continued upgrade and 
reset work for the Abrams tank.
    With the cancellation of EFV and what I perceive to be a 
multi-year gap in the Abrams program in the upgrade work, what 
are we going to do? Do you stand by your assessment from last 
year that this will significantly affect the health of this 
vital part of our military industrial base?
    Mr. Kendall. Go ahead.
    Mr. Lambert. We do have some programs that are getting 
started. We are looking at what to do about the EFV mission now 
that the program's been cancelled. We're starting the Ground 
Combat Vehicle program for the Army and there's a program to 
upgrade the Army's artillery piece, the Paladin. So there are 
some things ongoing. I think there's some continuing work on 
Stryker as well. It's not to the volume that we might like to 
have, but we think it's enough to sustain the base.
    Senator Portman. You think it's enough to sustain the base 
even if there is this gap in the Abrams Main Battle Tank reset 
work?
    Mr. Lambert. There is a concern about the plant in Lima, 
which I think is what you're referring to.
    Senator Portman. Yes.
    Mr. Lambert. It's not clear that we can keep that plant 
open at this time.
    Senator Portman. Well, again that concerns me greatly, not 
just because it happens to be in Lima, OH, but because again it 
has this incredible workforce and capability that you can't 
suspend temporarily. Those people will leave, just as the 
engineers at GE will leave, and go off to do other things, and 
we lose an incredibly important industrial capability.
    So I hope you'll work with us on that. I know that there's 
the Ground Combat Vehicle program coming up and maybe there's a 
way to ensure that we don't have that vulnerability.
    With that, I'm over time here. I have so many other 
questions I'd love to ask, but I appreciate your being here 
today, and I apologize that our voting schedule is going to 
make it hard for us to stay for all the questions for the 
second panel. Thank you.
    Senator Hagan. Thank you.
    Obviously, due to the vote, what I'd like to suggest is 
that we reconvene at the second panel as soon as this vote 
takes place. This is a resolution that we're putting forward 
honoring the excellent mission that our Special Operations 
Forces have just done, and we certainly want to honor all of 
the individuals and agencies that were involved.
    So what I'd like to do is thank you for your testimony and 
we will have a recess, and as soon as we come back--I hope some 
of our members can come back--we will then start with the 
second panel. I envision it will probably be 15 minutes or so.
    Thank you.
    Mr. Kendall. Thank you, Chairman Hagan.
    Senator Hagan. Thank you. All the questions that we have 
not been able to ask the first panel, we will submit those 
extra questions to you in writing. Thank you. [Recessed.]
    I will reconvene our hearing. Once again, I apologize for 
the delay, but I could think of no better reason for the vote 
that we just took, and it certainly did pass unanimously for 
all the members there. I really do want to praise our military 
and in particular our special forces for the carrying out of 
that incredible mission.
    If we could go ahead and start with our opening testimony 
for this panel, Mr. Augustine.

 STATEMENT OF NORMAN R. AUGUSTINE, RETIRED CHAIRMAN AND CHIEF 
         EXECUTIVE OFFICER, LOCKHEED MARTIN CORPORATION

    Mr. Augustine. Thank you, Chairman Hagan, members of the 
subcommittee. I'm pleased to have this chance to describe to 
you my thoughts on the defense industrial base and particularly 
to do it in the company of two long-time dear friends. I would 
like to submit for the record a written statement, if I may.
    Senator Hagan. Please.
    Mr. Augustine. I should also note that I am here 
representing myself and not any firm or organization with which 
I have been associated.
    I would like to begin by asserting that in 21st century 
conflict that a strong defense industrial base is every bit as 
important; to have a strong Army or Navy or Air Force or Marine 
Corps or Coast Guard. Today there are about a quarter million 
people from our industry in Afghanistan and Iraq. Last week, 
sadly, two of them from the company I used to serve were 
killed.
    At the end of the Cold War, it was generally agreed that 
America had the finest military equipment that was to be found 
in the world. I believe that to be true in general. I think the 
reason for this was that we have chosen to use the free 
enterprise system as best we can to supply our military forces, 
as opposed to adopting an arsenal system such as was done in 
the Soviet Union and many other countries.
    However, this is an unusual free enterprise system. It's a 
system characterized by a monopsony at the top, with monopolies 
embedded in it for specific items of equipment. That means that 
this is a free enterprise system, or version of it, that 
requires very great responsibility on the part of both the 
buyer and the seller.
    It has now been 20 years since the so-called ``Last 
Supper,'' at which DOD gathered about a dozen of us who were 
running the major defense contractors at the time. We were told 
that the DOD was going to be buying less equipment, given the 
end of the Cold War; that DOD had no intention to pay for 
overhead for a lot of companies with half-full factories and no 
money to invest in R&D and that it would be up to those of us 
from industry to solve the problem, DOD wasn't going to do it 
for us.
    I still remember a chart that was shown on that occasion of 
16 different categories of military equipment. In five of them 
the DOD said they could only afford two industrial participants 
and in six of them they could only afford one participant. 
Shortly thereafter, 5 years later, 75 percent of the companies 
were gone, as were nearly half the people in the industry, 
about three-quarters of a million people.
    The question arises, was that a good thing? The question 
would be is it better to have 15 strong competitors in a sector 
than 2? Unquestionably, in my view, the former is. But that 
wasn't the choice. The choice was to have 15 weak competitors 
or 2 strong competitors, and in that case, clearly the latter 
in my judgment is a better outcome.
    As we then turn to today and look at the major resources it 
will take to have a strong defense sector, I believe there are 
really five categories that need to be addressed. The first of 
these is financial capital. We sometimes forget that our 
defense sector has to compete with all the other industries in 
this country and in the world in fact for equity and for debt 
capital. Without that, they cannot modernize their facilities 
or run their businesses. There's no place in the Wall Street 
Journal listing where there are asterisks that say ``This 
company is excused; it's a defense company.''
    Second and probably the most important is human capital, 
where our companies again have to compete with other companies 
in the country, whether they're in the defense business or not, 
and now have to compete with firms all around the world for 
people. Today 75 percent of the people who get Ph.D.s from U.S. 
engineering schools are not U.S. citizens. Half the bachelor's 
degrees in engineering or equivalent that are awarded in the 
entire world are now being awarded in China. Our K through 12 
education system, particularly in STEM, is among the worst in 
the world on average. DOD confronts these same issues in terms 
of building an industrial base and maintaining it as the 
economy as a whole does, except that the DOD and the defense 
contractors require clearable people, by and large, and that 
poses a major challenge.
    Third is knowledge capacity. Knowledge comes from basic 
research. There was a study released, a respected study, in the 
last 2 weeks by an organization in the United Kingdom that 
rather convincingly shows that China will surpass the United 
States in 2 years from now in terms of the number of technical 
papers published in respected journals. We all know the impact 
that technical breakthroughs coming from research can have in 
the outcome of warfare, whether you go back to the stirrup or 
the long bow or the rifle or the machine gun, the tank, the 
airplane, and so on. They can be decisive factors.
    Fourth, there is the state of the manufacturing capability 
of this country. We now are down to 11 percent of the gross 
domestic product in manufacturing, 80 percent in the service 
sector. I would submit that it may be possible to build a 
prosperous nation with only a service sector or primarily one, 
but I would doubt very much that one can win a war with a 
service sector economy.
    Many companies are leaving this country, putting their 
manufacturing abroad, and their research is following, or 
leading. I would commend to the committee the ``Rising Against 
the Gathering Storm'' condensed version that just came out, 
that has the reasons rather clearly stated as to why companies 
are doing this.
    Fifth and finally is the ecosystem that pertains to the 
defense industrial base. There's a lot that could be said. Let 
me just say that the turbulence in that base in terms of 
schedule changes, requirements changes, budget changes, people 
changes, makes it almost impossible to manage the industrial 
base efficiently and effectively.
    With that, Chairman Hagan, I'll close and turn to my 
colleagues. I'll be happy to answer any questions you might 
have.
    [The prepared statement of Mr. Augustine follows:]
             Prepared Statement by Hon. Norman R. Augustine
                              introduction
    Senator Hagan, Senator Portman, members of the subcommittee, thank 
you for this opportunity to share my views regarding the state of our 
Nation's defense industrial base. It is a particular privilege to sit 
alongside such distinguished colleagues and long-time friends as the 
other members of these panels.
    In the way of background as to my perspective, I should note that 
my career has included 10 years' service in the Department of Defense, 
30 years in the aerospace industry, a few years in academia, and 
participation in over 500 board meetings of commercially-oriented 
Fortune 100 companies.
    Hopefully, my ``retired'' status permits me to take a somewhat 
detached, yet informed, view of the challenges confronting the Nation's 
defense industrial base. I should emphasize that I appear before you as 
a private citizen and that the opinions I will express are entirely my 
own and do not necessarily reflect those of any organization with which 
I have been affiliated.
    Following a few introductory remarks, I would like to address five 
specific categories of issues and then offer a few suggestions 
regarding the path forward. The categories I will consider are 
Financial Capital, Human Capital, Knowledge Capital, Manufacturing 
Capability, and the Defense Industrial Ecosphere.
                              perspective
    In our Nation's early years, defense needs were primarily satisfied 
by what has generally been referred to as the arsenal system. 
Government-owned and operated engineering and manufacturing facilities 
fulfilled the relatively limited categories of needs of our Armed 
Forces. This is in fact the system that was employed by the Soviet 
Union throughout the Cold War and is still employed by the United 
States for a few items of uniquely military equipment.
    As America began to build a broader and stronger commercial 
manufacturing capability and as military equipment became increasingly 
diverse, the Nation moved away from what was in essence a socialist 
system towards a free-enterprise approach to provisioning our Armed 
Forces--and in my opinion realized many of the same benefits following 
that transition that have been realized by the economy as a whole.
    Following the collapse of the Warsaw Pact, leaders in our 
government concluded that there were too many firms supplying America's 
defense needs and that paying the overhead costs associated with such a 
structure was not in the Nation's best interest. This led to a dinner 
meeting in the Pentagon involving the senior leadership of both the 
Defense Department and major defense firms. The following day, in 
response to a reporter's question, I referred to the event as ``The 
Last Supper''--a sobriquet that has stuck over the years.
    During that meeting Secretary Les Aspin, Secretary Bill Perry and 
Director of Defense Research and Engineering John Deutch made 
unmistakably clear to those of us present from industry that there were 
more firms supplying the Nation's defense needs than the Nation could 
afford, and that it would be up to the industry to solve that problem . 
. . and this would be done with the government's support but not its 
direct involvement. At the meeting a chart was shown--a copy of which I 
have retained to this day--which indicated that a massive downsizing of 
the industry and a concurrent increase in efficiency was expected. 
Interestingly, in the case of 6 of the 16 equipment categories cited in 
the chart, the Department of Defense said it could support only one 
industrial participant. In five other categories it indicated it was 
prepared to support only two suppliers.
    A massive structural reengineering of the defense industrial base 
soon began. It ended about 5 years later with 70 percent of the 
companies or major elements of companies that supported national 
defense no longer in business . . . along with fully half of their 
workers no longer employed in the industry. I am unaware of any other 
industry in our Nation's history that has undergone such a massive 
change in so short a period of time--and done so with as limited 
disruption as occurred. Literally billions of dollars were saved by the 
Department of Defense, savings that continue to this day, according to 
the government's own independent audits.
    But, all things considered, was the downsizing a good thing? In my 
opinion, as painful as it was to implement, it was the only thing to 
do. Would I prefer an industry with a dozen strong competitors to one 
with only two or three? Of course. But that was never the choice. The 
choice was between an industry sector composed of a dozen weak 
competitors with high overheads and largely unused factories and little 
money to invest in research or talent on the one hand, or an industry 
consisting of two or three strong competitors operating efficiently on 
the other. In perhaps familiar words, what resulted was not the best of 
all worlds . . . it was merely the best of all possible worlds.
    I would hasten to add that I believe there is a major discontinuity 
that appears when one drops below two suppliers for a given category of 
equipment. I believe strongly in competition whenever it can be made to 
make sense--which is usually but, unfortunately, not always the case. 
With but one supplier, nationalization of an industry cannot be far 
behind . . . and with that the loss of free-enterprise market pressures 
in favor of a demonstrably less effective socialistic approach that has 
failed throughout much of the world in the commercial sphere. As 
capable participants are added, competitive pressures grow--but this is 
governed by the law of diminishing returns. In short, there is a level 
of defense spending within any category of equipment below which 
competition simply cannot be sustained. Even in this case it may be 
possible to maintain competition at the lower supplier-tiers which 
represent roughly half of defense procurement dollars.
    It also needs to be recognized that the defense industry operates 
in a strange sort of free-enterprise system: a monopsony with 
occasional monopolies embedded within it. Further, it must be 
recognized that for so-called ``defense firms'' to raise the capital, 
both human and financial, needed for their continued survival and 
contribution to the Nation, they must compete with every other firm in 
the country--not just other so-called ``defense firms.'' The rating 
agencies and equity markets make no concessions because a firm is in a 
business that happens to be critical to our national interests. Thus, 
defense suppliers, if they are to survive, must earn--and I do mean 
earn, as in deserve--returns commensurate with the firms with whom they 
compete in the financial and talent markets.
    With this as background, it is particularly important to note that 
America can no more conduct a 21st century military operation without a 
viable defense industrial capability than it could without a viable 
Army, Navy, Air Force, Marine Corps, or Coast Guard. Indeed, the 
``defense industrial base,'' as diffuse as it may be, is in effect one 
more ``branch'' of our Nation's Armed Forces.
    I would now like to turn to the five categories of issues that I 
mentioned in my introductory comments.
                           financial capital
    If defense-oriented firms are to modernize their factories and 
expand their capabilities when called upon to do so, those firms must 
have access to financial capital. This in turn implies that the firms 
must generate a risk-adjusted total shareholder return that is 
competitive not simply in comparison with other defense firms but in 
comparison with all firms, both domestic and abroad. In today's 
financial markets money moves literally at the speed of light as it 
seeks opportunity--with little regard for geopolitical borders or 
government needs.
    Thus, firms engaged in defense procurement are a microcosm of U.S. 
industry as a whole--and face many of the same challenges that are 
encountered by other U.S. firms, plus some that are unique to their 
activities.
                             human capital
    Throughout the Cold War the most attractive option for a scientist 
or engineer who wanted to work at the leading edge of science and 
technology was to work either in national defense or in the Nation's 
space program. Defense companies at that time had no difficulty 
attracting their share of our Nation's best and brightest. Today, young 
people aspiring to that same goal have far more options available to 
them, ranging from the biosciences to info-sciences to nano-sciences 
and more. In recent years one-fourth of the graduates of MIT are said 
to have opted to go to work for financial firms on Wall Street. Many 
others find their way to Silicon Valley or to the Nation's great 
biological research laboratories.
    America's science and engineering enterprise would barely function 
today were it not for foreign-born individuals who came to our country 
to attend our world-class colleges and universities and remained here 
to build careers. Fully three-fourths of the Ph.D.s in engineering 
granted by U.S. universities are awarded to non-U.S. citizens--a group 
that is increasingly returning home a few years after acquiring their 
degrees. The implications of this for the defense industry, with its 
dependence upon clearable employees, is evident.
    Further, the Defense Department and its suppliers are not immune to 
the near-disastrous situation prevailing in our Nation's 14,000 K-12 
public school systems--particularly with regard to STEM education. The 
U.S. status in this regard has been thoroughly documented in a number 
of reports including the ``Gathering Storm'' series prepared by the 
National Academies.
    In short, in seeking and retaining talent, defense suppliers face 
many of the same challenges as the Nation's industrial firms as a 
whole--but to a magnified extent. This is not to suggest that there are 
not many highly capable and dedicated individuals serving within the 
defense industry today; indeed there are. But this group is 
increasingly narrowing itself to those individuals who just happen to 
have a special commitment to national security or a particular 
excitement for state-of-the-art rockets, aircraft, ships, and the 
likes.
                           knowledge capital
    New knowledge capital is largely derived from basic research. 
Ironically, the ultimate applicability of that research is often not 
evident, even to those who pursue it. It is doubtful, for example, that 
those working in solid state physics many decades ago had in mind 
building iPods, iPhones, iPads, GPS, precision-guided ordnance or night 
vision devices. Nor is it likely that the Russian mathematician working 
during the Cold War on equations characterizing the reflection of 
electromagnetic waves realized that his work would give America the key 
to building stealth aircraft.
    Throughout history the course of conflicts has been tipped by 
technological breakthroughs--from the stirrup to the long-bow to 
gunpowder to the rifle to the machine gun to the tank to the aircraft 
to the ballistic missile to the nuclear weapon to spacecraft to night 
vision to precision guidance . . . and more.
    Unfortunately, America is losing its lead in science and 
technology. A recent report by the U.K. Royal Society projects quite 
convincingly that China will overtake the United States in science 
articles published in respected journals just 2 years from now. This 
relative decline of the U.S. position impacts firms supplying defense 
materiel to the U.S. Government just as it impacts every other U.S. 
firm competing in the high-tech arena. Further, U.S. industry as a 
whole, responding to the pressures of the financial marketplace, has 
largely abandoned its efforts in basic research in favor of 
development, and especially systems integration.
    With respect to the state of applied technology, perhaps there is 
no better indicator of health than the number of new aircraft types 
that have been developed each decade since the 1940s. Those figures 
have continued to drop precipitously until today an engineer would be 
fortunate to work on two new aircraft types in his or her career. I 
once asked Kelly Johnson, head of the iconic Skunk Works, how many 
different aircraft he had worked on during his career and as I recall 
he said ``32.'' The implications of this shrinkage with regard to the 
experience level achieved by today's engineers as they pass through 
their careers can be profound. Add to this that China is now graduating 
half the world's new engineers vs. the United States' 5 percent and it 
is not difficult to see where current practices are leading.
                         manufacturing strength
    The U.S. economy is now 11 percent manufacturing and nearly 80 
percent services. While it is arguably possible to prosper economically 
with a pure service economy, the likelihood of winning major wars with 
a service economy seems remote. When U.S. firms weigh the benefits and 
liabilities of expanding their activities in research and development 
as well as in manufacturing, either in the United States or abroad, the 
answer is increasingly becoming to move abroad. It is generally 
considered that the more critical elements of those firms that serve in 
national defense must remain in the United States--for reasons that are 
presumably evident. This pressure does not, however, apply to the 
component supplies who, though not generally considered a part of the 
``defense industrial base,'' are indispensable to it. A consequence is 
that the manufacturing surge capacity that the Nation has available 
with which to quickly expand its Armed Forces is rapidly diminishing.
    To its credit, the United States has sought to reduce the loss of 
life among those serving in our military focus by placing increasing 
dependence on technological capability. Unfortunately, along with the 
latter have come increased unit costs . . . and further declining 
production volumes . . . still further exacerbating the industry's 
dilemma.
    While such topics as contract-type and the preservation of 
competition deservedly receive a great deal of discussion in the 
manufacture of defense systems, other often overlooked factors can 
swamp the above issues in terms of impact. Prominent among the latter 
are:

         Unrealistic initial estimates of the size of the total 
        production buys and production rates--which lead to excessive 
        tooling costs and amortization penalties.
         Cutbacks in planned annual purchases--which diminish 
        the significant gains that can otherwise be realized by moving 
        down the learning curve.
         Uncertainty in year-to-year funding--which precludes 
        efficient purchasing-quantities, discourages contractor 
        investment in productivity measures, and leads to cancellation 
        or renegotiation of sometimes thousands of subcontracts.
         Failure to discount future cash flows--something that 
        would never be permitted in the private sector.
         Failure to provide reserves in proportion to the risk 
        entailed in a task--again, something that could never be 
        tolerated in the private sector.
                       defense industry ecosystem
    National defense today depends not only on companies generally 
associated with national security but also on the thousands of 
subcontractors and suppliers who provide the larger firms with 
everything from castings and forgings to microchips and lasers. Many of 
these smaller firms do not possess the financial staying-power or 
resiliency of the larger firms and are thus even more vulnerable to 
turbulence in the procurement process.
    Viewing the environment in which both large and small U.S. firms 
operate today, the outlook for our Nation's security, let alone the 
economy as a whole, is not reassuring. American firms spend over twice 
as much on litigation as on research. They commonly spend more on 
healthcare for their employees and retirees than on the basic material 
that go into their products. They are subject to the second-highest 
corporate tax rate in the world. They are motivated by the tax laws not 
to return foreign earnings to be reinvested in the United States. The 
patent system is ponderous and the export laws were designed for 
another era. The immigration laws discourage much-needed talent from 
remaining in our country. The prevailing tax and market structure 
encourages a short-term outlook and disincentivizes long-term 
investment--for example, research. The demise of the iconic Bell 
Laboratory, home of the laser, transistor and many Nobel Laureates, is 
but one example of the latter. If current plans are carried out the 
government will soon have the equivalent of two Army divisions 
overseeing defense procurement. While oversight is indispensable, the 
question of balance is nonetheless present--particularly when 
industry's response is likely to be to match that number of overseers 
within its own firms as a defensive measure.
                            the way forward
    The first step in assuring a strong and efficient industrial 
capability with which to supply our Armed Forces is to take steps that 
will make American industry as a whole competitive. These include 
repairing our public schools; particularly in math and science; 
investing more in scientific research; controlling healthcare costs; 
reshaping our tax structure and encouraging; not discouraging, 
immigration of talented individuals in fields where America has 
legitimate needs.
    Within the defense arena, useful steps include:

         Return to the practice of the 1960s, promoted by Dave 
        Packard, to build prototypes of advanced systems--even though 
        most of them may never be procured for operational use. This 
        preserves the Nation's critical engineering design teams and 
        advances the state of the art at a relatively low cost.
         Make it extremely demanding to begin new engineering 
        development programs--and equally demanding to change or stop 
        them, eliminating a primary contributor to waste.
         Invest in manufacturing process technology, much as 
        manufacturing product technology has been supported in the 
        past, with a focus on flexible, low-rate production.
         Establish practices that enable the Department of 
        Defense to fulfill some of its needs by drawing upon the 
        capabilities of commercial producers. An example from the past 
        was paying commercial airlines the marginal cost of 
        incorporating extra-wide doors in passenger aircraft that could 
        then accommodate military materiel, if that should be needed.
         Make it practicable once again for people with 
        industrial experience to serve in senior positions in 
        government functions that require a knowledge of industrial 
        practices.
         Seek to maintain competition in development and 
        procurement to the maximum extent practicable.
         Rewrite the export laws, including those applicable to 
        deemed exports, to reflect the global economy as it exists 
        today, not 25 years ago.
         Standardize equipment across the Services and our 
        allies wherever practicable so as to permit manufacturers to 
        exploit the benefits of higher volumes further down the 
        learning curve.
         Continue to purchase in very limited quantities those 
        few truly critical items that are required to sustain key 
        elements of the defense industrial capability--even if their 
        immediate operational need may be questionable. This is akin to 
        paying the premium on an insurance policy.
         Utilize multi-year procurements or unit buys whenever 
        needs are clear.
         Continue efforts to fix the defense procurement system 
        by repairing the requirements process; providing program 
        stability; including Reserves in budgeting; and more.
         Strengthen the government's ability to serve as an 
        intelligent buyer . . . but have the government itself engineer 
        or manufacture only those items that the private sector is 
        incapable of--or unwilling to--provide. This is, of course, the 
        basis of the free enterprise system, a system that has shown a 
        strength vastly exceeding that of any other systems yet 
        conceived.

