Federal Research: DOD's Small Business Innovation Research Program
(Letter Report, 04/30/97, GAO/RCED-97-122).

Pursuant to a legislative requirement, GAO reviewed certain aspects of
the Department of Defense's (DOD) Small Business Innovation Research
(SBIR) Program, focusing on whether: (1) quality research is performed
under the funding agreements; (2) competitive procedures are being
followed; and (3) technologies developed through the program are likely
to be used in military programs or projects.

GAO noted that: (1) DOD has implemented policies and procedures and has
established an organizational structure to manage its SBIR programs; and
(2) on the basis of these factors and the results of DOD's research
under the program to date, GAO believes that processes are in place to
help ensure that quality research is being conducted, that competitive
procedures are being followed, and that the resulting products and
processes are being used in military projects and programs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-97-122
     TITLE:  Federal Research: DOD's Small Business Innovation Research 
             Program
      DATE:  04/30/97
   SUBJECT:  Research and development
             Competition
             Research program management
             Small business set-asides
             Small business assistance
             Technical assistance
             Defense contracts
             Dual-use technologies
             Research grants
             Commercial products
IDENTIFIER:  DOD Small Business Innovation Research Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

April 1997

FEDERAL RESEARCH - DOD'S SMALL
BUSINESS INNOVATION RESEARCH
PROGRAM

GAO/RCED-97-122

DOD's Small Business Innovation Research Program

(141014)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  R&D - research and development
  SBIR - Small Business Innovation Research Program
  SBA - Small Business Administration

Letter
=============================================================== LETTER


B-275265

April 30, 1997

The Honorable Strom Thurmond
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Floyd D.  Spence
Chairman
The Honorable Ronald V.  Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

The Department of Defense (DOD) and certain other federal agencies
are required to set aside a certain percentage of their research and
development (R&D) budgets for the Small Business Innovation Research
(SBIR) Program.  In fiscal year 1997, this will amount to about $1
billion governmentwide, of which about $500 million is expected to be
funded by DOD. 

The National Defense Authorization Act for Fiscal Year 1997 required
GAO to review certain aspects of DOD's SBIR program and report the
results to the Congress.\1 To meet these objectives and by agreement
with your offices, we reviewed DOD's policies and procedures to
determine if they establish processes that help ensure that (1)
quality research is performed under the funding agreements, (2)
competitive procedures are being followed, and (3) technologies
developed through the program are likely to be used in military
programs or projects. 


--------------------
\1 P.L.  104-201, Sept.  23, 1996. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOD has implemented policies and procedures and has established an
organizational structure to manage its SBIR program.  On the basis of
these factors and the results of DOD's research under the program to
date, we believe that processes are in place to help ensure that
quality research is being conducted, that competitive procedures are
being followed, and that the resulting products and processes are
being used in military projects and programs. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Small Business Innovation Development Act of 1982 was intended to
(1) stimulate technological innovation, (2) use small businesses to
meet federal R&D needs, (3) foster participation by minority and
disadvantaged persons in technological innovation, and (4) increase
private sector commercialization of innovations derived from federal
R&D.\2 The act required that agencies with "extramural" (external)
R&D budgets of $100 million or more set aside a certain percentage of
those budgets for the SBIR program.  Specifically, the act required
that these agencies set aside not less than 0.2 percent of their
extramural R&D budgets and provided for annual increases up to a
ceiling of not less than 1.25 percent of their budgets.  The act
provided for a three-phased program:  Phase I to determine the
scientific and technical merit and feasibility of a proposed research
idea; phase II to further develop the idea, taking into consideration
such things as the commercialization potential; and phase III to
commercialize the resulting product or process with no further SBIR
funding. 

The act gave the Small Business Administration (SBA) responsibility
for (1) issuing guidance to the participating agencies on managing
their SBIR programs, (2) surveying and monitoring the agencies'
programs, and (3) reporting at least annually to pertinent committees
of the Congress on the status of the programs and the results of the
monitoring.  SBA's policy directive to the participating agencies
recommended that each phase-I and phase-II proposal be funded at
$50,000 or less and $500,000 or less, respectively. 

The Small Business Research and Development Enhancement Act of 1992
reauthorized the SBIR program through fiscal year 2000.\3 The act
emphasized the program's goal of increasing private sector
commercialization.  The act provided for further incremental
increases in SBIR funding up to not less than 2.5 percent of
agencies' extramural R&D budgets by fiscal year 1997.  In addition,
the act directed SBA to modify its policy directive to increase
funding for phase-I and phase-II proposals to $100,000 and $750,000,
respectively, with adjustments once every 5 years for inflation and
changes in the program. 

Funding for DOD's SBIR program since fiscal year 1992 is shown in
figure 1. 

   Figure 1:  DOD's SBIR
   Expenditures, Current-Year
   Dollars (i.e., Not Adjusted for
   Inflation)

   (See figure in printed
   edition.)

Note:  Percentage of extramural R&D budget--1992 (1.25), 1993-94
(1.5), 1995-96 (2.0), and 1997 (2.5). 