    The above is a long and demanding list, yet it is only a partial 
list.
    Nonetheless, the task to be accomplished is critically important.
    Thank you for affording me this opportunity to share my concerns 
regarding the defense industrial base. I will of course be pleased to 
address any questions you might have.

    Senator Hagan. Thank you.
    Dr. Gansler.

 STATEMENT OF JACQUES S. GANSLER, Ph.D., DIRECTOR, CENTER FOR 
 PUBLIC POLICY AND PRIVATE ENTERPRISE, UNIVERSITY OF MARYLAND 
                    SCHOOL OF PUBLIC POLICY

    Dr. Gansler. Thank you very much for inviting me to this, 
what I think is critically important topic, and I appreciate 
your holding these hearings. As you're well aware, the national 
security environment for the 21st century has totally changed 
from that of the 20th century. However, the U.S. industrial 
base that supports it has simply been consolidated from around 
50 major suppliers to a half a dozen. A 2008 Defense Science 
Board task force that I chaired concluded: ``The Nation 
currently has a consolidated 20th century industry, not the 
required and transformed 21st century national security 
industrial base that it will need in the future.''
    Now, unfortunately, in the 3 years since that report, while 
there have been some positive steps taken, there has not been a 
noticeable improvement. In fact, in many areas the trends are 
actually adverse to the need. We have rising costs for 
equipment and services, stretched-out schedules, undesirable 
shifts in acquisition and procurement practices.
    Let me give you a couple of examples. I'd like to have my 
complete text part of the record and I give a lot of examples 
there. But for example, a noticeable shift from what used to be 
best value awards to making awards on the basis simply of low 
bid, technically acceptable.
    Another example is in-sourcing of non-inherently 
governmental work. Another area, stopping--Congress has 
actually stopped--public-private A76 competitions for non-
inherently government work that's currently being done in 
house, even though the results of the competitions 
overwhelmingly show that we get higher performance, the cost 
savings on average of over 30 percent.
    I could go on with these examples, but let me shift to the 
industrial base part of it. To meet the 21st century national 
security environment, the industrial base clearly has to be 
flexible, adaptable, agile, responsive, innovative, and it must 
provide high-quality goods and services at affordable prices, 
and, most important, in the quantities required.
    Now, to achieve this I think it requires the government to 
change the way it does its business. As Mr. Augustine said, in 
a monopsony environment it's the government's responsibility to 
do that. It has to reform its laws, its regulations, its 
policies, its acquisition procurement practices, and in general 
it has to remove the barriers that have been created through 
what I would categorize as overregulation and detailed input 
specifications, and shift much more to an emphasis on creating 
incentives for industry and focused on output results rather 
than input specifications.
    Let me briefly just note the four findings of that Defense 
Science Board Task Force that I mentioned, whose objective was 
achieving a 21st century industrial base. The first finding 
was: ``Current trends and policies will not result in an 
effective industrial base.'' Second: ``That the DOD must drive 
the industrial base transformation in order to support the 21st 
century military.'' Third: ``The government must change in 
order to facilitate rapid and affordable acquisition of needed 
weapons, systems, and services.'' Fourth: ``A weakened DOD 
acquisition workforce impedes the acquisition of military 
capability and government oversight.''
    This all involves changing the way the government does its 
business, which basically is a cultural change. For successful 
implementation of culture change, the literature is clear: it 
requires leadership with a vision, a strategy, a set of 
actions, a set of metrics to continuously monitor it.
    So in order to stay within the time, let me simply tick off 
the ten recommendations that I have in my prepared statement 
and just briefly note them. The first one is, in order to do 
this the DOD has to articulate a national security industrial 
vision and adopt policies that match this vision and secure 
incentives for industry to achieve that vision, and then of 
course monitor it in order to see the realization of it.
    I think perhaps the most important part of that vision is 
incorporating the competitive commercial marketplace into it. 
We have barriers significantly to that. In fact, let me just 
quote from a National Defense Industry Association report that 
just came out: ``Removal of the many barriers--legislative, 
regulatory, et cetera, that prevent new suppliers, commercial 
particularly, from entering the aerospace and defense 
industries and previous suppliers from returning. These 
barriers include specialized cost accounting, export controls, 
intellectual property rights, government-unique flowdown 
requirements to the lower tiers,'' and so forth.
    Second, the weapons requirements process has to shift to be 
focused on the netcentric system of systems in order to gain 
the force multiplier effect of the lower-cost, multiple 
distributed sensors and shooters, rather than the historic 
focus on self-contained complex, expensive platforms.
    Third, we have to achieve lower costs and faster-to-field 
capabilities, while still getting better performance. The 
computer industry shows us we can get higher and higher 
performance at lower and lower costs. We have to use that 
model. That requires the DOD to change its requirements process 
in order to include cost and schedule and then use a block 
upgrade model where block 1 uses existing technology and 
continues to do R&D as future blocks evolve.
    Fourth, we have to train as we fight, which means 
recognizing the very big role of contractors on the 
battlefield. Today in Iraq and Afghanistan we have about 
270,000 contractors, more than we have in uniform, and yet they 
are performing non-inherently governmental functions, but they 
come with pretraining and lower cost, and the government has 
the responsibility for managing them and part of that means 
that they have to include the planning, training, exercise, 
education in order to prepare for this mixed force.
    Fifth, we have to focus on staying ahead, and that means by 
adequately resourcing the engines of innovation. Now, 
historically the first things that get cut when the budget goes 
are research and then training and travel. Well, we cannot 
afford to allow research to go away, especially for the small 
businesses, the SBIR program which was mentioned earlier, basic 
research at universities and government labs, the clear IR&D of 
the companies, the IR&D effort, if you will, and the important 
manufacturing technology areas. All of those have to be 
continued to be supported or we'll simply fall behind.
    Sixth, we have to understand and realize the benefits of 
globalization while of course mitigating its risks. Today it's 
very clear that technology and industry are globalized and for 
the United States to take advantage of this from both economic 
and military perspectives we have to change our export and 
import laws. It's time for recognition of the globalization in 
this area.
    Seventh, we have to achieve far greater use of best value 
competitions and foster long-term competitive dynamics. These 
incentives coming from this continuous competition are obvious 
in terms of competitive dual sourcing. The data are clear, but 
we're in many cases doing it in speeches, not in reality.
    Eight, we have to transform the DOD logistics system into a 
world-class datacentric logistics system. It is the most 
expensive of all our acquisition phases, costing over $270 
billion last year, and carrying an inventory of $90 billion, 
and not doing a world-class job by any measure in terms of 
responsiveness, reliability, asset visibility, cost, you pick 
one. It's absolutely critical that we revise that and that's an 
area for big cost savings as well as greatly enhanced 
performance.
    Ninth, we have to recognize that over half of the DOD 
acquisition costs--in fact, in fiscal year 2009 it was 57 
percent--are for services, and yet all of our regulations, 
policies, practices, education, et cetera, are based upon 
buying goods. That has to change. We have to recognize that an 
important part of our industrial base are the Services, not 
just the people building ships, planes, and tanks, and our 
policies therefore have to change.
    Last, tenth, DOD, with Congress' help, has to move 
aggressively to strengthen the future high-quality, high-skill 
government acquisition workforce. I recently chaired a 
commission on Army acquisition and program management in 
expeditionary operations and the whole commission was shocked 
to find how much the DOD acquisition workforce, particularly at 
the senior levels, has been undervalued, not just in numbers, 
but in senior positions.
    For example, in 1990 the Army had five general officers 
with contracting experience. In 2007 they had none. I give you 
lots of other examples. Without smart, well-trained, 
experienced acquisition buyers and managers, we will not get 
there in my opinion. It's simply not achievable to get the 21st 
century structure that we need.
    In my prepared remarks I also discuss the other workforce 
concern, which is S&T workforce, which Norm Augustine just 
highlighted, and clearly that's an area that has to be 
addressed, both for security and economic competitiveness.
    So, in summary, it's absolutely critical that the 
government changes the way it does its business and as a result 
that the national security industrial base is transformed into 
a flexible, adaptable, agile, responsive, innovative structure 
that provides high-quality goods and services for 21st century 
military needs, but at affordable prices and in the quantities 
required. I think the men and women of our armed services 
deserve nothing less.
    Thank you.
    [The prepared statement of Dr. Gansler follows:]
        Prepared Statement by Hon. Jacques S. Gansler, Ph.D.\1\
---------------------------------------------------------------------------
    \1\ Dr. Gansler is a professor and holds the Roger C. Lipitz Chair 
in Public Policy and Private Enterprise at the University of Maryland's 
School of Public Policy; where he also directs the Center for Public 
Policy and Private Enterprise. He is a former Under Secretary of 
Defense, responsible for Acquisitions, Technology and Logistics (1997-
2001); and is the author of the forthcoming: ``Democracy's Arsenal: 
Creating a 21st Century Defense Industry'' (MIT Press; June, 2011). He 
recently has served as the Chairman, ``Commission on Army Acquisition 
and Program Management in Expeditionary Operations;'' and as the 
Chairman, ``Defense Science Board Task Force on Improvements to 
Services Contracting.''
---------------------------------------------------------------------------
    The National Security environment of the 21st century has totally 
changed from that of the 20th Century--as shown by the many areas 
listed in Table 1. However, the major supply-base change has simply 
been consolidation (from around 50 major suppliers to a half dozen). As 
a 2008 Defense Science Board (DSB) Task Force (which I chaired) 
concluded, ``the Nation currently has a consolidated 20th century 
defense industry, not the required and transformed 21st century 
National Security Industrial Base it needs for the future.'' (reference 
1)
    Unfortunately, in the 3 years since that report, there has not been 
a noticeable improvement. In fact, in many areas the trends are adverse 
to the need--with rising costs for equipment and services; stretched 
out schedules; and undesirable shifts in acquisition and procurement 
practices (as discussed below).
    To meet the 21st century National Security environment, the 
industrial base must be flexible, adaptable, agile, responsive, and 
innovative; and it must provide high-quality goods and services at 
affordable prices, in the quantities required. To achieve this, 
requires the government to change the way it does its business, i.e. 
reform its laws, regulations, policies and acquisition/procurement 
practices. It must remove the current barriers--created through 
overregulation and detailed ``input'' specifications--and shift to an 
emphasis on creating incentives for industry to achieve the desired 
output results.
      
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
      
    Let me cite a few of the recent acquisition/procurement adverse 
trends:

         A significant shift from contracts awarded on the 
        basis of ``best value'' (i.e. a combination of risk [based on 
        prior performance and technology status], proposed performance, 
        schedule, and costs) to awards based on ``Low Bid, Technically 
        Acceptable''--which is an invitation to ``buy in;'' wait for 
        directed contract changes (to be quoted high, in a sole-source 
        environment); and not focus on quality, cost or schedule 
        control, or ``past performance'' evaluation.
         A ``requirement' to recompete all service contracts 
        every 3 years (independent of performance and costs achieved)--
        which is a disincentive; compared to the incentive-based 
        requirement to recompete every 3 years unless the supplier is 
        getting higher and higher performance at lower and lower costs 
        (in which case they deserve to receive the follow-on award).
         Not recognizing that ``competition for an award'' is 
        dramatically different than ``competition during execution''--
        where the former results in a monopoly supplier and large cost 
        growth (from the many changes that came along--from technology 
        changes, mission changes, interface changes, etc.); and the 
        latter results in competitive efforts to continuously improve 
        performance and reliability, and continuously lower costs (in 
        order to get a larger share of each ``best value'' award). A 
        current example would be the second engine for the F-35 
        fighter. Here, there never was a competition for the engine 
        (only for the prime contract); and the history (from the 
        ``Great Engine War,'' for the engines for the F-15 and F-16) is 
        clear--the Air Force ran a continuous competition between Pratt 
        and Whitney's engine and GE's; and they got higher and higher 
        performance and increased reliability, at lower and lower 
        costs, from both engines (saving over $4 billion--net). Since 
        the F-35 is the largest program in history (with 11 nations 
        participating) and since engine maintenance is the highest cost 
        element of the Department of Defense (DOD) support; and since 
        the same two companies have both developed engines for this 
        aircraft; instead of just giving speeches about 
        ``competition,'' why not do it? Simultaneously, maintain the 
        only two U.S. suppliers, and their lower-tier suppliers, for 
        the future, competitive industrial base of military jet 
        engines.
         Another barrier to competition--this time put in place 
        by Congress--is the passing of laws inhibiting public/private 
        competitions (via OMB Circular A-76 rules) for work currently 
        being done by government workers, but which is not inherently-
        governmental work. The hundreds of cases in the past have shown 
        savings of over 30 percent--no matter whether the winner is the 
        public or private sector!
         Similarly, the current administration push for 
        ''insourcing'' of work--without specifying that it is intended 
        only for inherently-governmental work--is actually raising 
        costs. (For example, the Air Force said they would save 40 
        percent by bringing equipment maintenance in-house; but the 
        Congressional Budget Office (in October 2005) had stated ``over 
        a 20 year period, using military units would cost roughly 90 
        percent more than using contractors''--and ``wrench-turning'' 
        is certainly not inherently-governmental (only the management 
        and contracting for it is inherently governmental).
         Finally, some of the greatest, and most innovative, 
        ideas in the past came from unsolicited proposals from industry 
        (which then received an award for a ``demonstration''). 
        However, these unsolicited proposals are now being greatly 
        discouraged, because they are getting a response that says, 
        ``Thank you for the idea, we will now put it out for 
        competition--or otherwise it will hurt our competition 
        scorecard.''

    I could go on with the examples; but, instead, let me briefly note 
the four critical ``findings'' of the above-noted DSB Task Force (on 
achieving a 21st century industrial base):

    1.  Current trends/policies will not result in an effective 
industrial base.
    2.  DOD must drive transformation to support a 21st century 
military.
    3.  Government must change to facilitate the rapid and affordable 
acquisition of needed weapons, systems, and services.
    4.  A weakened DOD acquisition workforce impedes the acquisition of 
military capability and government oversight.

    Since ``changing the way the government does its business'' and, 
correspondingly, ``transforming the National Security industrial base 
for 21st century needs,'' is basically a ``cultural change,'' the 
literature is clear--for successful implementation of a cultural change 
it requires leadership (with a vision, a strategy, a set of actions, 
and a set of metrics).
    Let me draw on (and add to) the ``recommendations'' of the DSB Task 
Force, in order to address the above-noted four findings:

    1.  Articulate a National Security Industrial Vision; adopt 
government policies to implement the Vision; structure incentives for 
industry to achieve the Vision; and monitor ongoing industrial dynamics 
to ensure its realization.

    Critically important is that this vision includes the incorporation 
of the high-tech, high-quality goods and services available in the 
competitive commercial market. A recent report from the National 
Defense Industrial Association (NDIA, February 2011; reference 2) 
stated ``there are many capable U.S. manufacturers that simply choose 
not to work in the aerospace and defense industries.'' They went on to 
observe the many barriers (legislative, regulatory, etc.) that 
``prevent new suppliers from entering the aerospace and defense 
industries, and previous suppliers from returning (these ``barriers'' 
include: specialize cost accounting rules; export controls; 
intellectual property rights; government-unique ``flow down'' 
requirements to lower-tier suppliers; etc.). Finally, this group of 
defense industry executives concluded that ``the existing suppliers 
base may not be the most conducive to helping the industry meet 
expanding requirements for improved security, higher levels of 
innovation and greater responsiveness.''
    As I, and others, have written (in numerous articles and books), it 
makes economic and strategic sense (in terms of low cost, high quality, 
rapid response, surge capability, reduced overheads, etc.) to combine 
commercial and military engineering, production, and support in the 
same industrial operations. But to do so requires the removal of the 
above-noted barriers. It should be observed that other countries 
clearly recognize these benefits (of ``dual-use'' operations); and, in 
fact, the recently-released ``Chinese defense industrial policy'' 
explicitly advocates the use of ``dual-use'' (civil and military) 
industrial operations.

    2.  In the weapons' ``requirements process,'' focus on 
interoperable, Net-Centric Systems-of-Systems (with independent 
``architects,'' and enhanced government management and systems 
engineering, capability).

    Here, it is particularly important, in order to gain the force-
multiplier effect of distributed sensors and shooters, in a ``net-
centric'' model (vs. the prior, ``platform centric'' model), that we 
pay close attention to cyber security--in our design, development and 
testing.

    3.  Achieve lower costs and faster-to-field capabilities, while 
still achieving better performance.

    As the computer world has demonstrated--with higher and higher 
performance, at lower and lower costs, with each new generation of 
systems; and with new systems coming out on 18 month cycles--it is 
clearly possible, using product and process technology evolution, to 
simultaneously realize the dual objectives, of lower cost and higher 
performance. However, this requires changing the DOD ``requirements'' 
process, to include cost and schedule; and to fully-utilize a ``Block 
upgrade'' process--beginning with proven technology (for ``Block I''), 
in order to get it out into the field rapidly. Then, continue with R&D, 
to prove out the technology for future ``Blocks''. (This is a common 
commercial practice, known as ``spiral development.'') It also requires 
a change in the DOD ``requirements process'' itself (as General 
Cartwright, Vice Chairman of the Joint Chief's, has recently advocated) 
in order for the system to respond faster to the changing ``urgent 
needs'' of the combatant commanders; and to be able to make faster 
decisions, while trading off performance, schedule and cost, in early 
``blocks'' of the equipment, as it evolves (see reference 3).

    4.  Train as we fight: Recognize the role of ``contractors on the 
battlefield.''

    Today's military operations involve a ``mixed force'' of military, 
government civilians, and many contractors (e.g. in Iraq and 
Afghanistan, around 270,000 contractors--even more than the military). 
They are performing non-inherently governmental functions (with pre-
training, and at low cost) but they must be government-managed; and 
there has been inadequate staffing, as well as inadequate planning, 
training, educating, and exercises in preparation for this ``mixed 
force.''

    5.  Focus on ``staying ahead'' by adequately resourcing ``Engines 
of Innovation.''

    Historically, whenever there are shrinking budgets, the first 
things to be cut are research, training, and travel. With the need to 
``stay ahead'' (i.e. to maintain technological superiority-- which has 
been the U.S. security strategy for the past half century), we must 
make sure we don't ``eat our seed corn.'' We must not allow our 
industry and university research budgets to shrink--especially in these 
areas: (1) for small businesses (e.g. via the ``Small Business 
Innovative Research Program''); (2) in the Industry's ``Independent 
Research and Development'' (which must remain ``independent''--and 
which recently has been drifting toward efforts to support near-term 
``bid and proposal'' efforts); and (3) in the important ``manufacturing 
technology'' effort (which must be geared to a focus on lower cost, but 
high quality, manufacturing processes--even when producing an item in 
relatively small quantities).
    Finally, there are times when an R&D award (at the prime contractor 
level, or in a critical subsystem or part) may be the only way to 
maintain a competitive, potential second source in a key industrial-
base area (and this award also serves to keep pressure on the current 
source, to continue to innovate--in order to remain competitive). Thus, 
there is a need for a strong link between the R&D organizations and 
those doing industrial base analyses.

    6.  Understand and realize the benefits of globalization while 
mitigating risk.

    As I wrote in ``Foreign Policy'' (March 2009, reference 4), ``The 
United States must face the fact that it no longer has a monopoly on 
the world's best military technology. America's path toward future 
security involves cooperating with allies and taking advantage of the 
best they have to offer, not cutting itself off and watching as its 
military superiority slips away.''
    Given that one purpose of military procurements is to ensure 
competitive advantage over the other countries' technological arsenals, 
the idea of depending on foreign sources for military equipment might 
seem ill-advised, even dangerous. But, in fact, virtually every weapons 
system used by the U.S. military today contains components that were 
manufactured or designed somewhere else--and their selection was based 
on higher performance; not on lower costs. Take, for example, the 
Army's new mine-resistant, ambush-protected (MRAP) vehicles. Designed 
to protect soldiers in Afghanistan and Iraq, they have a V-shaped hull 
that was originally developed and refined in South Africa, along with 
armor that was designed in Israel, robust axles from Europe, and 
electronics from Asia.
    Of course, critics argue that these arrangements are incredibly 
dangerous. After all, couldn't the U.S. weapons supply be cut off 
during wartime if the country were too reliant on foreign parts? Most 
of these foreign sources, however, are from NATO nations or other 
countries with which the United States has had enduring military and 
commercial relationships. For example, despite very public opposition 
in some of these countries to U.S. actions in Afghanistan or Iraq, at 
no time did foreign suppliers (including 20 German and 2 French 
suppliers) restrict the provision or sale of components.
    Skeptics also worry about ``Trojan horses'' built into foreign-
supplied systems, particularly in the case of software. But this 
potential threat can be addressed through extensive and rigorous 
testing and reverse engineering; just as required in the financial and 
medical communities. Still others raise serious and legitimate concerns 
about military technology leaking into the hands of rogue regimes or 
terrorists, or being sold to third parties without U.S. knowledge. 
These are certainly excellent arguments for international arms-control 
treaties. But there's no reason why such treaties need preclude legal 
arms trade among allies, along with mutually-agreed-to verification 
techniques.
    More commonly, opponents emphasize the potential loss of jobs that 
might occur as a result of buying equipment from offshore firms. This 
was the argument critics in the U.S. Congress fell back on in March 
2008 when the U.S. Air Force awarded a contract to build an airborne 
refueling tanker to Northrop Grumman, over rival Boeing. What made 
Northrop's bid controversial was that it planned to convert commercial 
aircraft built by the European conglomerate EADS (using Airbus 
aircraft) for military use. Some parts would be built in Europe and 
then shipped to the United States for assembly in Alabama. The response 
from Congress was as predictable, as it was wrongheaded. Members from 
both parties swiftly denounced the decision to reward the lucrative 
contract to a ``foreign firm'' (even though it was to be built in 
Alabama).
    The Defense Department should not become a social welfare 
organization; and its sole responsibility should be to supply U.S. 
warfighters with the best equipment at the best price. Luckily, though, 
these two goals aren't mutually exclusive: in fact, the Air Force found 
that the presence of the Northrop/Airbus bid resulted in a dramatic 
reduction in the Boeing bid (as the eventual winner).
    The United States is still the world's largest military customer 
(in fact, larger than all the others combined), and it's in the 
interest of international weapons manufacturers to do business where 
the buyers are. In the past decade, a number of major international 
firms have set up shop in the United States (bringing money and jobs to 
the United States, along with their technology; and even increasing 
U.S. trade exports). Alone, the Northrop deal would have created tens 
of thousands of U.S. jobs.
    It is also inconceivable that the United States would be involved 
in any future military operation without being in some form of 
international coalition. This is primarily for geopolitical reasons 
(rather than simply military ones), but its importance cannot be 
underestimated. When operating in a coalition environment, the United 
States must be able to fully operate in an integrated fashion with its 
allies; and they all must have the best possible equipment.
    Despite the benefits that military globalization has already 
brought, Congress continues to pass laws blocking its expansion. These 
laws can sometimes be directly detrimental to military operations. In 
1998, export controls held up the production of a U.S. fighter plane 
for 7 months while a U.S. company waited for an export license to 
supply technical data to a Dutch company that was building parts for 
it. These U.S. export controls even prompted one major German defense 
contractor to instruct its employees to ``avoid U.S. defense goods at 
all costs.''
    In addition, the export control laws also create a significant 
barrier to commercial firms doing defense business. For example, when a 
commercial electronic part was used in a ``Maverick'' missile (and, 
therefore, under export control), it also was being used in a Boeing 
737 aircraft, being sold (commercially) offshore. This resulted in an 
export violation; and caused Boeing a $15 million fine. (See reference 
8) Clearly, the commercial world market for electronic parts is far 
larger than the DOD's, so such restrictions greatly discourage 
commercial firms from offering their high-performance, low-cost parts 
to the DOD. Obviously, this leads to specialized DOD parts (at low 
volume and high cost); and to reduced exports of any parts or equipment 
(including commercial) that are used in DOD systems. Neither of which 
results is desirable.
    On the import side, the 1993 ``Buy American Act'' requires that 51 
percent of all purchases by the Pentagon be produced in the United 
States. This often results in foreign-designed weapons systems being 
transferred to the United States for production at a significant 
increase in cost to the American taxpayer. Congress has occasionally 
flirted with expanding the act to cover all military purchases. (In 
fact, in 2004, the House of Representatives passed a law stating that 
all parts of all weapon systems must be made in the United States; on 
U.S. machine tools.) This requirement would have had disastrous 
consequences for military procurements (i.e. lower performance and 
higher costs); and in some cases would have required the government to 
create entirely new (subsidized) industries. (Fortunately, the Senate 
did not concur; so it did not become law.)
    It is clear that, today, technology and industry are globalized; 
and for the United States to gain the advantages of this (for economic 
and military benefits) it is time to revise the Nation's export and 
import control laws! The President currently has a Task Force 
addressing this issue.

    7.  Achieve far greater use of ``best value'' competitions, and 
foster long-term competitive dynamics.

    I have written and testified frequently about the benefits (in cost 
and performance) of competition. But, there are (as described above) 
right and wrong ways to perform a competitive acquisition (see 
reference 5). Weapon systems are not interchangeable commodities (so 
you can not just ``open the envelope'' and pick the low bidder) the 
decision must be based on a combination of risk (based on ``past 
performance'' of the firm and current status of the proposed 
technology) and the proposed performance, cost, and delivery (i.e. 
``best value''); as well as the probability of maintaining these 
``promises'' in the presence of the large number of future changes 
(that are unavoidable in this rapidly-changing world).
    So, incentives are required (to achieve high performance at low 
cost); and the best one (over the long run) is the presence of, or a 
credible option for, continuous competition among two sources (known as 
``competitive dual-sourcing'').
    The usual counterargument is that ``we can't afford the second-
source start-up costs;'' and ``this time will be different''--``We will 
manage the sole-source contractor, and allow no government-imposed 
changes.'' But this just doesn't have any credibility!

    8.  Transform the DOD logistics system into a world-class, data-
centric logistics system.

    The DOD Logistics system is, by far, the most expensive of its 
overall acquisition phases (in fiscal year 2009 it cost over $270 
billion, and the DOD also carried an inventory of over $90 billion); 
and yet, it is not world class (by any measure--responsiveness; 
reliability; asset visibility; cost; etc.). However, for warfighting, 
it is absolutely critical that ``the right part gets to the right 
place, in the required time.'' A comparison with the logistics systems 
of Walmart, UPS, Fed Ex, Caterpillar, etc. shows that it can be done; 
and that the DOD has no choice but to modernize its logistics systems--
both for higher performance and for significant cost savings!
    The only way to achieve this is to spend some R&D money on 
modernizing the existing DOD's, 20th century, logistics systems (of 
which there are over a thousand relevant I.T. systems alone), and to 
continue its recent emphasis on ``Performance Based (i.e. results-
based) Logistics.''

    9.  Recognize that, while over half of DOD's acquisitions are for 
services, all of the current regulations, policies, practices, 
education, etc. are based on acquiring goods; and this must change.

    I recently chaired a congressionally-mandated DSB Task Force on 
``Improvements to Services Contracting'' (reference 6, May 2011), and 
found that, in fiscal year 2009, 57 percent of all DOD acquisition 
dollars went to buying services. Of course, the boundary between 
hardware and services is increasingly blurred (i.e. buying 
transportation services as opposed to buying trucks). While specifying 
the requirements for the services, and effectively managing them, 
(often without clear metrics for performance) is extremely difficult, 
and requires extensive training and experience, this is not recognized 
or appreciated in current DOD policies, practices, training, education, 
and (particularly) in hiring and promotions. When it is realized that 
essentially all of the contractors in Iraq and Afghanistan are 
performing ``services'' (of an extremely wide variety), the importance 
of this area (to the military mission) should become clear. 
Additionally, when one thinks of ``the defense industrial base'' they 
tend to think of the firms building ``ships, planes, and tanks;'' and 
yet, they also need to consider those firms providing services (and 
receiving over half of the acquisition dollars)--and often providing 
these services ``in harm's way'' (in fact, the dead and wounded from 
industry have recently been exceeding those in uniform).
    It is time for policies, organizations, personnel activities, etc. 
to recognize that (like the U.S. economy) services are, and will 
continue to be, a big part of doing business in the National Security 
arena. This change must take place!

    10.  Move aggressively to strengthen the future, high-quality, 
high-skill, Government Acquisition Workforce.

    When I chaired an independent Commission for the DOD on ``Army 
Acquisition and Program Management in Expeditionary Operations'' 
(reference 7; October 31, 2007), we were shocked to find how much the 
DOD acquisition workforce (particularly at the senior levels) had been 
undervalued. This is shown clearly by the data in Figure 1.
      
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
      
    Since the mid-1990s, as the dollars and actions for DOD 
acquisitions were rising dramatically, the acquisition workforce was 
being cut. (25 percent of this was by congressional mandate.) Even more 
critical than the numbers being cut, were the senior positions. For 
example, in 1990 the Army had five general officers with contracting 
experience; in 2007 they had none. In this same time period, the 
Defense Contract Management Agency went from 4 general officers to none 
(while their workforce went from 25,000 to 10,000). The Air Force had 
cut both their acquisition general officers and their SES acquisition 
personnel in half.
    Without smart, well-trained, experienced acquisition buyers and 
managers, making the required changes in DOD buying practices, and 
achieving the required transformation of the industrial base (for 21st 
century National Security) will simply be unachievable. Fortunately, 
Congress has recognized this need with some important acquisition 
workforce legislation. Also, the Army has established the ``Army 
Contracting Command;'' while Senator Collins and Representative 
Connelly have recently introduced a very positive set of bills to 
address acquisition workforce education and training. But progress is 
moving slowly--and (as described above) there have been many actions 
(by both Congress and the administration) that are more focused on 
``rule compliance'' than on ``results achieved.''
    One final personnel issue which must be addressed is the science 
and technology (S&T) workforce (in government and industry). It has 
been increasingly difficult to get U.S. students (in general) to go 
into S&T and those that do, prefer to work in Hollywood animation, 
Wall Street computer modeling, or biotech; to working in aerospace and 
defense (the greater money, more work freedom, and greater job 
stability appear to be better). One of the unique government 
requirements (that is requested to be ``flowed down''--even to 
university researchers and lower-tier defense workers) is that the 
workers must be U.S. citizens. (This is in spite of the fact that we 
allow 3 percent of the U.S. military to not be U.S. citizens.) 
Importantly, in 2006 the National Science Foundation reported that ``35 
percent of those obtaining graduate degrees in science and engineering, 
in U.S. universities, held Temporary Visas''--and they were even 
required to sign an agreement that they would leave the United States 
when their studies were completed. Given America's history as an 
``immigrant nation,'' and the number and quality of these foreign S&T 
graduate students, I would think that, after an appropriate security 
check, we should ``staple a green card to their graduate degree;'' and 
encourage them, along with their U.S. counterparts, to seek work in 
fields related to National Security. (Realizing that Enrico Fermi was 
not a U.S. citizen when he worked on the Manhattan Project for us; and 
that many of the founders of Silicon Valley were not U.S. citizens; it 
only makes sense to consider them.)
    In summary, it is critical that the government changes the way is 
does its business (i.e. implement real acquisition reform); and, as a 
result, that the National Security Industrial base is transformed into 
a flexible, adaptable, agile, responsive, innovative, structure that 
provides high-quality goods and services (for 21st century military 
needs) at affordable prices and in the quantities required.
    The men and women of our armed services deserve nothing less!
    Thank you.
                               references
    1.  ``Defense Science Board Task Force on Creating an Effective 
National Security Industrial Base;'' July 2008
    2.  ``Recovering the Domestic Aerospace and Defense Industrial 
Base;'' S. Malnyk, K. Sullivan, C. Peters; National Defense Industrial 
Association; February 2011
    3.  DSB Task Force on ``Fulfillment of Urgent Operational Needs;'' 
July 2009
    4.  ``Trade War;'' Jacques Gansler; ``Foreign Policy;'' March 2009
    5.  ``National Security Acquisition Challenges;'' J. Gansler, W 
Lucyshyn; Strategic Studies Quarterly; Winter 2010 (pages 13-31)
    6.  Defense Science Task Board on ``Improvements to Services 
Contacting;'' May 2011
    7.  ``Urgent Reform Required: Army Expeditionary Contracting;'' 
report of the ``Commission on Army Acquisition and Program Management 
in Expeditionary Operations;'' October 31, 2007
    8.  ``Boeing Pays $15 Million Fine;'' Dominic Gates; The Seattle 
Times; April 8, 2006

    Senator Hagan. Thank you.
    Mr. Odeen.

 STATEMENT OF PHILIP A. ODEEN, MEMBER, DEFENSE BUSINESS BOARD, 
    TASK GROUP CHAIR, ASSESSING THE DEFENSE INDUSTRIAL BASE

    Mr. Odeen. Thank you very much, Chairman Hagan. First of 
all, let me say thank you for holding this hearing. This is a 
very important issue but it seldom gets attention before 
Congress, so this is a great step forward. It struck me as an 
excellent example of what President Eisenhower called 
``absolutely critical, but not urgent, issue.'' People know how 
important it is, but they never quite get around to addressing 
it. So thank you for doing this.
    I'm going to take a bit of a different tack in my comments. 
My prepared statement agrees with many of the things Jack and 
Norm have said, so let me just look at this issue in a 
different light. First, the health of the defense industry 
today. The traditional aerospace-defense companies are in very 
good condition right now. They have strong earnings, cash flow 
is excellent, their debt levels are low, and they have very 
solid investment grade credit ratings.
    It may seem surprising but over the past decade they've 
been able to attract very capable technical people, both new 
college graduates and some experienced people. The economic 
situation in particular is a factor, although September 11 
might have had an impact as well.
    At the other end, because of the recession, experienced 
people are not leaving as early as they often did, so the 
companies have experienced a short-term step up in the 
capability of their workforce. Longer term, it's a different 
issue and there still is a ``bathtub'' in their experience 
base. They hired nobody in the 1990s, essentially, so they lack 
people who would have 10, 15, 20 years of experience that are 
simply not in that workforce. So you have a real gap there, 
made up temporarily by these more experienced people that are 
staying on.
    The current situation is in stark contrast to the picture a 
decade ago. Following a decade of defense budget cuts, the 
industry consolidation that's been discussed, revenue and cash 
flow were declining, debt levels were high, and most of the 
companies had subinvestment grade credit ratings. Moreover the 
stock prices had done very badly throughout the 1990s. The 
company also had an aging workforce and great difficulty in 
recruiting capable technical talent, either new graduates or 
experienced people.
    All is not well, even though the overall picture looks 
pretty good right now. There are some significant challenges 
that DOD and its industrial partners face. You have a web of 
third- and fourth-tier subcontractors that support larger firms 
in very important ways and they are in real disarray. Many of 
them are primarily commercial in their orientation and the 2008 
recession, with its dramatic impact on the industrial base, 
hurt them badly. This has had a flow-through effect on DOD.
    Because of the lower expected defense spending, stock 
prices are not doing well, despite very good earnings and very 
strong dividend increases. Stock prices today of all the major 
companies are well below the level in 2009 after the recovery 
from the 2008 stock crash. By contrast, the rest of the stock 
market has improved dramatically. Weak stock prices make it 
harder to attract capital, but also to reward people with 
stock-type compensation.
    Perhaps the most difficult issue facing DOD today has been 
touched on already and that is the ability to access commercial 
technology, which is critical to most important defense 
capabilities. Let me talk about this briefly because it's one 
of my special concerns. Many critical defense capabilities rely 
heavily on the commercial sector, which leads, in fact often 
dominates, cutting edge technologies in computers, software, 
communications, and other areas of electronics.
    The policy and regulatory changes made in the 1990s, which 
Jacques will recall, helped facilitate DOD's access to the 
commercial world. Unfortunately these have been seriously 
eroded over the past decade. There are other barriers as well: 
the slow, complicated acquisition process and the multiple, 
complex regulations Jacques mentioned; a convoluted, opaque 
requirements process which makes it hard for companies to know 
what defense needs and where they should be directing their 
investment; buy-America laws and export controls, which you've 
discussed already.
    Let me mention one of the nuances in export controls. If 
you're a high-technology American company with really 
interesting technology and opportunities to sell worldwide, you 
don't want to get involved with DOD. Before you know it, your 
item will be ITAR-controlled and your ability to export will be 
diminished dramatically. Many companies with good technology 
simply refuse to deal with DOD because of that risk.
    There are a lot of future challenges for DOD, assuming 
reduced defense spending and the end of the wars in Iraq and 
Afghanistan. Some of these challenges have already become 
evident: tough decisions on the cancellation of existing 
weapons programs; very tough choices between buying more of 
today's traditional systems and next generation capabilities; 
pressure on investment spending from the growth in military 
personnel-related programs, in particular health care and 
retirement; and finally, the greater difficulty to maintain 
competition as we enter a period of lower investment spending. 
You're seeing these issues emerge already and they will grow in 
importance in the years ahead.
    How will the defense industry react to this? As I said, 
they're doing well today, but as defense spending comes down 
they're going to have to respond. Small niche-type acquisitions 
can provide special new capabilities, and some additional 
incremental revenue, and you're already seeing this. They're 
going to diversify or attempt to diversify into those 
government markets that they see as stable or perhaps growing--
intelligence, cyber, homeland security, areas like that. You 
may see some effort to move into the commercial sector, 
although, as Norm Augustine knows well, that has not been 
successful in the past. Also, you will see increased efforts to 
sell products internationally, especially to the Middle East 
and Asian markets, where there's a lot of procurement going on. 
Export controls are a complication here. The recent issue on 
the sale of fighter aircraft to India is an interesting case 
study of the problems that export controls create.
    Mega mergers are not likely, as far as I can see. However, 
if the spending cuts are deep like they were in the 1990s, 
you're likely to see a different situation. It may force DOD to 
rethink its policy on mega mergers or at least support limited 
mergers of some sectors of the defense industry, for example 
shipbuilding. If there isn't enough money to support adequate 
multiple suppliers, they're likely to have to permit more major 
mergers.
    How does DOD respond to this? First of all, there's no 
silver bullet, no one-size-fits-all policy, given the complex, 
multifaceted nature of the industrial base supporting DOD. In 
my view, DOD must make every reasonable effort to maintain some 
competition on those platforms that will be of continued 
importance in the future, not all major platforms, but those 
that will clearly be important for a long period into the 
future.
    Even more critical strong competition, the next level down, 
major subsystems, such things as radar, aircraft electronics, 
fire control systems for ships, aircraft engines, and so forth. 
You must have competition in these areas if at all possible.
    It will also be important for DOD despite lower budgets to 
invest in areas that are going to be central to the future 
effectiveness of the military--C\4\ISR is the obvious example--
as well as promising new capabilities, such as unmanned systems 
that can really change the game. Investment to preserve options 
for the future, such as funding prototypes, can also be 
important. They give us choices as we go forward.
    I've talked primarily about the hardware suppliers in my 
comments today, as have my colleagues. The important services 
sector, which is roughly half of DOD contract spending, will 
also face challenges that DOD will need to respond to. They're 
somewhat protected for a variety of reasons, such as the nature 
of their funding, their ability to be flexibly cut back and 
maintain profits and cash flow. They'll face big problems as 
well that I can cover in more detail during the discussion if 
you wish.
    In closing, just let me again compliment the committee for 
addressing these issues. I know DOD is addressing them and your 
interest and support will encourage the Department to cope with 
the industrial base challenges that lie ahead.
    Thank you very much and I look forward to your questions.
    [The prepared statement of Mr. Odeen follows:]
                Prepared Statement by Hon. Philip Odeen
    Good afternoon, I appreciate the opportunity to appear before you 
today. The Defense Industrial Base is a vitally important issue, but 
one that seldom gets attention from Congress. It is a perfect example 
of issues that President Eisenhower described as 'critical but not 
urgent.'
                       the industrial base today
    The large Defense industrial companies are in sound condition 
today; strong revenue and cash flow, growing profits, and impressive 
balance sheets with limited debt and investment grade credit ratings. 
This is in stark contrast to the Industrial Base a dozen years ago, 
following a decade of sharp reductions in Defense spending and the 
massive consolidation of the traditional industry players following the 
so-called ``last supper,'' hosted by Secretary Perry. Revenues had 
declined along with profits, cash flow was weak (in part due to the 
Department of Defense (DOD) policies), and the surviving companies had 
heavy debt loads and non-investment grade credit ratings. They also had 
an aging workforce and found it difficult to attract well-qualified 
technical and engineering talent.
    Today's Defense Industrial Base is healthy in areas beyond its 
financial condition. Human capital has been rebuilt after a decade of 
attracting quality college graduates and experienced technical and 
engineering talent. This is due largely to the weak industrial economy 
and the good wages and benefits Defense industry offers. But I believe 
the attitude of our people post-September 11 contributes as well.
    While the large primes and most major subcontractors are in good 
condition, the lower tier suppliers are a different story. The recent 
recession impacted many of them severely. Most of these firms primarily 
sell to larger commercial manufacturers, and commercial demand dropped 
sharply in 2008. A number of small companies providing items such as 
forgings and specialized components went bankrupt or had to close 
selected operations. Defense industry was able to work through these 
issues, but problems still remain. In many ways, these 3rd and 4th tier 
suppliers are the weakest link in the Defense industry supply chain. 
Hopefully the current recovery of the broader manufacturing sector will 
reduce the risks going forward.
    DOD, however, relies on a much larger web of suppliers beyond the 
well-known aerospace and defense primes. In many areas such as 
electronics, information technology, and communications, most of the 
new technologies reside in the commercial world--frequently in firms 
based outside our boarders. Here DOD's outlook is far less positive. 
The policy changes made in the 1990s to facilitate DOD's access to the 
commercial world have largely been eroded. As a result, DOD is again 
forced to rely heavily on its traditional suppliers and sources of 
technology.
                          access to technology
    Looking beyond DOD's limited access to commercial technology is 
DOD's own investment in the science and technology so critical to its 
future needs. During much of the second half of the 20th century, the 
United States was the leader in defense technologies. DOD had a robust 
research and development program and with its industrial partners, 
accounted for a significant share of the key new technologies that 
supported our military capabilities. That is far less true today--again 
due to a variety of factors.