--------------------
\2 P.L.  97-219, July 22, 1982. 

\3 P.L.  102-564, Oct.  28, 1992. 


   ENSURING QUALITY RESEARCH
------------------------------------------------------------ Letter :3

Following SBA's guidance, DOD manages its program through its SBIR
Program Manager in the Office of the Director, Small and
Disadvantaged Business Utilization, which reports to the Under
Secretary of Defense for Acquisition and Technology.  There are eight
participating military departments and defense agencies, referred to
as "components." The components include the Air Force; Army;
Ballistic Missile Defense Organization; Defense Advanced Research
Projects Agency; Office of the Director, Defense Research and
Engineering; Defense Special Weapons Agency; Navy; and Special
Operations Command.  The components use the following criteria
approved by the Under Secretary to develop their own prospective SBIR
R&D solicitation topics.  The topics are to

  -- solicit R&D, not procurement; -- fall within one of DOD's key
  technology areas; -- allow the performing company significant
     flexibility in formulating its approach to meeting the R&D
  requirement; -- include examples of possible phase III "dual-use"
  applications;\4 and -- not duplicate each other by soliciting
     identical or very similar sets of proposals. 

The components use their own procedures for evaluating and ranking
their topics and then submit them to the DOD SBIR Program Manager. 

DOD has a formal process for reviewing the topics, resolving any
areas of concern, and incorporating the approved topics into a
DOD-wide solicitation for proposals from small businesses (see app. 
I).  This process is done twice each year.  The proposals are
received and reviewed by the cognizant DOD components.  Each
component uses the following criteria by DOD for selecting research
proposals.  The reviewers are to consider the

  -- soundness and technical merit of the proposed approach; --
     potential for commercial (government or private sector)
  application and the expected benefits from commercialization; --
     adequacy of the proposed effort for fulfilling requirements of
  the research topic; and -- qualifications of the proposed
     principal/key researchers, supporting staff, and consultants. 
     Qualifications include the ability to perform the R&D and to
     commercialize the results. 

However, each component uses its own procedures for evaluating and
ranking the proposals and for determining which proposals will be
funded.  The components provide oversight of the ongoing R&D. 

Measuring the value or quality of any R&D effort has always proven to
be difficult.  In a previous report, we used certain statistics to
try to measure whether the quality of SBIR proposals governmentwide
had kept pace with the program's expansion.\5 We looked at trends in
the level of competition (the number of proposals submitted vs.  the
number funded) and the quality of competition (the number of
proposals funded vs.  the number deemed worthy of funding but not
funded).  These statistics indicated that (1) the level and quality
of competition had kept pace with the increases in funding and (2)
the level of research quality was being maintained.  In reporting to
the Congress on the quality of its SBIR research, DOD used the same
statistics.\6

For this review, we updated these statistics through fiscal year
1996.  The percentage of phase-I proposals that were funded (fig.  2)
and the ratio of phase-I proposals that were funded to the worthy
proposals not funded (fig.  3) have remained fairly constant. 

   Figure 2:  Percentage of
   Phase-I Proposals Funded

   (See figure in printed
   edition.)

Note:  Percentage of extramural R&D budget--1992 (1.25), 1993-94
(1.5), and 1995-96 (2.0). 

   Figure 3:  Phase-I Proposals
   Deemed Worthy of
   Funding--Funded vs.  Not Funded

   (See figure in printed
   edition.)

As additional potential measures of research quality, we also
obtained available statistics on the percentage of phase-I proposals
that went on to phase II (see app.  II) and on the extent of
commercialization of the results of the research.  On the basis of
the preliminary results of a survey by DOD, we determined that

  -- about one-half of the respondents have had sales of a product,
  process, or service; -- average sales amount per project has been
  about $756,000; and -- about 52 percent of the total sales have
     been made to DOD or its prime contractors, about 35 percent to
     the private sector, and the remaining percent to other
     customers. 

These data suggest that quality projects are being funded, that there
is adequate competition for the projects, and that the research
results are being used in military projects and programs. 


--------------------
\4 Dual use means that the research product or process can be used in
military projects or programs and can be used commercially. 

\5 Federal Research:  Interim Report on the Small Business Innovation
Research Program (GAO/RCED-95-59, Mar.  8, 1995). 

\6 Quality of Research Under the DOD Small Business Innovation
Research (SBIR) Program, Office of the Under Secretary of Defense
(Acquisition & Technology), May 30, 1996. 


   ENSURING FULL, OPEN COMPETITION
------------------------------------------------------------ Letter :4

DOD has implemented procedures to help ensure that competition for
research funding under the SBIR program is fair.  The solicitations
for research proposals are published widely through trade
publications, regularly established information outlets for DOD's
contracting, and the Internet.  The solicitations are generally open
to any individual or organization that qualifies as a small business. 
The solicitations specify the requirements that small businesses must
meet to be eligible to apply.  Furthermore, in their proposals, the
small businesses must certify under penalty of law that they meet all
of the requirements.  The DOD Inspector General conducts
investigations, as warranted, to ensure compliance with these
requirements. 