         The growing importance to DOD of new areas of 
        technology (communications, IT, etc.)--all areas led, and in 
        many cases, dominated by the commercial world.
         Pressure within DOD budgets on S&T spending and 
        similar pressures on Independent Research and Development 
        spending by the aerospace and defense companies.
         The explosion of technology developments and products 
        outside the United States, especially in regions such as Asia. 
        As a result, technologies that are important to military 
        capabilities are often available to anyone with ``deep 
        pockets.''

    DOD and its traditional suppliers, have difficulty accessing these 
robust external sources of advanced technology for various reasons. 
Some are self-imposed, such as:

         Slow, complicated acquisition processes and complex 
        and onerous rules and requirements, which deter commercial 
        companies.
         A lengthy, convoluted and opaque requirements process 
        that make it difficult for industry to understand future 
        defense needs.
         `Buy America' regulations and other barriers that 
        often exclude foreign suppliers.
         Export Controls (both here and abroad) designed to 
        limit the spread of defense-critical technology that can limit 
        access to the United States as well as foreign technology.
         Other impediments are more traditional, ranging from 
        inadequate knowledge of what is available in the wider 
        industrial base (here and abroad) and the ``not invented here'' 
        syndrome.

    DOD is concerned by these issues and is addressing them. But 
support from Congress for the needed funding and legislative action 
will also be important.
    Future Challenges to the Defense Industrial Base
    Looking to the decade ahead and beyond, it is clear that DOD and 
its industrial partners will face escalating challenges, in part due 
the likely downward trajectory of DOD spending. This has implications 
for both DOD's access to needed industrial capabilities and the makeup 
of its traditional supplier base. It will also make it more difficult 
to maintain effective competition as consolidation continues and some 
firms narrow their focus to businesses where they have comparative 
advantages.
    DOD's challenges are already obvious:

         Tough decisions to cancel existing weapons programs 
        that may not be affordable in the future.
         Difficult investment choices between traditional 
        platforms and next generation weapons and capabilities.
         Finding adequate funding for investments given the 
        growing spending on military personnel (pay and benefits, 
        retirement programs, and in particular, the rapid rise of 
        healthcare spending).
         Trying to maintain competition when there are only a 
        few (maybe two) providers.

    The traditional Defense contractors will also face challenging 
times exacerbated by reduced defense budgets. Given the concentration 
of the Industrial Base today, we are unlikely to see the mega mergers 
and acquisitions we saw in the 1990s. Rather, companies will likely 
respond in other ways:

         Smaller--often niche--acquisitions to provide new 
        capabilities, contract vehicles and incremental revenue.
         Diversification efforts, which are already in evidence 
        as companies try to penetrate Government markets that are seen 
        as growing or at least stable (e.g. intelligence, CYBER, and 
        Homeland Security). Some limited efforts to expand into 
        commercial markets can also be expected.
         Increased emphasis on international sales, despite the 
        constraints of export controls (e.g. the recent failed effort 
        to sell combat aircraft to India).
         Selling or spinning out declining or less profitable 
        business areas, leaving a more focused and stable base 
        business.

    If the investment budget cuts are deep (as in the 1990s), more 
draconian actions will be needed, that could include mergers of large 
primes, or sectors of two companies (e.g. shipbuilders). This may prove 
unavoidable, but will further reduce competition. The smaller players 
will have other challenges. Do they sell, refocus on commercial 
markets, or leave the defense sector entirely? This is already underway 
as numerous small firms have been acquired by larger companies or, in 
some cases, gone private with the help of private equity firms.
    All segments of the Defense Industrial Base will find it harder to 
attract and retain a capable workforce in a period of decline and 
contraction. I will leave this discussion to the expert, Norm 
Augustine.
                          the services sector
    My remarks above have largely focused on the aerospace and defense 
hardware sector. The Services Sector--roughly half of Defense contract 
dollars--will also face a range of challenges, some different from 
those facing manufacturing companies. Services cover a broad range of 
offerings from complex software and Command, Control, Communications, 
Computers, Intelligence, Surveillance and Reconnaissance (C\4\ISR) 
technology to routine actions to maintain bases and facilities. It is 
highly competitive with 70 percent of the dollar value delivered via 
task order contracts (indefinite delivery/indefinite quantity, 
Government-wide Acquisition contract).
    The Services Sector may be impacted less, given that much of their 
funding is from Operation and Management accounts. They also have 
capabilities that have readier applications in the commercial world 
(e.g. CYBER or IT). Also, they can quickly cut costs to maintain 
profits and cash flow, since they are not burdened by extensive 
facilities and infrastructures. But, they will be undoubtedly impacted 
despite these advantages. I can expand on the Services Sector in the 
discussion period if you have questions.
              how should dod respond to these challenges?
    Determining how to best respond to these challenges will not be 
easy as the industrial base is large, complex, and multi-faceted. A 
variety of selected policies and programs will be needed. The 
appropriate proper actions for the hardware programs will depend on:

         The industry segment
         The competitive landscape
         The access needed to technology and products

    The actions that will be required include:

         Preserving competition for key platforms whenever 
        possible, even though it will be costly in the short term. At a 
        minimum, preserving competition among the major system 
        providers is important (engines, fire control systems, radars, 
        etc.)
         Focused investments to encourage competition in new 
        areas critical to combat effectiveness such as C\4\ISR or 
        innovative capabilities with great potential, such as unmanned 
        vehicles of all types.
         Use of tools such as Broad Area Announcements and 
        prototyping to provide future options and maintain critical 
        skills in the Industrial Base.

    A major strength of the Services Sector is its robust competitive 
nature, its agility and the continued emergence of new, creative 
companies. This competitive landscape needs to be maintained. Properly 
administered task order contract vehicles, careful application of OCI 
(conflict) rules, and actions to enable nontraditional suppliers to 
compete will all help.
    Conversely, DOD must avoid letting excessive competition damage 
quality of the services, which can result from an undue focus on low 
price. Best value must be the key mantra in most cases, especially 
those involving technology and specialized expertise.
    Finally, the health of the Defense Industrial Base must be 
regularly monitored. This includes its financial condition, access to 
technology and the state of its human capital. We must not recreate the 
Defense industrial landscape of the 1990s.
                          concluding comments
    I compliment the committee for addressing these issues. I know DOD 
is addressing them as well and your interest and support will help the 
Department cope with the industrial base challenges that lie ahead.
    I look forward to responding to your questions and comments.

    Senator Hagan. Let me just say thank you to all of you for 
agreeing to come and share your information and background and 
testimony with this committee. I think it's extremely helpful.
    I will go ahead and start with some questions. In last 
year's QDR it called for a consistent, realistic, and long-term 
strategy for shaping the structure and capabilities of the 
defense technology and industrial base. Given all of your prior 
DOD experience, do you feel that DOD has a long-term strategy 
that's executable and will it be able to account for the rapid 
evolution of commercial technology and the unique requirements 
of ongoing conflicts?
    Do you want to start, Mr. Augustine?
    Mr. Augustine. I'd be happy to. I think the first thing I 
would note is that the defense industry to a large degree is 
really a microcosm of U.S. industry as a whole, and U.S. 
industry as a whole, I believe, is greatly threatened by 
international competition today. We simply aren't very 
competitive and we're becoming less so. DOD has the added 
complication I've already mentioned of needing security 
clearances for its industrial base in many instances.
    Does DOD have a long-term strategy for dealing with this? I 
would have to say I don't believe it does today. On the other 
hand, I have to give DOD credit that there's probably more 
attention being given to the defense industrial base today than 
there has been in a long time, and I think that's important.
    There are many things that could be done in terms of a 
strategy. I would just cite one thing that stands out in my 
mind. Perhaps the most valuable asset that the industrial firms 
have are their advanced design teams. Our factories are 
valuable and so on, but the really irreplaceable thing is 
experienced advanced design teams. How do you maintain those, 
for example, when you develop one new airplane every 3 decades? 
In my judgment the only way you can do that is to adopt an 
approach promoted by Dave Packard, my former boss, when I was 
in the Pentagon. That is to prototype systems.
    So to me the keystone of a strategy, at least one of the 
keystones, should be to adopt--to reinvigorate the prototyping 
program, the intention would not be to deploy the systems, but 
simply to maintain the state-of-the-art, advance the state-of-
the-art, maintain the knowledge base, and the people base. It 
doesn't cost that much to do that. The payoff is enormous.
    Senator Hagan. Dr. Gansler.
    Dr. Gansler. Let me just pick up on Norm's last point, 
because I think it's really important to do the prototyping, 
but I think it's even more important to do it competitively, so 
multiple sourcing. I think that was as well what Dave Packard 
was really pushing.
    I would argue that right now your question about rapid 
acquisition--I did a Defense Science Board study recently on 
rapid response to combatant commander's needs. We don't have a 
rapid responding system at all. Beginning with the requirements 
process and then the procurement process and all the gates that 
you have to go through and the inflexibility of that system for 
rapid response--we do need to have a change in that process in 
terms of everything, including the budget process, so there 
would have to be some dollars available to rapidly respond as 
well. But then you need an ability to do the process much more 
rapidly.
    We can do it. We've done it sometimes on some programs, but 
it's always a special case. In fact, in that hearing when we 
did the Defense Science Board we were kind of surprised to see 
every time someone would come up and talk about something that 
they had done rapidly, they started off by saying: We had to go 
around the system. You shouldn't have to do that. Fortunately, 
they had supplemental funding, and without supplemental funding 
they would not have been able to do that.
    An area that I am very worried about, as I said in my 
remarks earlier, is research. If we start trying to save money, 
we put off the future for the present, and that's not going to 
be the smart move to make. It's eating our seed corn, if you 
will. We can't afford to do that.
    Then lastly, I think, relative to the vision, having a 
vision statement that you don't implement is not effective. 
They give lots of speeches about trying to have competitive 
sources, at least two sources, in the United States and then, 
as Senator Portman mentioned, for example on the second engine 
for the JSF, where we have a strong history with the great 
engine war for the F-15 and F-16, that both engine suppliers 
got higher performance, higher reliability, lower cost. The Air 
Force in that smaller program said they saved over $4 billion. 
This is a much larger program. Why aren't we doing it?
    Well, because this year we don't have the money and this 
program we know how to manage better than we have all the other 
ones in the past, we won't have any changes, and all these 
things that I think are not credible.
    So we have to implement this vision, not just talk about it 
in speeches.
    Mr. Odeen. Let me just add one other point related to that. 
The S&T spending, SBIR programs, are all important, but the 
most critical thing for DOD is to be able to reach out to that 
very large commercial technology sector, both in the United 
States and even overseas. I believe that has to be a key 
element of any strategy.
    We're simply not going to be able to spend enough on S&T 
within the companies. There are IR&D programs that the Pentagon 
is spending on its labs. You have to reach out to the broader 
technology base of the country, which is huge in comparison to 
the amount of money spent on technology within DOD or by its 
suppliers.
    So I think that this must be a key element of the strategy, 
reaching out to industry, finding ways to simplify the 
acquisition process, get rid of these barriers that keep 
companies from wanting to play. I think this is important and 
should be a key part of the strategy.
    Dr. Gansler. If you needed some examples of what he was 
just saying, Boeing just recently had to pay $15 million for a 
commercial transport that had a part that happened to also be 
in a missile. It was a commercial part and therefore they had 
to follow export controls for that little electronic part that 
was inside of its avionics in a commercial aircraft. That's 
kind of silly, isn't it?
    In other cases where we were ahead commercially.
    Senator Hagan. How was that determined, investigated? How 
did that come up?
    Dr. Gansler. The ITAR list of parts. If a system is in a 
defense product, as a commercial item, if it's on that list of 
controlled items it automatically has to then get permission 
for export control.
    Senator Hagan. So they had--they paid the penalty, but 
continued?
    Dr. Gansler. No. Then they had to start getting export 
control permission for that electronic part.
    Mr. Odeen. They probably self-reported it.
    Dr. Gansler. Yes, they self-reported, in terms of how they 
found out about it. But it's just an absurd example, it seems 
to me, of overdoing the controls.
    Another example that I've heard of would be the infrared 
area, where we used to own the night and we were way ahead. But 
our companies couldn't export infrared and so now the French 
are taking over the world market. They can export around the 
world. We have to be sensible about the fact that the world is 
now globalized. Technology is globalized, industry is 
globalized, labor is globalized, but we're trying to protect, 
and that's hurting us.
    Senator Hagan. Do you know the last time we updated these 
laws?
    Dr. Gansler. Yes. We update them all the time. We add more 
things to them. The problem is we haven't removed things from 
them.
    Senator Hagan. Dr. Gansler, in your written testimony, and 
you also mentioned it, you talked about low-bid, technically 
acceptable. Can you tell me a little bit of background? I guess 
I'm surprised, depending on what it is we're talking about.
    Dr. Gansler. We're talking about either services or 
products. I mean, I certainly know you wouldn't get your heart 
surgeon on the basis of lowest hourly rate and someone with a 
degree.
    Senator Hagan. Well, I think about all the high-tech 
instruments that we have to have to conduct the mission we just 
saw.
    Dr. Gansler. Exactly.
    Senator Hagan. I don't think I'd want somebody with just a 
technically acceptable item.
    Dr. Gansler. No. That's, the problem is that people say, 
well, gee, you could save money by taking the low bid, even 
if--I mean, how would you buy an engineer at the lowest hourly 
rate? If they happen to have a degree from the back of a 
matchbox and their temperature's 98.6, they're qualified as an 
engineer. That's not the way you should be buying services, nor 
is it the way you should be buying products.
    Increasingly there's been a shift towards that throughout 
the DOD and the intelligence community, by the way. So I think 
we have to get back to recognizing that you pay a little more 
and you get a lot more, it's worth it.
    Senator Hagan. Last year's Defense Business Board study on 
the defense industrial base addressed the specific issue of the 
need for the defense industrial base to continue to have access 
to crucial technology, expertise, and capabilities, what we're 
talking about. Mr. Odeen, as the leader of that study, how well 
do you think DOD is taking--is doing in taking the steps that 
were recommended to ensure its access to technology in a 
globalized world?
    Mr. Odeen. It's a little hard for me to say. They were 
receptive to the report. We briefed many of the senior people 
on it. We had very good exchanges. They understand the need to 
do that. But I'm not sure exactly how far they've gone on that. 
Perhaps someone from DOD could answer that. It's only been a 
year and a half, which seems like a long time, but that's not a 
long time for DOD to respond in terms of changing policies and 
regulations.
    But they certainly ``got it'' based on my conversations, 
and hopefully they will move down that path in the months and 
years ahead.
    Senator Hagan. Thank you for your participation in that, 
too.
    Dr. Gansler. There are still problems in that area. For 
example, Ronald Reagan, not an ultra-liberal, said that 
fundamental research should be globalized; it should be 
independent of what countries the researchers come from or we 
can share cooperatively, we can publish freely. But a lot of 
the policies in recent years have said United States only 
people and, as Norm pointed out, most of the Ph.D.s today 
coming out of our universities are not United States and 
therefore can't take part in this research.
    I'm sure you know that most of the people founding Silicon 
Valley were not U.S. citizens. Enrico Fermi was not a U.S. 
citizen; he worked on the Manhattan Project. We can take 
advantage of these foreign students and scholars.
    Senator Hagan. I agree. We were talking about that earlier. 
Actually, my next question has to do with that, the fact that 
we heard in the first panel some of DOD's initiatives and 
programs to attract and retain a new generation of scientists 
and engineers, but not only in DOD, but also for the broader 
defense industrial base.
    Dr. Gansler, particularly in your statement you raised the 
concept that we talked about of stapling the green card to a 
degree of a graduating student in S&T who has had an 
appropriate security check. In your wide-ranging interactions 
with others on this topic, what do you see as the way ahead as 
far as implementing this proposal and what are some of the 
impediments or concerns that would have to be addressed for 
successful implementation?
    Dr. Gansler. Right now, by law I believe they're required 
to sign that they'll go home. That seems to me a silly law. I 
would not do that. We're a nation of immigrants. Why would you 
force them to sign that they'll go home when they're finished? 
Because they're here on a temporary visa and the concept behind 
the temporary visa is that they will agree to go back.
    Well, when they get their Ph.D. maybe you do staple a green 
card with it, and many of those could easily be encouraged to 
go into the defense sector. We actually have 3 percent of the 
military as non-U.S. citizens. We let them get shot at and 
killed. Why won't we let them go into our defense industry or 
why won't we let them go into the government? There's some 
conflict there.
    Mr. Odeen. It's more than just defense industry. They can 
populate the broader industrial base. This is good for the 
United States and has various feedbacks to DOD. If there are 
issues, they don't all have to go to work for a company like 
Lockheed Martin. They can go work for other companies that will 
be providing technology and products that will help the country 
more broadly, but can respond to defense needs as well. We 
should clearly encourage them to stay.
    Dr. Gansler. But at the lower tiers we now have again a law 
that says that the prime contractor must pass on all the 
requirements that they have to the lower tiers. So the point 
that Phil is talking about about the lower tiers, if they hire 
non-U.S. citizens they're again not following the directives 
that came from the prime down through law to the lower tiers. 
We should perhaps not require that to be passed on that it must 
be a U.S. citizen working on the widgets.
    Mr. Augustine. I'd like to touch on that myself. There's a 
real dilemma here. The percentage of bachelor's degrees that 
are awarded in the STEM fields are about 4.4 percent of the 
total degrees awarded. So about 95 percent of our people are 
not studying in the STEM fields in college. That's one of the 
lowest ratios in any industrialized country, or any developing 
country at this point.
    You go from there to the fact that when I graduated from 
college, and maybe my colleagues on the panel, if you wanted to 
work at the leading edge of the state-of-the-art, the place to 
work was either in the defense industry or the space program. 
Today that's not the case. There are a lot of exciting things 
in biotechnology and nanotechnology and information systems and 
so on.
    There are certainly exciting things in the defense 
industry, as well, but the point is that there are options. 
There are a lot more options. When the students look at the 
bureaucracy of the defense sector, it's very tempting to them 
to go elsewhere, and I'm afraid that's been happening.
    One of the recommendations that was made in ``The Gathering 
Storm'' study was that when a student graduates with a Ph.D. in 
one of the sciences or engineering, hard sciences or 
engineering, that they be given 1 year to gain a ``permanent'' 
job, and when they do gain that job that they then be given a 
green card and an expedited process to become a citizen should 
they want to do so. I don't think that's been acted on, but I 
believe it would be a useful thing to do.
    Mr. Odeen. Could I add one more comment about the STEM 
issue?
    Senator Hagan. Certainly.
    Mr. Odeen. The defense industry is very concerned about 
this longer term. I was on the Northrop Grumman board for a 
number of years, and they now give 90 percent of their 
charitable contributions, which are substantial, to STEM-type 
programs. The charity golf outings are gone, the symphony 
orchestras and operas are getting hit, because they're putting 
their money against STEM programs, 90 percent of it, because 
they're so concerned about the long-term implications it has 
for their business.
    Dr. Gansler. If I could add to Norm's point about 
citizenship, I can give you a specific example of that, too. A 
leading nanotechnology expert in the United States came to me 
and said: I applied three times for citizenship, I had my 
fingerprints taken, and because it mentions in nanotechnology 
something about the word ``nuclear'' and he was an Iranian 
citizen, so they kept rejecting it.
    I just got so fed up with it, I took his resume to 
Secretary Gates and said: ``Bob, you have to get him 
approval,'' and he did. But you can't normally do that. So we 
have to make it a lot easier for people to get citizenship who 
want to be citizens.
    He said to me: I'm going to have to go to Canada; I just 
can't get citizenship here. That's inexcusable.
    Senator Hagan. Let me move to the manufacturing 
technologies. In the written statement, the DOD mentioned the 
need to continue efforts to strengthen the focus on 
manufacturing process development. Mr. Augustine, in your 
statement you also mentioned the need to invest in 
manufacturing process technology. Do you feel that DOD is 
investing at an adequate level and in the right areas, and if 
not how can they improve?
    Mr. Augustine. I really don't believe that DOD is investing 
adequately. They do invest in product technology, as 
distinguished from process technology. The areas they tend to 
invest in, though, are probably not the ones that we're going 
to need in the future. I think we're going to need highly 
flexible, low-rate manufacturing technology and that really is 
getting very little attention anywhere in this country.
    Senator Hagan. I'm sorry? Say that one more time? Highly 
successful low-rate?
    Mr. Augustine. Low-rate, highly flexible manufacturing 
technology. We have a situation where the bulk of the 
manufacturing technology used to come out of the private 
sector, non-DOD. Today that technology is moving abroad and DOD 
is therefore going to have to pick up a bigger load for this 
low-rate, highly flexible effort of the type used for defense.
    Senator Hagan. Dr. Gansler, you led a Defense Science Board 
study on DOD's manufacturing technology program in 2006. Do you 
feel that DOD is following the recommendations of that study, 
and if not what do you think are some of the impediments to 
pursuing those recommendations?
    Dr. Gansler. I would strongly support the points that Norm 
just made, because in terms of the focus on manufacturing 
technology, manufacturing processes, the focus needs to really 
be on low-cost, small quantity, low rate. It's not just being 
able to produce at a low rate, but it's efficiently producing 
at a low rate. Usually people say, well, gee, if you just let 
me build another million of them I can lower the cost. But we 
don't have the money to do that, and on the other hand we ought 
to be able to build at lower rates more efficiently with modern 
flexible manufacturing technologies. The focus in that area it 
seems to me is where I would place the emphasis.
    I think there isn't a full recognition, even though there's 
lots of speeches being made about the importance of low cost. I 
think we have to incorporate into those speeches the importance 
of low-cost manufacturing processes, and a focus on research in 
that area I think is critical.
    Senator Hagan. DOD is taking efforts to revitalize 
industry's IR&D activities and resurrect a more meaningful 
interaction with industry on communicating future R&D needs. 
What do you feel that DOD's efforts in this area--are they 
being effective, and if not what other actions would you 
recommend?
    Mr. Odeen. Well, let me just make one comment. IR&D is 
obviously an expense. It is reimbursed by the government, but 
it goes into your overhead rate and therefore it competes with 
other things. In particular, bid and proposal money and IR&D 
used to be in the same category. I think they're now separating 
them again. But in a highly competitive kind of situation, the 
mere fact that you'll get reimbursed for it doesn't help if it 
drives up the overall cost of your product.
    So there's a tough dilemma in the intensely competitive 
world we're in right now. We need to find ways to permit 
companies to spend reasonable amounts of money on that. DOD 
also needs to reach out, and I think they're beginning to do 
that, reach out more to take advantage of company technology. 
It often is not actively accessed by the Services to see how 
they can use it. So the companies invest in on technology the 
next big weapons competition, as opposed to trying to do more 
basic, fundamental technology research that could broadly 
benefit DOD.
    Dr. Gansler. We found that there were two shifts taking 
place in this IR&D. One was forgetting that the ``I'' stands 
for ``independent,'' and the government was trying to suggest 
to the companies where they should spend their money; then 
second, that the companies were shifting a lot of what had been 
IR&D into the bid and proposal activities because they had been 
combined. So separating them out is really important.
    Mr. Odeen. I was going to say what Jacques just did, that 
the ``I'' stands for independent. You have a double-edged sword 
when the government says, we're going to get involved and help 
you. The government, well-meaning, believes that if they tell 
industry what it is they're interested in that industry will 
spend its money more effectively than if it doesn't know what 
the DOD wants.
    The problem is that when you implement that, the government 
becomes very invasive and starts telling you what it is you 
should be working on, which is contrary to the whole idea of 
IR&D.
    Senator Hagan. Let me ask a question about the DOD 
laboratories. Across the Services, the DOD has an impressive 
laboratory enterprise with scores of facilities across the 
country that employ or fund a range of people, from the most 
junior postdoctoral student to Nobel Prize winners. Dr. 
Gansler, given that you were previous Under Secretary for AT&L 
and had oversight of DOD's laboratories, how well is DOD 
currently managing and utilizing its laboratory enterprise and 
how successful are the interactions between the DOD labs and 
industry and what are some ways to improve these interactions?
    Dr. Gansler. I think one of the main things is trying to 
recognize the directions of changes. One of the tendencies of 
any laboratory, including the DOD labs, is to do incremental 
change to old technology, try to make it a little bit better, 
but not to shift to totally new areas. One of the things that 
made Bell Labs so exciting was that they shifted in some cases 
into totally new semiconductors and things of that sort.
    If you can--so-called disruptive technologies, if they 
could be encouraged in the laboratories, that would be great. 
One of the problems that comes up is that the military have an 
institutional inertia also, so they tell the labs, I want to 
continue to build airplanes with men in them and I want them to 
go faster and higher and so forth, but not encouraging them to, 
say, start doing unmanned systems, for example. That would be 
kind of a disruptive technology, is what I meant by the 
example.
    To the extent that we can get some of the laboratories 
working into these areas that are disruptive, I think we can 
make a bigger impact in the long term.
    Senator Hagan. Should they not be doing that on their own? 
I mean, when you say we should get them----
    Dr. Gansler. Well, the problem is they are funded by DOD. 
That's what we were talking about, the importance of 
independent research from the industry because they're not 
constrained to doing just the incremental stuff. They can do 
the disruptive stuff that gets into a new field, and that's 
what we should be encouraging some of the labs to be doing as 
well.
    Senator Hagan. Do any of the others want to comment on this 
question?
    Mr. Odeen. One comment on the labs. I think the fact that 
they're now being able to attract some better people, that was 
talked about I think by Brett Lambert or one of the speakers 
earlier, is good, because they have had a real problem of an 
aging workforce and great difficulty attracting good people. A 
role they could play is to some degree reaching out to the 
commercial technology industry to look for solutions to the 
issues that they understand their Service faces. They can be an 
interface between the Service and the commercial world because 
they have an understanding of both the Service and its needs 
and also technology. So that might be a role that they do some 
of already, I think, but they could perhaps do more.
    Dr. Gansler. One other area that the labs have had some 
success with and that is cooperative ventures with university 
research. To the extent that that brings in some of these new 
ideas, I think that should be encouraged as well.
    Senator Hagan. We're very interested in technology transfer 
between our universities and corporate and, obviously, defense. 
In your view about this, how well is DOD engaging in technology 
transfer and transition to industry?
    Dr. Gansler. Well, the valley of death, getting over that 
is a really important part of the SBIR program, for example. To 
the extent that we continue to sponsor and help it, that's 
really an important way of doing it. Half of the total 
government's SBIR program, of the $2 billion, about $1 billion 
of that is DOD efforts, and that has been a major support for 
the small business and for new ideas coming in and for more 
rapid transition of ideas to application, to commercialization 
of these ideas, is what's behind the SBIR selections. That's an 
important one that I hope Congress can support.
    Mr. Augustine. I would like to observe what a complex issue 
this really is: the company I used to work for operated several 
research labs. They happened to be Department of Energy labs as 
opposed to DOD labs, but the situation I think is similar. We 
were strongly encouraged to try to transfer technology outside 
the labs. But any technology that transferred into our company 
was viewed as our taking undue advantage of our situation of 
operating the lab. So we built high walls so that no knowledge 
could get out of the lab and into our company. It would be like 
Boeing getting fined $15 million.
    In fact, we had a program where we got a share of the 
profit in startup companies that we helped create. The first 
couple years, we started about 15 companies--I say ``we'' did; 
the people who ran them started them--with the technology that 
the labs we were able to provide. These were independent little 
companies. About ten of them failed and a couple of them did 
so-so and one or two of them hit a home run and we made some 
money on them.
    We got such criticism for taking advantage of our position 
with the government that I remember our chief of advertising 
came in and said: Look, you're killing us; why don't you get 
out of these places? So we said, don't give us a share of these 
businesses any more, we don't want anything to do with the 
profits.
    So here's a case of a really well-meaning rule, but as it 
was applied I think it hurt everybody. I also have a belief 
that the government should do only those things that cannot be 
done well in the private sector. I've traveled 109 countries 
and I have yet to see any system that's better than our free 
enterprise system. I see us moving away from it across the 
board.
    Senator Hagan. So tell me what you want us to--what we 
should be doing?
    Mr. Augustine. I will be very candid here.
    Senator Hagan. Please.
    Mr. Augustine. I think our Congress and our administration 
views a job in the government as more important than in the 
private sector. I've experienced this for many years. This 
isn't a new phenomenon.
    Senator Hagan. Some of us will take issue.
    Mr. Augustine. I'm sorry?
    Senator Hagan. Some of us will take issue with that.
    Mr. Augustine. Yes, I would hope so.
    But I have testified many times where that seemed to be the 
case. I'm not an anarchist, I might add. I spent 10 years with 
the government. When I was with the government and in the 
position I held I could cancel a contract in industry and 
10,000 people would lose their jobs and I'd probably get two 
letters. I can recall trying to close Frankfort Arsenal that at 
the time I don't think had contributed anything since 1776, and 
it took us 4 years and many people even say it may have cost 
the President his job in a close reelection.
    I think the government has to play an important role--and 
that role is to do high-risk, high-payoff, long-term research 
and engineering. When it begins doing other things, I think it 
hurts industry, particularly in a time of declining budgets.
    Senator Hagan. Let me ask about small business. All of you 
have mentioned the importance of small business and the lower 
tier suppliers within the defense industrial base. In your 
view, how can the roles that small businesses play in the 
defense industrial base be strengthened? I know that from our 
small businesses, they create so many jobs throughout our 
country.
    Mr. Augustine. Small businesses do create a lot of jobs. 
They create most of the really new leading edge ideas that are 
so important. About half of the money that is put into the 
prime contractors goes back out to subcontractors, many of 
which are small businesses. They're the ones who know how to 
build the optical coatings or a particular kind of laser or a 
certain kind of chip or a package. That's a technology that's 
only known to those companies in many cases.
    But small businesses don't have deep pockets. Just as when 
the government has a budget problem, it pushes it down onto the 
prime contractors, the prime contractors do exactly the same 
thing to the small companies. The small companies are the ones 
who suffer the most. I think one of the things that has to be 
done is to watch out for those companies that have very key 
technologies, and to create an environment so that new 
companies can start in a way that they can afford to do 
business with the Defense Department.
    Dr. Gansler. One specific thing that you can do is to start 
counting those lower-tier contracts to the small businesses. 
The goal for small business contracts is purely the government 
direct contract, and there are not many small businesses that 
build a fighter plane or a ship or things like that. Yet a 
large share of it and most of the small business participation 
is in the technology area and down at the lower tiers. Perhaps 
maybe even if you raise the percent of the work total that has 
to go to small businesses, but count the lower tiers and 
directly related.
    Now, the other impact on the small businesses are the 
overburdening regulations and legislation that get passed on to 
them downstream from the primes. Again, that's a legislative 
requirement that everything be passed on, and perhaps a way of 
relieving that would be helpful to the small businesses as 
well, so that you could have some flexibility on what you pass 
down to them so that they have more flexibility and rapid 
response capability, the innovation that they could wring out, 
without being burdened by having to have the 12-foot-long 
bookshelf of the Federal Acquisition Regulations and things 
like that, hiring their own lawyers and writing contracts. It 
would be much helpful to them if they could do business in a 
commercial-like fashion at the lower tiers.
    Mr. Augustine. If you would permit me to share a real-world 
story that applies to Jack's comment, some years ago I was 
running our company's astronautics group and one day a box 
showed up in the mail. When I opened it, it had a bunch of 
seals in it that we used on Titan launch vehicles. In it was a 
letter from the president of the company who manufactures the 
seals. He said: We really want to help America. We believe in 
America and want to do everything we can. Here's a 5-year 
supply of seals; will you please go away and leave us alone? 
That carried the message to me of how oppressive we were.
    Senator Hagan. Interesting story. Wow.
    I was hoping we'd have a few others come in, but obviously 
with the vote and some of the other meetings that are going 
on--I think we've had a very good discussion on your 
perspectives, on the challenges and your views of the 
effectiveness of the various strategies, plans, and programs 
that DOD is pursuing to address the challenges facing the 
defense industrial base.
    I want to ask you one closing question, and that is, in 
your view, if you can, what are the top three things that 
Congress can do to help address these challenges we discussed? 
I know that the exports area was certainly one of them, but if 
you have any details on the top three I would be very anxious 
to hear.
    Mr. Augustine. Since my name starts with ``A,'' I'll start 
out. It's hard to narrow the list to three, but one thing would 
be to fund----
    Senator Hagan. We'll certainly take extras, extra written 
testimony.
    Mr. Augustine.--would be to fund a series of competitive 
prototypes. A second thing would be to fix the export laws. The 
way to do that is to build high fences around really important 
things, rather than what we do today, which is to build low 
fences around everything. If you go down the export list, 
you'll be amazed at what's on there: handcuffs, shotguns. 
There's something on there called ``horses at sea.'' Seriously. 
I've never figured out why ``horses at sea'' are on the export 
list, but they're there. So that would be a second action.
    It's hard to narrow down to a third one, but I guess it 
would have to do with people. That would be to find a way to 
encourage U.S. students to study science and engineering and 
encourage foreign students to come here and to stay here.
    Senator Hagan. Dr. Gansler?
    Dr. Gansler. My top three I think would be starting with 
the workforce as being I think essential, and this is--across 
the board, this is in terms of some senior people in the 
government with experience and training and so forth, on the 
military and civilian side, all the way down, because if you 
don't have smart buyers you're in trouble. Even if you had a 
good industry, they can't recognize them. So I'd go all the way 
down to the industry side as well.
    Someone asked a question earlier about how you can get some 
people into the government. I know when Norm and I went in it 
was under something called Public Law 313. That doesn't exist 
any more, but it allowed us to come from senior positions in 
industry into the government for 3, 5 years, and then not have 
to get through that whole civil service system. They could hire 
people.
    You now have provisions under highly qualified experts to 
be able to do that. We should take full advantage of that.
    Senator Hagan. But you're saying we used to have that and 
then we stopped it, and now----
    Dr. Gansler. We had Public Law 313. That was abolished, but 
now you have allowed, for example, 20 people at DARPA for 
highly-qualified experts. I think that could be greatly 
expanded in allowing people coming with industry experience 
into the government. Seeing both sides of the street is really 
important.
    Senator Hagan. I'm glad you brought that up, because I was 
going to ask that.
    Dr. Gansler. Workforce I think is my first one. I think 
globalization is my second one. How does the Nation gain the 
benefits of globalization instead of creating the barriers to 
globalization, which we have been doing? We talked a lot about 
that already.
    My third one is commercialization, being able to bring in 
the technologies, the goods, the services, particularly the 
services. Almost every one of the services, 57 percent of what 
we buy, are in the Yellow Pages. We ought to be able to take 
full advantage of commercial practices, commercial goods, 
commercial services, commercial firms, as part of the broadened 
industrial base, and globalized. It was no question in the 
tanker case that we gained an enormous benefit by allowing a 
foreign competitor to bid against Boeing. Boeing won, but at 
much lower prices than they would have if it wasn't for the 
presence of competition. So opening up the market. It's imports 
as well as exports that have to be addressed in globalization.
    Senator Hagan. How would you defend that against jobs in 
America?
    Dr. Gansler. Just the opposite. Actually, the presence 
today of the foreign firms investing in the United States have 
actually, increased as a result of their money coming in here, 
have increased our exports, our jobs, and our capital 
investments in the United States. When you put in--you know, a 
Finmeccanica comes here, EADS comes here, Thales comes here, 
AIA comes down here--go down the list of all the foreign 
companies that are now investing in the United States and 
helping our exports, bringing technology, creating jobs, and 
bringing high tech technology of their country so that we can 
take full advantage of it. I think it's helping our economic 
and job situation.
    These people who we were talking about earlier with their 
Ph.D.s from schools, they're not replacing the unemployed today 
in America.
    Mr. Odeen. It's hard to add any after those three, but let 
me comment the latter one, the job issue. If you look at the 
Northrop Grumman-EADS tanker bid and the recent EADS bid as 
well, they were going to put a very large presence in the 
southeastern part of the United States and create a lot of 
jobs. I suspect they would have created as many jobs as Boeing 
will with its tanker. So it wasn't really a jobs issue, where 
the jobs were located.
    If you're going to be a major supplier to the U.S. 
marketplace as a foreign company, you're going to build your 
presence here, like BAE Systems has and others have. So you're 
going to bring jobs here and perhaps export from here as well. 
So I don't think it's a jobs issue.
    Second, the workforce issue. Letting there be a free 
exchange or maybe a managed exchange between industry and 
government, going both ways, has great benefits for both 
industry and for the government, and this has been mentioned 
earlier. In about 2001 I took a look at the senior leadership 
of the defense industry, in particular the top 10 or 12 
companies. I think all but one of them were led by a person who 
had had a real experience in DOD at some point in time, like a 
Norm Augustine or Boeing's Frank Shrontz. They all had a time 
in the government to learn how the government operates. You're 
a better supplier if you understand the government, how the 
government works. You also bring a lot of knowledge to the 
government. So those exchanges I think are critical. 
Unfortunately it doesn't happen today.
    Back again to the prototyping idea, I think that's a lot of 
benefit from it. Other ways to encourage fresh ideas? There are 
so-called broad area announcements (BAA) that ask for people to 
come in with creative ideas to solve military capability needs. 
That's another way to draw in ideas, then have bakeoffs or a 
competition. Low level, not costly, but this really brings new 
and fresh technologies to the defense marketplace.
    Senator Hagan. I really do appreciate your time here, the 
fact that you had to wait for the vote. I really do appreciate 
it. But first of all, I appreciate the service that you've 
given and your testimony today. I do want to say that we will 
keep the hearing record open for 3 days to allow other members 
to submit statements and-or questions for the record.
    Thank you, we will certainly take note of all of your great 
ideas and hopefully take action on them.
    This subcommittee is adjourned.
    [Questions for the record with answers supplied follow:]
                Questions Submitted by Senator Kay Hagan
               long-term defense industrial base strategy
    1. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, the most recent Quadrennial Defense Review (QDR), released 
early last year, addressed the need for strengthening the Defense 
Industrial Base (DIB). Specifically, it said, ``America's security and 
prosperity are increasingly linked with the health of our technology 
and industrial bases. In order to maintain our strategic advantage well 
into the future, the Department of Defense (DOD) requires a consistent, 
realistic, and long-term strategy for shaping the structure and 
capabilities of the defense technology and industrial bases--a strategy 
that better accounts for the rapid evolution of commercial technology, 
as well as the unique requirements of ongoing conflicts.'' Is DOD 
developing an industrial base strategy that will be published?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The Department 
recognizes the DIB is more global, commercial, and financially complex 
than ever before, however in general the Department believes that 
market forces should shape the industrial base.
    The Department regularly addresses specific industrial base 
concerns within programs and services to determine if intervention in 
the market is warranted. The expectation is that there may be rare 
cases when the Department would intervene to preserve competition or to 
ensure that sources for key products are maintained, but these 
interventions would be on a case by case basis. The Department has also 
embarked on a more comprehensive sector-by-sector, tier-by-tier (S2T2) 
analysis of the industrial base, which will help inform future 
programmatic decisions and allow for the continued monitoring of the 
health of the industrial base. A summary of the S2T2 analysis will be 
included in the annual industrial capabilities report submitted to 
Congress pursuant to 10 U.S.C. 2504.