To promote more competition for its research projects, DOD conducts
three national SBIR conferences each year and participates in many
state-organized conferences.  These conferences are used to provide
small businesses with information on R&D opportunities available to
them and on how to submit research proposals or how to obtain
technical assistance in developing proposals.  Technical assistance
is available from the Defense Technology Information Center through
the mail, walk-in offices, and the Internet.  DOD also has a
prerelease program, whereby small businesses learn about upcoming
research solicitations in advance so that they can contact the
appropriate DOD component to get specific information.  According to
DOD, this results in higher-quality proposals.  To better gauge the
extent of competition, DOD's solicitations now require small
businesses to provide information on their prior SBIR proposals that
have been funded. 

The DOD components have their own programs to encourage more
competition.  The components issue brochures and advertisements in
trade journals, informing small businesses how to get detailed
information on R&D opportunities and how to apply for them. 


   ENSURING MILITARY APPLICABILITY
------------------------------------------------------------ Letter :5

Several factors help ensure that the research efforts under the SBIR
program have military applicability.  The research topics are
developed by the components' technical organizations to support their
missions, all of which are military-related.  DOD's guidance requires
that the research topics address one of the Department's key
technology areas and that they have dual-use application.\7 There is
required linkage between the topics and military planning documents. 
Furthermore, the preliminary results of DOD's recent survey on
commercialization show that about one-half of the sales from the
program's research efforts have been made to DOD or its prime
contractors for use in military programs. 


--------------------
\7 For example, a primary success story of DOD's SBIR program is the
"SaviTag" system of tracking shipping containers.  Combined military
and commercial sales of this system were anticipated to be $30
million in 1996. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided copies of a draft of this report to DOD for review and
comment.  We discussed the draft with DOD officials, including the
SBIR Program Manager, who said that the Department concurs with the
facts in the report.  The manager also provided information to update
certain statistics.  That information has been incorporated into the
final report. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

We interviewed officials in SBA, DOD, and the participating DOD
components.  We obtained and reviewed implementing instructions,
guidelines, and other pertinent documents.  However, we did not
evaluate the effectiveness or implementation of DOD's policies or
procedures.  Our verification was limited to reviewing statistics on
the number of research proposals funded; the ratio of funded
proposals to worthy but unfunded proposals; the number of phase-I
proposals that go on to phase II; and the extent of commercialization
of the research results.  Our planned work--mandated by the Small
Business Research and Development Enhancement Act of 1992--will
examine in greater detail the management and implementation of the
SBIR programs of all participating federal agencies, including DOD. 
We performed our review from January through March 1997 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Secretary of Defense and
the SBA Administrator.  We will make copies available to others on
request.  If you have any questions or need additional information,
please call me at (202) 512-3841.  Major contributors to this report
are listed in appendix III. 

Victor S.  Rezendes
Director, Energy, Resources,
 and Science Issues


THE DEPARTMENT OF DEFENSE'S TOPIC
IDENTIFICATION AND APPROVAL
PROCESS
=========================================================== Appendix I



   (See figure in printed
   edition.)

Note:  The Department of Defense's (DOD) review is performed by the
Office of the Director, Defense Research and Engineering, which
interacts with the components to resolve any concerns.  If the
concerns cannot be resolved, the topic is submitted to the Integrated
Review Committee for final review (this is a 1-year pilot program). 
The Committee makes its recommendation to the Director, Office of
Small and Disadvantaged Business Utilization.  The Director makes the
final decision in consultation with the Director, Defense Research
and Engineering.  The review process (from DOD's review to topic
approval) takes about 6 weeks. 


PHASE-I PROPOSALS THAT WENT ON TO
PHASE II, FISCAL YEARS 1983
THROUGH 1996
========================================================== Appendix II

                                                            Percent of
                                                               phase-I
                                   Phase-I      Phase-II     proposals
                                 proposals     proposals  that went on
                                    funded        funded   to phase II
----------------------------  ------------  ------------  ------------
Army                                 2,681         1,041          38.8
Air Force                            3,865         1,448          37.5
Director, Defense Research              59            22          37.3
 and Engineering
Navy                                 3,190         1,005          31.5
Defense Special Weapons                248            70          28.2
 Agency
Defense Advanced Research            1,360           382          28.1
 Projects Agency
Ballistic Missile Defense            1,555           418          26.9
 Organization
Special Operations Command              30             7          23.3
======================================================================
Totals                              12,988         4,393          33.8
----------------------------------------------------------------------
Note:  The Special Operations Command and the Director, Defense
Research and Engineering, have been participating in the program
since fiscal years 1993 and 1995, respectively. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Allen Li
Robin M.  Nazzaro
Katherine L.  Hale
Michael F.  Duffy
John C.  Johnson

OFFICE OF THE GENERAL COUNSEL

Mindi G.  Weisenbloom


*** End of document. ***