    2. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, what budget items, if any, in the fiscal year 2012 President's 
budget request are directly related to the development of this 
strategy?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. A number of defense 
accounts are focused on supporting innovation and improvements in 
industrial capabilities. The Defense-wide Manufacturing Science & 
Technology line is currently funded at $18.9 million in fiscal year 
2011 and at $17.9 million for fiscal year 2012. Additional Service and 
Agency Manufacturing Technology programs are funded at a total of 
$189.4 million in fiscal year 2011 and $193.7 million in fiscal year 
2012. This brings total funding for Manufacturing Technology programs 
to $208.3 million for fiscal year 2011 and $211.6 million for fiscal 
year 2012. Furthermore, the Defense Advanced Research Projects Agency 
(DARPA) has a focus on disruptive manufacturing. DARPA is budgeted to 
invest $54.4 million in fiscal year 2011 and $91.5 million in fiscal 
year 2012 for manufacturing initiatives. Combined with the 
Manufacturing Technology budgets, these research and development 
investments total $243.8 million in fiscal year 2011 and $303.1 million 
in fiscal year 2012.
    Defense Production Act (DPA) Title III activities are funded 
through the ``DPA Fund.'' Under Executive Order 12919, the Secretary of 
Defense is designated the DPA Fund manager. The Title III Program, 
working with other Federal departments and agencies, has initiated a 
number of large-scale actions to create or expand domestic production 
capabilities for essential materials and technologies, including 
radiation-hardened electronics; lithium ion batteries; Vacuum Induction 
Melted/Vacuum Arc Remelted specialty steel; beryllium production; 
renewable energy sources; satellite communications transceivers for 
warfighter communications; and advanced electronic materials, including 
silicon carbide and gallium nitride for next generation radars and 
electronic warfare capabilities, to name a few.
    Additionally, to enhance the efficiency and effectiveness of long-
term DIB strategy, the Department has funded a S2T2 assessment of the 
industrial base as a component of the Department's study budget. This 
project is a multi-pronged effort to collect industrial base data to 
inform acquisition strategy and industrial base policy decisions.

                    recruiting and retention efforts
    3. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, how is DOD measuring the effectiveness of its Science, 
Technology, Engineering, and Mathematics (STEM) education, recruiting, 
and retention efforts?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The DOD has a vision of 
inspiring, developing, and attracting diverse and world-class STEM 
talent to meet national defense needs. The DOD-wide STEM Education and 
Outreach Strategic Plan builds on and coordinates existing evaluation 
and assessment efforts for the Department.
    At the post-secondary level, for each of these major programs, we 
measure DOD effectiveness using a mixture of qualitative and 
quantitative tools. The Department has several major thrusts, such as 
Science, Mathematics, and Research for Transformation (SMART), the 
National Defense Science and Engineering Graduate (NDSEG) Fellowship 
Program, and the Information Assurance Scholarship Program (IASP). 
Metrics and approaches include tracking scholarship and fellowship 
recipients who transition into the DOD STEM workforce, the number of 
current employees who participate in certain STEM degree completion 
programs, the geographic reach of efforts as represented by the 
diversity of applicants, and post-intervention feedback received from 
participants. To date, nearly 500 undergraduate to doctoral graduates 
from the SMART program and 240 from the IASP have transitioned into the 
DOD workforce.
    At the K-12 level, individual STEM education efforts occur 
throughout the United States and are managed both locally and centrally 
by the DOD components. However, metrics for the effectiveness are 
imprecise.

    4. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, could the current Military Accessions Vital to the National 
Interest (MAVNI) program that targets non-U.S. citizens with critical 
foreign language and medical skills be applied to STEM-related fields 
and for DOD civilians?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. Section 504b, title 10, 
U.S.C., allows the Secretary of a Military Department to enlist other 
than U.S. citizens or legal permanent residents when such enlistment is 
vital to the National interest. The MAVNI Pilot Program used this 
authority to provide a unique opportunity to fill some of our most 
critical readiness needs, specifically with health care professionals 
and those who possess particularly important foreign language and 
cultural skills. MAVNI is statutorily limited to enlistment into the 
military and has no counterpart for civilian hiring. We are not aware 
of any STEM-related critical shortages in the military force structure, 
particularly or entry-level requirements.
    Although the current MAVNI Program is not directly applicable for 
DOD civilians, it could be used as a starting point for analysis into 
the possibility of designing a similar program for civilian foreign 
students pursuing degrees in STEM-related fields at colleges and 
universities in the United States. The analysis would need to address 
Appropriations Act constraints, Immigration Law, personnel security 
requirements, and Office of Personnel Management non-citizen hiring 
regulations.

    5. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, what would be specifically necessary, as some have suggested, 
to staple a green card or certificate of citizenship to the doctoral 
diploma of a graduating non-U.S. citizen who has studied in a field 
that is of importance from a national security perspective, has been 
appropriately cleared, and is willing to commit to a certain period of 
employment in the defense industrial sector or the DOD?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. Providing a Green Card 
or Naturalization certificate to such a doctoral degree recipient, as 
posited in your question, would require changes to the Immigration and 
Naturalization Act of 1952, P.L. No. 82-414, and Title 8 of the U.S. 
Code. Naturalization would immediately qualify the recipient for 
employment with DOD.
    However, under Executive Order 11935, only United States citizens 
and nationals (i.e., certain Pacific Islanders) may compete for 
competitive service positions. Federal agencies (not just DOD) are 
permitted to hire Green Card-holding non-citizens only when there are 
no qualified citizens available. A non-citizen may only be given an 
excepted appointment and may not be promoted or reassigned to another 
position in the competitive service, except in situations where a 
qualified citizen is not available. The non-citizen may be hired into 
the competitive service only if permitted by the appropriations act and 
immigration law, as well as any relevant Executive Orders or other 
regulations.

                        industrial base analysis
    6. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, when will the initial S2T2 industrial base analysis be 
completed to a sufficient level to be shared with Congress?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The S2T2 effort is a 
process to expand the scope of the Department's industrial base 
assessments beyond traditional programmatic boundaries and to create a 
database on industry for use as inputs to many decisionmaking processes 
across the Department. S2T2 is not a ``study'' in the traditional 
sense. It draws from existing and ongoing work across the Department, 
the results of which the Services and program offices already share 
with Congress in various formats. S2T2 matches those ongoing efforts 
with a holistic Office of the Secretary of Defense-level look at the 
industrial base that will gather new data. Much of the data in the S2T2 
effort will be company proprietary--data that will be very helpful for 
informing some of the Department's internal decisions--and must be 
carefully protected. We will need to determine the extent to which the 
final S2T2 analysis can be shared when we complete each analysis and 
ascertain the extent to which the included data is releasable.
    The initial S2T2 effort will not be comprehensive but is based on a 
sample of companies and datasets. The Department will continue to 
refine and extend the data over time. From the initial phase, we expect 
actionable implications, and the Department will include such results, 
as appropriate, in the President's budget proposals in future years. 
Results from S2T2 work will also be included in the annual industrial 
capabilities report submitted to Congress pursuant to 10 U.S.C. 2504.

                    manufacturing technology program
    7. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, in 2006, a Defense Science Board (DSB) panel published a 
report titled: ``The Manufacturing Technology Program--a Key to 
Affordably Equipping the Future Force''. This report recommended that 
DOD's manufacturing technology program grow its investment level to 1 
percent of the overall Research, Development, Test and Evaluation 
(RDT&E) budget. The fiscal year 2012 budget requested about $200 
million for manufacturing technology--which is only about a third of a 
percent of the RDT&E budget. Should the 1 percent level be a funding 
target?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The Department responded 
to the 2006 DSB report, which was a seminal study of the Manufacturing 
Technology program, by creating and funding a Defense-wide 
Manufacturing Science & Technology line in 2008. The line is currently 
funded at $18.916 million in fiscal year 2011 and at $17.888 million 
for fiscal year 2012.
    The additional Service and Agency Manufacturing Technology programs 
are funded at a total of $189.4 million in fiscal year 2011 and $193.7 
million in fiscal year 2012. This brings total funding for 
Manufacturing Technology programs to $208.3 million for fiscal year 
2011 and $211.6 million for fiscal year 2012.
    The report also recommended DARPA have a focus on disruptive 
manufacturing. DARPA is budgeted to invest $54.4 million in fiscal year 
2011 and $91.5 million in fiscal year 2012 for manufacturing 
initiatives. These include three programs known as META, the Fast 
Adaptable Next-Generation Ground Combat Vehicle, and Open 
Manufacturing. Combined with the Manufacturing Technology budgets, 
these research and development (R&D) investments total $243.8 million 
in fiscal year 2011 and $303.1 million in fiscal year 2012. Such 
increases demonstrate the Department's commitment to these priorities, 
particularly in the current constrained fiscal environment. The 
recommendation made in 2006 that 1 percent of the RDT&E budget go to 
manufacturing and technology arose in a much different fiscal 
environment than exists today.
    Additionally, the S2T2 analysis referenced previously includes 
assessment of industrial and technological capabilities resident in 
manufacturing sectors. The output of this activity will provide some 
insights for the development of future-year defense budgets, including 
manufacturing-related programs. The Department does not believe that an 
arbitrary spending target for manufacturing technology is needed or 
appropriate.

                  independent research and development
    8. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, Under Secretary of Defense, Ashton B. Carter, has stated that 
he wants DOD to reinvigorate industry's Independent Research and 
Development (IR&D) efforts and increase the interactions and insights 
between DOD and industry. What is DOD specifically doing to revitalize 
industrial IR&D?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. DOD reimburses IR&D 
expenses as allowable indirect costs for approximately 1,200 firms in 
the DIB. The DOD IR&D program is one of the Department's key sources 
for technology innovation. In the mid-1990s, the law governing IR&D 
oversight was changed to provide contractors more autonomy in their 
choice of IR&D projects, which effectively eliminated DOD oversight of 
a contractor's IR&D projects and investment objectives. As a result of 
this change, the Department's science and technology and defense 
acquisition program managers lost insight into IR&D projects planned 
and underway and thus lost opportunities to leverage the DIB's IR&D 
efforts in DOD programs. The change also resulted in a loss of 
information relevant to the DIB's overall IR&D investment trends and 
technology thrusts. The net effect is the Department does not have 
access to the information it needs to enact policies relevant to the 
IR&D program that will maximize the benefit the Department and the DIB 
can derive from the DIB's IR&D efforts.
    The Department is launching two initiatives to open up new channels 
of communication with industry. The Department believes the 
initiatives, when combined, will provide opportunities to better 
leverage the innovation in the DIB's IR&D efforts for DOD programs.
    The two initiatives are:

    1.  Collect IR&D project data; store it in a centrally located and 
protected data base accessible to government science and technology and 
acquisition staff.
    2.  Request annual IR&D strategic plans that describe a firm's 
overall IR&D strategic investment objectives, trends, and technical 
thrusts.

    9. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, are there any legislative actions that might need to be taken 
to assist these efforts?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. DOD recommends no 
additional legislation.

                      access to foreign technology
    10. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, last year, the Defense Business Board's Task Group on 
Assessing the Defense Industrial Base issued a report that, among a 
number of recommendations, stressed the importance of DOD retaining 
access to critical technologies in the DIB. What is the impact of a 
budget reduction in fiscal year 2012 of about one third to the Foreign 
Comparative Testing (FCT) program and our ability to search and analyze 
technologies available globally?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. FCT is only one of 
several programs in our portfolio that facilitates access to 
technologies from traditional and non-traditional industrial base 
suppliers. Although FCT is one of the few programs focused specifically 
on accessing and evaluating technology from our foreign partners, it is 
not the only one. All of our technology investment programs, and many 
of our acquisition programs, can reach out across the global market, 
and have done so.
    For instance, under The Technology Cooperation Program, we 
established an action group comprising the United States, Canada, 
United Kindgom and Australia to coordinate on Technology Watch/Horizon 
Scan programs--those programs that look for emerging technologies. 
Though not specifically focused on global reach, we do have mechanisms 
within the international agreements process that leverage these 
technologies. FCT is one of several value-added programs we had to 
reduce funds in our fiscal year 2012 budget request in order to support 
the Secretary's Defense Efficiency-Baseline Review initiative. The 
Secretary's reform agenda required a zero-based review of all programs, 
aligning the fiscal year 2012 resources with the most critical 
priorities and eliminating or reducing funds for lower-priority 
functions. We do plan to revisit the decision in future-year 
deliberations, and adjust funding thresholds among our various 
technology programs, as needed, to support ongoing operations.

                   technology transfer and transition
    11. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, in the National Defense Authorization Act (NDAA) for Fiscal 
Year 2009, Congress asked DOD for a report on its broad technology 
transfer and transition activities. Two years later, this report has 
not yet been delivered. When is DOD planning on completing and 
delivering this report to Congress?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The Department is aware 
of the reporting requirement and is updating the report to reflect 
current activities for technology transfer and transition. The revised 
report is in coordination within the Department and we anticipate 
sending it to Congress shortly.

    12. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr. 
Lambert, it appears that Secretary Lemnios, the assistant Secretary of 
Defense for Research and Engineering ASD(R&E), is increasing quick 
reaction special projects at the expense of technology transfer and 
transition programs (e.g. the Defense Acquisition Challenge (DAC) 
program and the Technology Transfer Initiative (TTI)). What is the 
rationale?
    Mr. Kendall, Mr. Lemnios, and Mr. Lambert. It is true that the 
budget request for the Quick Reaction Special Project (QRSP) program 
has increased from a budget request of $78 million in fiscal year 2011 
to $92 million in fiscal year 2012. We did not, however, increase the 
QRSP at the expense of DAC and TTI. As part of our annual program 
review, we assess the relative effectiveness of all our programs. We 
assessed that the work sponsored under DAC and TTI was just as 
effectively conducted by the Military Departments. We determined that 
an additional Office of the Secretary of Defense (OSD)-level investment 
was no longer needed.

              laboratories and the defense industrial base
    13. Senator Hagan. Secretary Lemnios, from your perspective, what 
are the roles of DOD labs?
    Mr. Lemnios. The Department's laboratories are an important part of 
the science and technology enterprise. The Department's laboratories 
serve as its technical base, and fulfill several key roles, including, 
but not limited to:

         rapid technical responses to warfighter operational 
        needs,
         technically competent, unbiased assessments of 
        commercial and defense industrial solution technologies,
         key sources of breakthrough technologies for future 
        acquisition programs, and
         a unique conduit to transition the knowledge gained 
        from basic research investments into warfighting capabilities.

    14. Senator Hagan. Secretary Lemnios, what are their core 
competencies?
    Mr. Lemnios. The DOD Laboratories have many Core Competencies 
closely aligned with national defense objectives. I consider a core 
competency to be the people (scientists and engineers), technical 
skills, and physical infrastructure (labs/equipment) to develop and 
deliver new technology products; and provide support to new and 
deployed warfighting systems. For example, DOD Labs maintain core 
competencies in topics such as energetic materials, submarine 
hydroacoustics, and radar electronics to support advances in future 
acquisition programs. In an effort to scope and categorize DOD Lab core 
competencies more systematically, I have initiated a three-phase 
process:

         Phase 1 is currently assessing the laboratories' 
        competencies in the seven S&T priorities (data to decisions, 
        cyber technology, autonomy, electronic warfare & protection, 
        human systems, countering WMD, and engineered resilient 
        systems) established by the Secretary of Defense in his 19 
        April 2011 memorandum.
         Phase 2 will assess abilities to support technical 
        requirements in cross-cutting technology areas that were 
        identified in the 2010 QDR and recent DPPG.
         Phase 3 will examine the laboratories' support to 
        unique Service requirements, e.g., oceanography, armor, and 
        space technology.

    After completion of these phases, I believe we will be able to 
better access core and critical technologies.

    15. Senator Hagan. Secretary Lemnios, Congress has provided a broad 
range of personnel authorities, such as the Laboratory Personnel 
Demonstration program and direct hiring authority to allow DOD 
laboratories to recruit and retain the best and brightest scientists 
and engineers. What is your assessment of how well the Services are 
using these authorities?
    Mr. Lemnios. The Services are effectively utilizing the Demo Lab 
authorities within the established limits of Title 5 statutes. My 
assessment is that these authorities provide the necessary flexibility 
to develop and preserve our technical workforce within the labs. The 
pay for performance system is a significant contributor to retaining 
our talented technical personnel and the direct hire authority ensures 
our labs can rapidly target and hire talented graduates as they enter 
the job market. Within the Department, the Under Secretary of Defense 
for Personnel and Readiness governs personnel policy, instructions, and 
directives and maintains an ongoing dialogue with the Services, 
specifically the labs, to ensure authorities are implemented and 
exercised to their potential.
    I have personally visited several DOD laboratories and spoken with 
many of our scientists and engineers, a growing percentage of whom are 
in the early stages of their careers. I have found a bright, energetic 
and talented workforce that is dedicated to supporting our military 
through the development of new technologies and weapon systems. I have 
not seen, nor am I aware of any impediments to exercising the demo lab 
or direct hire authorities.

    16. Senator Hagan. Secretary Lemnios, what challenges are the labs 
facing on the personnel issues that are not under your direct control?
    Mr. Lemnios. Lab personnel policies are the responsibility of the 
Under Secretary of Defense for Personnel and Readiness (USD(P&R)). P&R 
maintains a high level of communication with the labs and supports 
rapid implementation of all the Demonstration Lab authorities that have 
been granted by Congress over the past several years. As an example of 
a lab personnel challenge, I am concerned about the significant 
fraction of lab staff that is eligible for immediate retirement, and 
what the subsequent effect on lab capabilities would be if large scale 
retirements occurred.
    I am also concerned about the rapidity by which our labs can hire 
new talent. I am familiar with the practices we used at Lincoln Lab to 
hire top quality talent. We could have people in the roles and working 
in a matter of weeks. This is not the case in DOD labs.
                                 ______
                                 
             Questions Submitted by Senator Jeanne Shaheen
                   national defense education program
    17. Senator Shaheen. Secretary Lemnios, the National Defense 
Education Program (NDEP) has been reduced in this year's budget request 
so that there will be approximately 50 fewer graduating students in the 
SMART program per year that will be available for employment at DOD 
laboratories. Given the need for more scientists and engineers in DOD, 
what was the rationale for this budget reduction?
    Mr. Lemnios. The National Defense Education Program (NDEP) provides 
support ranging from K-12 students through world-class researchers, and 
ensures a steady stream of new technical talent into the Defense 
workforce. In view of increasing budgetary pressures, the SMART program 
is being re-aligned towards a steady state of about 800 students vice 
the original projection of 1,000 when SMART began in 2006.

                            small businesses
    18. Senator Shaheen. Secretary Lemnios, DOD's fiscal year 2012 
budget proposes the elimination or reduction of many programs critical 
for transition of R&D production, including DAC, TTI, FCT, and 
Manufacturing Science and Technology (S&T). What are you doing to 
better assist small- and medium-sized firms in the transition of R&D 
projects to the defense and commercial marketplace?
    Mr. Lemnios. DOD has an active technology transfer program that 
assists small- and medium-sized firms to develop products that have 
defense and commercial applications. Companies are offered access to 
government developed technology and encouraged to recognize 
opportunities to apply technologies developed for commercial 
applications against DOD needs. We also work with these firms to 
jointly develop technologies for both military and commercial 
applications. We use Cooperative Research and Development Agreements 
(CRADAs) to allow both the private sector and DOD activities to provide 
technical expertise to mature the technology. On a non-interference-
with-mission basis, we also allow these firms to use DOD laboratory 
equipment and facilities when it is in the best interest of the 
government. We provide technical assistance to companies working 
through advanced defense technology clusters funded by the Small 
Business Administration and plan to provide this same assistance to the 
``innovation clusters'' which will be formed and funded via the 
administration's Jobs Accelerator and Innovation Challenge, announced 
on May 20, 2011.
    The Small Business Innovation Research (SBIR) Commercialization 
Pilot Programs within the Military Departments are also used to bridge 
gaps in moving technologies into acquisition. The program allows DOD 
components to spend 1 percent of their SBIR budget on commercialization 
activities that accelerate the transition of SBIR-funded technologies 
to Phase III and focus on systems being developed, acquired and 
maintained for the warfighter. Plans for the recently authorized Rapid 
Innovation Fund Program include projects which assist small- and 
medium-sized firms in the transition of R&D projects to the defense and 
commercial marketplace.

    19. Senator Shaheen. Secretary Kendall, the NDAA for Fiscal Year 
2011 authorized the Rapid Innovation Program, which was funded at $439 
million for fiscal year 2011. Could you elaborate on implementation 
plans for this program?
    Mr. Kendall. The Department issued guidance on August 12 providing 
an implementation plan for the Rapid Innovation Program Fund. The 
guidance is attached.
       
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

    20. Senator Shaheen. Secretary Kendall, with the moratorium on 
congressionally-directed spending, how do we ensure that ideas in the 
seed stage of development continue to be funded?
    Mr. Kendall. The Department has a robust science and technology 
investment portfolio that provides competitive funding opportunities 
for technology developers with ideas in the seed stage of development. 
In most cases, ``seed stage'' ideas would be appropriate for basic or 
applied research funding.
    Small businesses can compete for DOD funding through the Small 
Business Innovation Research (SBIR) program. In particular, 15 U.S.C. 
638 authorizes 2.5 percent of the DOD extramural R&D budget set aside 
for the SBIR program. Small businesses can compete for DOD funding 
through SBIR, currently funded at $1.2 billion per year.

    21. Senator Shaheen. Secretary Kendall, SBIR is one answer, but by 
itself, insufficient. How is DOD addressing start-up funding vital to 
getting many of our small contractors off the ground?
    Mr. Kendall. Small businesses are a critical part of the DOD supply 
chain. To maintain our technological edge on the battlefield, we 
recognize that small businesses are critical to providing innovative 
solutions to DOD needs. The Department is committed to maximizing the 
contributions of small business in DOD acquisition and is working to 
create a business environment that understands, appreciates and 
leverages their value. Each DOD component is expected to seek 
improvements in leveraging small businesses, and to establish 
aggressive Small Business Targets based on its unique product needs. In 
addition to the $1.2 billion of SBIR funding awarded to small 
businesses, the Department awarded 21 percent of all eligible contracts 
to small businesses in fiscal year 2010.
    We also participate in Administration efforts to encourage and 
provide assistance to start-up entrepreneurial businesses. For example, 
we are participating with other Federal departments via the President's 
Start Up America initiative and the Jobs Accelerator and Innovation 
Challenge. Furthermore, the Department is implementing the Rapid 
Innovation Fund (RIF) which Congress authorized in the NDAA for Fiscal 
Year 2011. One key goal of the RIF is to give small businesses 
opportunities to provide innovative technologies that resolve 
operational challenges or other critical national needs. Implementation 
will start with a pilot effort in fall 2011.

                               title iii
    22. Senator Shaheen. Mr. Lambert, the Defense Production Act (DPA) 
Title III Program (Title III) serves a critical role to ensure domestic 
production capacity for items essential for national defense. However, 
DOD's fiscal year 2012 request for the program is only $19 million and 
it will shrink to $12 million in fiscal year 2013. Could you explain 
DOD's decision to reduce funding in this critical area, particularly 
given that programs funded under this area are proven, needed, and 
provide immediate benefit to the economy?
    Mr. Lambert. DPA Title III activities are funded through the ``DPA 
Fund.'' Under Executive Order 12919, the Secretary of Defense is 
designated the DPA Fund manager. The amount included in the DOD budgets 
request each year for Title III is only a portion of the amount of 
funding available for this important program. Other Federal agencies 
are appropriated funds for their agency-specific projects; those funds 
are transferred to DOD as the Fund Manager for execution. The current 
DOD Title III budget reflects priorities set during the regular 
budgeting process to maintain previous ongoing initiatives. DPA Title 
III provides powerful tools to support our Nation's manufacturing 
capabilities, but the Department remains constrained in its ability to 
prioritize this program in the current fiscal climate.
    Additionally, the President has convened a Defense Production Act 
Committee (DPAC), consistent with the 2009 DPA Reauthorization (Public 
Law 111-67). The role of the DPAC, which is comprised of the heads of 
various Federal Departments and agencies, is to advise the President on 
the effective use of the DPA for mobilizing industry for important 
national needs. The DPAC is currently developing a strategic focus for 
future Title III activities, conducting comprehensive assessments of 
industrial capabilities, and determining appropriate mitigation 
strategies, including use of Title III, in areas critical to multiple 
DPAC members.

    23. Senator Shaheen. Mr. Lambert, for the Senate Armed Services 
Committee to better understand the expanded uses of Title III and the 
proper funding levels, it is critical that Congress receives detailed 
information on the specific industrial bases or technologies that 
shortfalls have been identified that Title III could address. Please 
provide this information.
    Mr. Lambert. The Title III Program, working with other Federal 
departments and agencies has initiated a number of large-scale actions 
to create or expand domestic production capabilities for essential 
materials and technologies including radiation-hardened electronics, 
lithium ion batteries, Vacuum Induction Melted/Vacuum Arc Remelted 
specialty steel, beryllium production, renewable energy sources, 
Satellite Communications transceivers for warfighter communications and 
advanced electronic materials including silicon carbide and gallium 
nitride for next generation radars and electronic warfare capabilities, 
to name a few.
    Additionally, the President directed the Secretary of Defense to 
lead a cabinet level inter-agency body known as the DPAC to advise him 
on the effective use of these powerful authorities. Such advice will be 
informed by the DPAC's ongoing efforts to identify cross-cutting 
manufacturing shortfalls. This analysis includes an examination of 
cross-program interdependencies, early indicators of risk, areas of 
limited competition, impact of reliance on foreign sources, and areas 
of limited needed industrial capacity.

                      shipbuilding industrial base
    24. Senator Shaheen. Mr. Lambert, in an April 21 article in 
Bloomberg, the Chief of Naval Operations, Admiral Gary Roughead, USN, 
commented that: ``The industrial base is really a strategic asset . . . 
the industrial base today, particularly as it applies to shipbuilding, 
is probably as fragile as it has ever been.'' Can you elaborate on the 
current state of the U.S. shipbuilding industrial base, and DOD's 
efforts to ensure that our current capabilities are maintained?
    Mr. Lambert. Our shipbuilding industrial base has emerged in the 
past three generations as a national strategic asset. Today's Surface 
Navy is at its smallest size since the early 1900s. As we work through 
the implications of managing the defense enterprise during a slowdown 
in spending, it is crucial that we preserve the capabilities resident 
in our shipbuilding industrial base in order to build and maintain a 
Fleet for the demands of providing global presence and readiness 
wherever our Nation's interests are challenged.
    Within our shipbuilding industrial base, thousands of firms and 
suppliers--some big, others small--help build, maintain and equip our 
Fleet. These firms, their suppliers, and their suppliers' suppliers, 
are each links in a chain that, if broken, can have unforeseen 
consequences on our military capabilities. To ensure the Nation has the 
shipbuilding industrial capacity it needs, we must better understand 
the different supplier tiers, their interdependence to one another, and 
the programs they serve across the Department.
    The Department and industry must manage resources in ways that do 
not hollow out the capabilities of our Nation's Fleet or recklessly 
jeopardize our shipbuilding industrial base.
                                 ______
                                 
            Questions Submitted by Senator Claire McCaskill
                   critical information technologies
    25. Senator McCaskill. Mr. Lambert, as I understand it, most 
cybersecurity-related projects by DOD have focused on cost and schedule 
enhancement enabled by sourcing production globally. While cost and 
schedule are always critical considerations, I am also concerned that 
there has not been enough consideration about risk management and 
system security implications, particularly as they relate to 
outsourcing the manufacturing and/or production of high-value, mission 
critical DOD Information Technology (IT) systems to other countries. I 
know that Senator Levin's staff is doing an important investigation on 
the issue of the security of the IT supply chain--and I support that--
in part because there are concerns that malware, or other malicious 
computer code, could be inserted into the global IT supply chain for 
computers and software destined for U.S. Government use. What are your 
thoughts regarding the threat posed by malware or malicious software on 
critical DOD information technologies?
    Mr. Lambert. Globalization continues to impact today's information 
and communications technology (ICT) sector. While globally sourced 
technology provides innumerable benefits to the Department, it also 
provides our adversaries with increased opportunities to compromise our 
supply chain by inserting malware into ICT to access or alter data, and 
intercept or deny communications. Even though the risk of such a supply 
chain attack may be tolerable for many consumers of commercial ICT, the 
DOD cannot ignore these risks to its national security missions. 
Managing DOD's risk will require a greater awareness of the threats, 
vulnerabilities, and consequences associated with acquisition 
decisions; the development and employment of tools and resources to 
technically and operationally mitigate risk across the lifecycle of 
products (from design through retirement); the development of new 
acquisition policies and practices that reflect the complex global 
marketplace; and partnership with industry to develop and adopt supply 
chain and risk management standards and best practices.
    DOD represents a small portion of the commercial ICT market; 
therefore, it is unlikely that our assurance requirements can drive the 
development of commercial off-the-shelf products. However, the DOD is 
taking a proactive risk management approach to address this issue, 
enhancing the acquisition process in light of the changing global 
market to ensure processes are strong and risks are mitigated.
    DOD is in the process of institutionalizing the Trusted Defense 
Systems/Supply Chain Risk Management strategies described in the 
Trusted Defense Systems response to the NDAA, section 254, delivered to 
Congress in January 2010. The Department's strategy for achieving 
trustworthy defense information and weapons systems in light of supply 
chain risk contains the following core elements:

    1.  Prioritize scarce resources based on mission dependence.
    2.  Plan for comprehensive program protection.
    3.  Detect and respond to vulnerabilities in programmable logic 
elements.
    4.  Partner with industry.

    The forgoing strategy is being implemented to protect DOD systems 
from supply chain risks, but this plan does not directly address 
commercially-owned and operated telecommunications infrastructures 
which may be facing similar risks. DOD and DHS are co-leading an 
Interagency Task Force that will in partnership with industry develop a 
more complete understanding of the relevant technical risks to the U.S. 
telecommunications infrastructure and will assess the dependency of 
vital governmental and economic operations upon that infrastructure. It 
will then evaluate a range of potential technical risk mitigation 
strategies.

    26. Senator McCaskill. Mr. Lambert, what is DOD doing in the 
public-private sector in support of U.S. Comprehensive National Cyber 
Security Initiative (CNCI) and Supply Chain Risk Management (SCRM)?
    Mr. Lambert. A foundational piece of DOD's CNCI work in the public-
private sector is the Enduring Security Framework (ESF). The ESF is a 
public-private partnership that includes the chief executive officers 
and chief technology officers of major information technology and 
defense companies. The ESF now meets regularly with top officials from 
the Department of Homeland Security, the Office of the Director of 
National Intelligence, and DOD.
    CNCI #4 coordinates and redirects research and development efforts, 
and CNCI #9 defines and develops enduring ``leap-ahead'' technology, 
strategies, and programs: DOD is spending over $500 million in cyber-
related R&D in both classified and unclassified domains. The majority 
of these projects are competitively sourced from the private sector. 
One of the largest projects is the National Cyber Range (NCR) that 
includes the Johns Hopkins Applied Physics Lab and Lockheed Martin. The 
NCR will provide an environment for realistic, qualitative and 
quantitative assessments of potentially revolutionary cyber research 
and development technologies. The range must be capable of testing a 
variety of technological thrusts. The goal of the NCR is to enable 
large scale experimentation and testing of new cyber technologies.
    CNCI #5 connects current cyber ops centers to enhance situational 
awareness: DOD is conducting a voluntary Cyber Security/Information 
Assurance (CS/IA) pilot program with the DIB. The DIB CS/IA Pilot 
program leverages DOD Cyber Crime Center intrusion forensic 
capabilities to analyze threat data and share threat information among 
the DIB companies. This unique threat sharing among DIB companies, 
which did not exist prior to the program, is believed to be responsible 
for preventing compromise of DOD information in the recently publicized 
hacking attempts on DIB companies.
    CNCI #8 expands cyber education: DOD has a full-time director of 
Science, Technology, Engineering and Mathematics (STEM) education. At 
military installations and DOD laboratories, our scientists and 
engineers-military and civilian-support science fairs and competitions, 
mentor our scholarship and fellowship recipients, and partner with 
science and math teachers in the classroom. An objective of the program 
is to inspire students, parents, teachers, and the public to engage in 
STEM discovery and innovation.
    CNCI #11 SCRM develops a multi-pronged approach for global supply 
chain risk management. Globalization of the technology marketplace 
provides increased opportunities for adversaries intent on harming the 
United States by penetrating the supply chain to gain unauthorized 
access to data, alter data, or interrupt communications. DOD and the 
private sector must manage risks stemming from both the domestic and 
globalized supply chain in a strategic and comprehensive way over the 
entire lifecycle of products, systems and services. This requires a 
greater awareness of the threats, vulnerabilities, and consequences of 
decisions. It also involves the development and employment of tools and 
resources to technically and operationally mitigate risk across the 
lifecycle of products (from design through retirement), and the 
development of new acquisition policies and practices that reflect the 
complex global marketplace. DOD will collaborate with industry to 
develop and adopt supply-chain and risk-management standards and best 
practices. This initiative will enhance Federal Government skills, 
policies, and processes to provide departments and agencies with a 
robust toolset to better manage and mitigate supply-chain risk at 
levels commensurate with the criticality of, and risks to, their 
systems and networks.
    CNCI #12 extends cybersecurity into critical infrastructure 
domains: DOD has been in discussions with DIB companies about 
voluntarily extending the Einstein ``shield'' to their private cyber 
infrastructures. Einstein 3 will draw on commercial technology and 
specialized government technology to conduct real-time full packet 
inspection and threat-based decisionmaking on network traffic entering 
or leaving Executive branch networks. The goal of Einstein 3 is to 
identify and characterize malicious network traffic to enhance 
cybersecurity analysis, situational awareness and security response. It 
will have the ability to automatically detect and respond appropriately 
to cyber threats before harm is done, providing an intrusion prevention 
system supporting dynamic defense.
                                 ______
                                 
               Questions Submitted by Senator Rob Portman
                       national security strategy
    27. Senator Portman. Mr. Lambert, in the 2010 National Security 
Strategy (NSS), the administration proposed that by 2020, the United 
States would restore leadership in higher education by seeking to lead 
the world in proportion of college graduates. The NSS also calls for 
heavier investment in STEM areas, and expanding the educational 
opportunities to underrepresented groups, including women. This is a 
noble, albeit, vague goal. What is DOD doing to assist in this effort?
    Mr. Lambert. DOD is a long-term, continuous sponsor of science and 
engineering education, and places specific emphasis on U.S. college 
students pursuing STEM degrees.
    DOD supports the NSS goal with the Department's STEM Education and 
Outreach Strategic Plan. DOD's National Defense Education Program has 
sent 1,750 DOD scientists and engineers into K-12 schools in 26 States 
supporting 8,000 teachers and inspiring 180,000 students. Since 2006, 
the SMART Scholarship for Service Program has supported hundreds of 
U.S. undergraduate and graduate STEM degrees with nearly 300 becoming 
employees in the DOD S&T/laboratory community. Continuing its historic 
engineering graduate student support, DOD awarded 200 new 3-year 
graduate fellowships through the NDSEG Fellowship Program while an 
additional 400 are receiving their second and third year of support for 
a total of 600 in the program. At the faculty level, DOD supported 29 
distinguished faculty members' basic research with some of the largest, 
longest-term educational grants in the Nation. These National Security 
Science and Engineering Faculty Fellowships simultaneously engage and 
financially support more than 150 of the best graduate and post 
doctorates in DOD-relevant research areas. DOD provides substantial 
annual support to the Historically Black Colleges and Universities and 
Minority Institutions program. Throughout DOD there are more than 130 
subsidiary education, training and outreach programs that inspire and 
develop students in STEM--from K-12 enrichment initiatives such as 
STARBASE, the Science and Engineering Apprenticeship Program, and 
JROTC, to college preparation (Great Minds in STEM), financial support 
(SMART, NDSEG, and the Information Assurance Scholarship Program), 
internships (Naval Research Enterprise Internship Program), 
undergraduate, graduate, postdoctoral and faculty education.
    DOD continuously funds STEM education as a matter of tomorrow's 
national security.

    28. Senator Portman. Mr. Lambert, how do you see this goal being 
achieved?
    Mr. Lambert. The National Security Strategy STEM goal was stated in 
the paragraph ``Improve Education at All Levels'' and is a total 
government commitment to restore U.S. leadership in higher education by 
seeking the goal of leading the world in the proportion of college 
graduates by 2020. DOD has a vital, continuing, national security 
interest in attaining this goal and has over the long-term, spent its 
appropriated funds to do so. DOD will continue to do more than its 
share to achieve this NSS goal. However, the total goal can only be 
achieved by coordinated efforts from all sectors of government, 
industry, the educational community, and society working together. In 
this regard, DOD is an active participant in the Office of Science and 
Technology Policy's Committee on STEM Education which seeks, among 
other things, to coordinate STEM education in the Federal Government.

    29. Senator Portman. Mr. Lambert, the 2010 NSS states, ``We have 
launched a number of science envoys around the globe and are promoting 
stronger relationships between American scientists, universities, and 
researchers and their counterparts abroad. We will reestablish a 
commitment to science and technology in our foreign assistance efforts 
and develop a strategy for international science and national 
security.'' What short-term benefits have been seen through this effort 
thus far?
    Mr. Lambert. DOD supports the Office of Science Technology and 
Policy science envoy initiative while managing complementary efforts 
for global scientific exchange through the international science 
offices of the Army, Air Force and Navy. These international offices--
located in London, Santiago, Tokyo, and elsewhere--are intended to 
contribute awareness of scientific strengths internationally and to 
fund talented international performers that fill gaps in existing 
portfolios. Short-term benefits provided by these efforts include 
facilitated scientific relationships between U.S. researchers and other 
global leaders, broad scientific situational awareness to inform 
technological strategic planning, and the ``transition'' of research 
breakthroughs throughout the world into technology development to 
support the U.S. national security requirements.

    30. Senator Portman. Mr. Lambert, is this exchange of ideas 
cultivating a renewed commitment to S&T in our own country?
    Mr. Lambert. Our Nation's commitment to science and technology 
(S&T) is spurred on not only by a sense of urgency to remain 
technologically dominant in areas of high priority to national 
security, but also through mutually beneficial partnerships with 
innovative international partners, such as those facilitated formally 
through the international research offices of the military services. It 
is in the United States' interest to support expanded international 
science partnerships, and it is our policy to continue them.
    Today's S&T is more global and distributed than ever before. While 
the United States remains among the world leaders in fast moving areas 
such as information technology, engineered materials, digital and 
quantum communications, and nanotechnology, among others, it is also 
the case that we are not the dominant leader in all S&T that we once 
were. Consequently, it is important to remain engaged in S&T throughout 
the world, to be aware of the advances and collaborate at the leading 
edge of science and technology.

                 education and outreach strategic plan
    31. Senator Portman. Secretary Lemnios, in 2009 the first STEM 
Education and Outreach Strategic Plan for 2010-2014 was produced and 
signed-off on by you. Since that time, what successes has the STEM 
Development Office seen?
    Mr. Lemnios. There have been numerous successes throughout the 
Department since the Strategic Plan was submitted to Congress in May 
2010. Broadly, it generated interest and awareness in the Department's 
role in fostering innovation and growing STEM workforce and 
capabilities.
    The SMART Program, in particular, is demonstrating positive results 
in attracting high quality students to the DOD workforce. As a 
scholarship-for-service program, SMART scholarships range from 1 to 5 
years for bachelor's, master's and doctoral students majoring in a STEM 
discipline or field. In 2011, applications rose from 2,600 to over 
2,800 and SMART graduates transitioning into the DOD workforce 
increased from 130 to more than 230. In 2012, we estimate that 
approximately 270 will become DOD employees. Building capacity in STEM 
critical areas such as systems engineering is also important. The 
Systems Engineering Capstone project funded teams of undergraduate and 
graduate students from both military and civilian institutions for the 
purpose of working on authentic DOD challenges. In addition, students 
received important mentoring from military and DOD civilian systems 
engineers as well as industry professionals.
    Across the Department, greater attention has been paid by 
Components to align STEM education, training and outreach to their 
technical workforce needs. The Army Education and Outreach Program 
(AEOP) implemented a management approach for a more cohesive strategy 
for its $17.2 million K-12 STEM investments. In 2011, AEOP awarded a 
cooperative agreement to execute a Virginia Tech led consortium of 
academic and nonprofit institutions to stimulate STEM education and 
outreach and highlight Defense career paths. The Navy committed to 
doubling STEM investments, including initiatives that reach under-
represented students in Los Angeles, St. Louis, and the Bronx. In March 
2011, the Air Force issued a STEM Workforce Strategic Roadmap, entitled 
``Bright Horizons'' that explains how they will manage their STEM 
workforce. Among other activities, the Air Force oversees the NDSEG 
Fellowship Program that supported nearly 800 graduate students enrolled 
at 79 graduate institutions.

    32. Senator Portman. Secretary Lemnios, what amendments/additions 
have you made to the plan since it was first published?
    Mr. Lemnios. The Education and Outreach Strategic Plan was 
developed as an overarching document that sets a foundation to achieve 
the vision of inspiring, developing and attracting a diverse, world-
class STEM workforce to meet the national defense needs. Following the 
congressional plan submitted in May 2010, the STEM Development Office 
has been working closely with the Military Departments as they develop 
their STEM strategic direction and service specific initiatives. As 
examples, the Air Force recently issued its STEM workforce strategic 
roadmap, ``Bright Horizons;'' the Navy's STEM2 Stern effort is 
providing guidance and planning for STEM investments, and the Army 
Education and Outreach Program is focusing on their K-12 investments. 
Currently underway is a strategic implementation framework that will 
provide a focused approach to the Department's current and future STEM 
investments and aligned to the NSTC Committee on STEM Education efforts 
and the DIB needs. This focused and integrated approach includes 
collaborative roles and responsibilities of the DOD components. 
Optimizing our STEM investment is more critical than ever and we are 
building a strong partnership across DOD to do so.

    33. Senator Portman. Secretary Lemnios, what kind of budget/
resources are required to run the office and implement the plan?
    Mr. Lemnios. The STEM Development Office (SDO) employs 3 to 4 DOD 
employees to run and implement the plan. In turn, each of the DOD 
Components must have staff and resources that SDO can draw on to 
implement their portions of the Plan.

    34. Senator Portman. Secretary Lemnios, what measures are being 
used to assess the effectiveness of your efforts?
    Mr. Lemnios. The measure of effectiveness for STEM activities is 
challenging, and a problem we continue to work at. To this end, I have 
reconstituted a STEM Board of Directors at a more senior level, with 
representatives from the military departments, as well as USD(P&R) and 
USD(I). We have invited the Department of Education and NSF as 
observers. Among the tasks the board will take on includes the 
understanding requirements, our gaps, and the efficiency of current 
programs to address them.
    At the end of the day, the measures of success must focus on 
whether the DOD can find the right mix and numbers of employees to 
deliver national defense capabilities. So, for example, the SMART 
program is assessed as to what fields of study the students pursue, and 
how many stay in DOD lab jobs after their required service period is 
over. Similarly, for the Systems Engineering Capstone project, 
effectiveness is assessed based on how many students participate in the 
DOD-inspired course projects, which is an indicator of students who are 
more inclined to pursue DOD S&T careers.

                       recruitment and retention
    35. Senator Portman. Secretary Lemnios, I understand that the 
military Services are having trouble recruiting, retaining, testing, 
and evaluating personnel at some test ranges because of, among other 
things, the remoteness of those test ranges; differences in pay; the 
length of time to hire new employees; the loss of the Federal Career 
Intern Program; and Base Realignment and Closure (BRAC). Do you agree 
with that assessment? If so, how do you intend to ameliorate how each 
of these factors negatively impact recruitment and retention?
    Mr. Lemnios. As part of the Developmental Test and Evaluation 
Fiscal Year 2010 Annual Report, components reported on recruitment and 
retention of qualified T&E personnel. There were no specific issues 
noted with their ability to recruit talented personnel at the Test 
Ranges. The components discussed many efforts in place for recruitment 
and retention including:

         Expedited Hiring Authority
         Section 853 Funding
         Targeted Recruitment
         Competitive Salaries
         Monetary Awards
         Intern Programs
         Career Fairs
         Tuition Assistance
         Funding to Offset Student Loans
         Career Development/Developmental Assignments

    There was minimal impact of BRAC on T&E Specific positions. Only 
the Army specifically noted a BRAC impact for the Army Test and 
Evaluation Command. The Army reported that ``efforts are underway to 
fill these positions using competitive and noncompetitive procedures, 
targeting diverse applicant pools (Federal and private sector 
employees, departing military, college graduates, etc.), and at entry, 
developmental, full-performance and senior levels.''

    36. Senator Portman. Secretary Lemnios, the Systems Engineering 
workforce directly supporting the Director for Systems Engineering is 
now at 117 and is projected to meet the goal of 172 by fiscal year 
2012. By contrast, the 59 people supporting the Director for 
Developmental Testing are expected to decrease to 52 next fiscal year 
and not expected to meet the goal of 70. Given the importance of 
developmental testing to ensuring the timely fielding of new, needed 
combat capability, what are you doing to reverse the trend in 
developmental testing hires?
    Mr. Lemnios. In general, the supply of qualified personnel for 
Developmental Test & Evaluation is not the issue. The current plan to 
reach a goal of 70 personnel has been impeded by overall restrictions 
on new government hires. This has affected 9 government billets, 
including the Principal Deputy SES position for DT&E. We have attempted 
to compensate for these gaps in government personnel through detailees 
and rotational assignments. While the number of oversight positions in 
OSD is important, so is rebuilding the Developmental Test and 
Evaluation competencies of the components. The overall test and 
evaluation workforce has grown from 7,420 personnel in fiscal year 2008 
to 8,591 in second quarter of fiscal year 2011. This represents a 
growth of 16 percent.

    37. Senator Portman. Mr. Kendall, last August, Secretary of Defense 
Gates said that his greatest fear is that in economic tough times 
people will see the defense budget as the place to solve the Nation's 
deficit problems, and that those cuts would be disastrous in the world 
environment we see today. With the current budget cuts that the 
President has proposed to DOD, how do you see it affecting our 
competitive advantage in S&T?
    Mr. Kendall. The Department is still formulating the budget for 
fiscal year 2013. Until we integrate all competing needs and 
requirements, it is not possible or prudent to speculate on how 
possible reductions will affect our competitive advantage in S&T. It 
remains clear that the Administration continues to value S&T. 
Recognizing the potential advantage it brings, the Department will 
balance this advantage with competing priorities in the fall budget 
development.

               the future of the defense industrial base
    38. Senator Portman. Mr. Kendall, in Dr. Jacques Gansler's 2007 
report, ``Achieving a 21st Century Defense Industrial Base,'' he states 
that, `` . . . the Defense Industrial Structure, the controlling 
policies, practices, laws, and the Services' budgets and requirements 
priorities have not been transformed to match the needs of [the post-
September 11] world.'' Would you agree with Dr. Gansler's assessment?
    Mr. Kendall. Dr. Gansler's 2007 report is informative and 
insightful in many respects. As we adjust to the needs of the post-
September 11 world, the Department's industrial policies must also be 
adjusted. However, the Department relies primarily on market forces to 
create, shape, and sustain the industrial, manufacturing, and 
technological capabilities in the industrial base. As the wars in Iraq 
and Afghanistan continue to evolve, and our Nation continues to recover 
from the worst economic recession since the Great Depression, the 
Department faces significantly greater constraints on resources. This 
evolution will have a significant impact on the DIB. The Department 
must work closely with our partners in the defense industry to ensure 
we are better stewards of the taxpayer's money in these fiscally 
austere times.

    39. Senator Portman. Mr. Kendall, how is DOD attempting to adapt 
the defense structure to more technological and unconventional warfare?
    Mr. Kendall. DOD relies on a responsive market driven industrial 
base and in general does not direct the internal structures of 
privately-owned corporations that constitute the DIB. Rather, these 
companies adapt to meet the requirements of the Department as expressed 
through its planned expenditures on research and acquisition programs 
and on its requirements as expressed to industry in any number of ways. 
As DOD requirements for materiel and service solutions to conduct more 
technological and unconventional warfare increase, the DIB is adapting 
to provide these solutions.
    The Department also periodically conducts analyses/assessments to 
identify and evaluate those industrial and technological capabilities 
needed to meet current and future defense requirements. We use the 
results of these analyses/assessments to make informed budget, 
technology investment, acquisition, and logistics decisions. DOD 
industrial assessments evaluate and address changes in key systems, 
subsystems, components, and/or material providers that supply many 
programs and affect competition, innovation, and product availability. 
DOD components also conduct their own assessments when: (1) there is an 
indication that industrial or technological capabilities associated 
with an industrial sector, subsector, or commodity important to a 
single DOD component could be lost; or (2) it is necessary to provide 
industrial capabilities information to help make specific programmatic 
decisions. These assessments generally are conducted, reviewed and 
acted upon internally within the DOD components.

                         acquisition workforce
    40. Senator Portman. Secretary Lemnios, the recently enacted Weapon 
Systems Acquisition Reform Act (WSARA) identified the deterioration in 
the DOD's core competency in systems engineering and developmental 
testing as an important cause of why the cost of acquiring major weapon 
systems have skyrocketed over the last decade or so. As such, the WSARA 
called on DOD to develop the relevant workforce to reacquire that 
competency. Where is DOD in building up its systems engineering and 
developmental testing workforce?
    Mr. Lemnios. The Department's systems engineering workforce 
(defined as those acquisition personnel designated as part of the 
SPRDE-SE/PSE Defense Acquisition Workforce Improvement Act (DAWIA) 
career field) grew by 4,972 personnel between fiscal year 2008 and 
second quarter fiscal year 2011. This growth is a 14 percent increase 
over the fiscal year 2008 baseline of 34,527 personnel. The Department 
is currently exceeding the system engineering workforce growth target 
established in 2008.
    The Department's test and evaluation workforce (defined as those 
acquisition personnel designated as part of the T&E DAWIA career field) 
grew by 1,171 personnel between fiscal year 2008 and second quarter 
fiscal year 2011. This growth is a 16 percent increase over the fiscal 
year 2008 baseline of 7,420 personnel and is a combination of in-
sourcing, re-coding, and new hires. The Department is currently 
exceeding test and evaluation workforce growth target established in 
2008. DASD (Developmental Test and Evaluation) (DASD(DT&E)) is 
currently working to ensure that all appropriate Government positions 
are DAWIA Test and Evaluation (T&E) coded and at the required level of 
certification.
    A USD(AT&L) memorandum dated August 25, 2010 identified eight Key 
Leadership Positions (KLP) that must be staffed with qualified, 
certified acquisition personnel in each Major Defense Acquisition 
Program (MDAP) and Major Automated Information System (MAIS) program 
office. Among the eight KLPs identified are Program Lead Systems 
Engineer and Program Lead for Test and Evaluation. The DASD(SE) and 
DASD(DT&E) are assisting in the development of qualification and 
training requirements for these positions.

    41. Senator Portman. Secretary Lemnios, to the extent that DOD has 
not performed to plan, what are the most substantial challenges to its 
ability to build up this important part of the acquisition workforce?
    Mr. Lemnios. DOD is currently performing to plan in staffing its 
systems engineering and test and evaluation acquisition workforce.
    The fundamental workforce challenges facing the DOD are the same as 
those facing industry: Attracting the best and the brightest technical 
talent in a competitive environment. The increasing complexity of 
systems and necessity for testing and evaluation rigor require 
recruitment of a technically-skilled workforce.
    There has been some concern that current hiring policy will impact 
the growth of the systems engineering and test and evaluation 
workforces. On March 16, 2011, USD(AT&L) and USD(Comptroller) co-signed 
a memorandum, entitled ``Continuation of Defense Acquisition Workforce 
Improvement Initiative'', noting that Defense Acquisition Workforce 
Development Fund (DAWDF) hiring continues and clarifying that the 
military departments may request in-sourcing exemptions within current 
budget levels for critical acquisition positions. This memorandum has 
clarified the process by which the Military Departments may continue to 
grow critical acquisition workforce areas, which include the systems 
engineering and the test and evaluation workforce.

    42. Senator Portman. Secretary Lemnios, how does DOD intend to 
overcome those challenges?
    Mr. Lemnios. We are working directly to grow the pool of talent 
available to support our systems engineering and test and evaluation 
workforces.
    As an example, in direct support of our Science, Technology, 
Engineering, and Mathematics (STEM) Strategic Plan, the DASD(SE) has 
implemented a Systems Engineering (SE) Capstone project with 10 
universities affiliated with our Systems Engineering Research Center 
(SERC) and with the four Service academies. The purpose of this effort 
was to explore techniques to improve SE knowledge and career interest 
among undergraduate and graduate engineering students and to increase 
the available pool of candidates for SE positions in the DOD. This 
effort provided students with substantive practical experience with SE 
concepts and skills, and with opportunities to apply these skills in 
the context of product development. The first year of this program has 
been very successful and we have recently implemented a second year as 
a follow up. We believe that this project will continue to increase the 
pool and capabilities of systems engineering talent for future DOD 
workforce needs.
    The DASD(DT&E) is working with the DOD components to identify and 
appropriately code all Government positions that conduct acquisition 
related Test and Evaluation (T&E) to insure that they are captured as 
part of the appropriate DAWIA workforce and that they are supported in 
achieving requisite acquisition certification.
    The DASD(DT&E) and DASD(SE) are working with the DOD components to 
identify their future needs for their respective technical workforce so 
that appropriate attention can be focused on recruiting, training and 
retaining skilled, talented, and certified personnel.

    43. Senator Portman. Secretary Lemnios, I understand that the 
Services are proposing to change their original acquisition workforce 
goals. In particular, the Services want to hire about 1,400 fewer 
professionals in the Systems Planning, Research Development, and 
Engineering and Systems Engineering/Program Systems Engineering (SPRDE-
SE/PSE) career field. Given how vital these functional capabilities are 
to helping senior acquisition managers make fully-informed investment 
decisions on major weapon systems (especially about technological and 
integration risk), why should Congress be comfortable with this change 
in goal?
    Mr. Lemnios. The Department has not formally changed the 
acquisition workforce goals established in 2008.
    SPDRE workforce growth to date has been consistent with the 2008 
plan and Secretary Gates' initiatives to restore and rebalance the 
acquisition workforce. DAWDF funding continues to be used effectively 
to recruit, train, and retain engineering personnel for the DOD 
acquisition workforce.
    The DOD fiscal year 2012 budget overview stated: ``DOD intends to 
hold the civilian workforce at fiscal year 2010 budget levels. This 
action does not apply to our ongoing acquisition workforce improvement 
strategy to hire about 10,000 new DOD acquisition civilians by 2015, as 
measured from fiscal year 2008 levels. The action may impact our 
continuing conversion of contractor filled positions to new DOD 
civilians (includes 3,000 acquisition positions so far). However, DOD 
will continue to ensure that inherently governmental functions are 
performed by career Federal employees.'' On March 16, 2011, Dr. Carter 
and Mr. Hale co-signed a memorandum entitled ``Continuation of Defense 
Acquisition Workforce Improvement Initiative'' clarifying the Military 
Departments' ability to request exemptions for additional in-sourcing 
authority for critical acquisition positions. It is our expectation 
that the military departments will exercise these authorities in 
rebalancing their workforce growth to meet the 2008 acquisition 
workforce growth plan.

    44. Senator Portman. Dr. Gansler, a recent article from Business 
Week stated that of the Indian and Chinese students who received a 
degree from an American college and returned home, 72 percent of Indian 
returnees and 81 percent of Chinese returnees said the opportunities to 
start their own businesses were better in their home countries. 
Furthermore, the speed of professional growth was also better back home 
for 54 percent of Indians and 68 percent of Chinese. How do you see the 
United States being able to compete with international businesses when 
entrepreneurs make it a point to not startup in the United States?
    Dr. Gansler. Unfortunately, today it is U.S. policy to make these 
top scientists and engineers (e.g. from India and China) sign an 
agreement (when they get their temporary student visas) that they will 
return to home when they get their degrees. This should change!
    In the past, Silicon Valley was largely founded by non-U.S. 
citizens; and Enrico Fermi was not a U.S. citizen when he worked on the 
Manhattan Project.
    It is U.S. policy to not restrict basic research on government 
contracts to U.S. citizens, but many agencies (e.g. DOD, DHA, 
Department of Energy) have been doing it anyway. This discourages 
graduate students in science and engineering (e.g. from India and 
China) from developing an interest in starting up a company in the 
United States based on their funded graduate research work; or from 
starting a U.S. company after their degree with a government-funded 
SBIR project.
    We need to create incentives for these people (after appropriate 
security checks) to want to remain in the United States (after getting 
their degrees) and to start up companies. Instead, we have created 
barriers to their doing so.

                            small businesses
    45. Senator Portman. Dr. Gansler, would you agree that current 
policies in the United States are discouraging talented individuals 
from starting a small business, particularly one that could contribute 
to the national defense?
    Dr. Gansler. Besides the barriers to non-U.S. citizens (discussed 
above), there are growing concerns by U.S. citizens about starting new 
businesses in the national security area. Specifically, these concerns 
are driven by the projections of shrinking national security budgets, 
as well as the requirement to deal with the excessive, complex, and 
costly procurement rules imposed by Congress and the executive branch 
(e.g. specialized cost accounting; intellectual properly demands; 
export control barriers; et cetera). Additionally, they see how hard it 
has been to extend SBIR legislation, and the tendency of many in 
security agencies to view SBIR as a ``tax'' on their program dollars 
(rather than a benefit). Finally, they know that whenever budgets have 
shrunk, in the past, the first area cut is usually R&D which startup 
firms (of course) require.

    46. Senator Portman. Dr. Gansler, what would you say needs to be 
done to encourage more businesses to contribute to the national 
defense?
    Dr. Gansler. Firms (small and large) would be interested in doing 
national security work if they were rewarded with sales and profits for 
doing better and better work at lower and lower costs (i.e. providing 
greater and greater ``value''). Instead, recently there have been many 
examples of a national security shift (driven by budget concerns and 
recent acquisition policy initiatives) to awarding contracts on the 
basis of ``low bid, technically acceptable;'' and providing award fees 
based on ``input'' rule compliance, instead of ``output'' results/
performance achieved.
    I am a strong advocate of the benefits of effective competition; 
and even the credible threat of introducing it. But when a firm does a 
great job, at an affordable cost, they deserve to receive a sole-source 
follow-on as a reward. But the current ``score card'' would list this 
as a ``noncompetitive'' contract; so it would count against the agency, 
and be discouraged; thus removing the incentive for the firm to achieve 
such beneficial (to the government) results.

                     industrial base consolidations
    47. Senator Portman. Mr. Augustine, in your June 26, 2006, 
editorial to Defense News, titled: ``The Last Supper, Revisited,'' you 
said that it was ``inevitable that much of this restructuring would 
occur sooner or later.'' Knowing what you now know about the fallout 
from the defense budget cuts of the 1990s, do you foresee any large-
scale consolidations among our domestic contractors? If so, why?
    Mr. Augustine. Without knowing the depth of actual budget cuts in 
the future it is of course impossible to state the extent of future 
consolidations that might be appropriate. If the cuts are extensive, it 
may be that further downsizing among the major defense domestic prime 
contractors would be appropriate. However, I think it is unlikely this 
will occur since in part because the administration has made clear that 
it does not intend to permit further consolidation under any 
circumstances. Combinations with foreign firms appear to be 
permissible; however, I believe they are unlikely at the prime 
contractor level.
    I do believe that consolidation among subcontractors and third-tier 
suppliers is both appropriate as well and as needed. That particular 
tier was not affected to the extent the prime contractors were affected 
following the ``Last Supper'' meeting and there do appear to be 
opportunities where cost savings could be made without significantly 
damaging the DIB. There is always the danger that we as a nation tend 
to focus on the health of the prime contractors whereas per se but fail 
to recognize that they would be unable to carry out their 
responsibilities without the support of the subcontractor and supplier 
base.

    48. Senator Portman. Mr. Augustine, what effects would 
consolidation have on products produced by the DIB and would these 
items be of value to the American taxpayer?
    Mr. Augustine. The impact of consolidation depends greatly on the 
size of the defense budget since one of the requirements for the 
industry is, within reason, to match its capacity to whatever the 
defense budget might prove to be. Previous consolidation of the defense 
budget tended to produce greater efficiency under circumstances where 
companies were over-sized compared to their market. On the other hand, 
consolidation can reduce competition and that tends to increase costs, 
thereby offsetting some of or more than, the potential savings. In 
general, one should try not to have fewer than three sources for any 
given item of equipment--and most certainly not less than two. Given 
the latter, and a reasonable-sized defense budget, I believe the DIB 
will be able to produce items of value to American taxpayers and to our 
Armed Forces. It should, however, be noted that this would require a 
far larger DIB than the DOD has in the past indicated was affordable.

                       competing internationally
    49. Senator Portman. Mr. Augustine, with an increasingly globalized 
economy, do you see the American DIB being able to compete with foreign 
companies?
    Mr. Augustine. It is my belief that if we remain on the path we are 
now pursuing as a nation, America will continue to erode its ability to 
compete with foreign companies, just as has been occurring for the last 
several decades. Since the DIB must draw upon many of the same 
suppliers as the commercial market; rely largely upon technology 
created for the commercial market; and utilize financial sources 
identical to those of the commercial market, it is my belief that the 
DIB will continue to deteriorate along with the overall U.S. base. If 
we are to change this glide path, we will need to repair our K-12 
education system, reverse the ongoing deterioration of our higher 
education system, significantly increase our investment in research, 
and create a regulatory and policy environment that is conducive to 
strengthening American competitors.

    50. Senator Portman. Mr. Augustine, if the American DIB cannot 
currently compete, what should be done so that they can be competitive 
or to keep a competitive edge?
    Mr. Augustine. Although the answer to this question was previously 
summarized, to those interested in America's future competitiveness I 
would commend the ``Gathering Storm'' reports prepared by the National 
Academies of Science, Engineering, and Medicine in 2005 and 2011.

                      communicating with industry
    51. Senator Portman. Mr. Odeen, a report recently published by your 
group, the Defense Business Board, recommended that DOD open a dialogue 
with defense industry companies to improve understanding between what 
DOD wants, and how industry can provide a timely, cost efficient, and 
quality product. This is a view shared by the top acquisition official, 
Under Secretary of Defense, Ashton B. Carter. In your view, has DOD 
adopted this recommendation?
    Mr. Odeen. You asked two questions related to a 2008 Defense 
Business Board report on improving the dialogue between DOD and Defense 
industry. I chaired the report and discussed it with senior OSD 
officials at that time. They were responsive to the issues raised and 
our recommendations, and the Deputy Secretary issued a letter in the 
fall of 2008 directing that communications with industry get higher 
priority, and directed that specific steps be taken to improve the 
dialogue.
    During the transition after the 2008 election. I briefed the senior 
OSD Acquisition nominees on the report and they indicated they fully 
understood the importance of robust communications with the Industrial 
Base. Since that time I have been told a number of times by industry 
executives that senior DOD Acquisition officials have been open to 
meetings and listened to their questions and concerns.
    With regard to your specific question about enhancing the dialogue 
regarding DOD's equipment requirements to ensure industry delivered 
more responsive, timely and cost effective weapons and equipment. I am 
not able to provide a specific answer. As a result of ours and other 
critiques of the capabilities requirements process, the Vice Chairman 
of the Joint Chiefs of Staff has undertaken a major review and 
revamping of the process. He feels the process is broken and requires 
fundamental change. This effort is ongoing and I am not privy to the 
status of the review or the changes under consideration. This would be 
an appropriate question to the Vice Chairman when he appears before the 
committee.

    52. Senator Portman. Mr. Odeen, have they done so successfully and 
what still needs to be done?
    Mr. Odeen. See response to question #51.

    [Whereupon, at 5:16 p.m., the subcommittee adjourned.]

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