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

[H.A.S.C. No. 112-66]

CHALLENGES TO DOING BUSINESS
WITH THE DEPARTMENT OF DEFENSE

__________

HEARING

BEFORE THE

PANEL ON BUSINESS CHALLENGES

WITHIN THE DEFENSE INDUSTRY

OF THE

COMMITTEE ON ARMED SERVICES

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

HEARING HELD

SEPTEMBER 20, 2011

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PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY

BILL SHUSTER, Pennsylvania, Chairman
BOBBY SCHILLING, Illinois RICK LARSEN, Washington
JON RUNYAN, New Jersey BETTY SUTTON, Ohio
ALLEN B. WEST, Florida COLLEEN HANABUSA, Hawaii
Lynn Williams, Professional Staff Member
Timothy McClees, Professional Staff Member
Catherine Sendak, Research Assistant

C O N T E N T S

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CHRONOLOGICAL LIST OF HEARINGS
2011

Page

Hearing:

Tuesday, September 20, 2011, Challenges to Doing Business with
the Department of Defense...................................... 1

Appendix:

Tuesday, September 20, 2011...................................... 29
----------

TUESDAY, SEPTEMBER 20, 2011
CHALLENGES TO DOING BUSINESS WITH THE DEPARTMENT OF DEFENSE
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Larsen, Hon. Rick, a Representative from Washington, Ranking
Member, Panel on Business Challenges within the Defense
Industry....................................................... 2
Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman,
Panel on Business Challenges within the Defense Industry....... 1

WITNESSES

Hodgkins, A.R. ``Trey,'' III, Senior Vice President for National
Security and Procurement Policy, TechAmerica................... 4
Jacobus, Heidi, Chairman and CEO, Cybernet Systems Corporation... 9
Smith, Bradford L., Jr., President and CEO, Civil Services
Strategic Analysis, Inc........................................ 6

APPENDIX

Prepared Statements:

Hodgkins, A.R. ``Trey,'' III................................. 36
Jacobus, Heidi............................................... 65
Larsen, Hon. Rick............................................ 35
Shuster, Hon. Bill........................................... 33
Smith, Bradford L., Jr....................................... 49

Documents Submitted for the Record:

Organizational Plan of the Panel on Business Challenges
within the Defense Industry................................ 95

Witness Responses to Questions Asked During the Hearing:

Mr. Larsen................................................... 99

Questions Submitted by Members Post Hearing:

Mr. Schilling................................................ 103

CHALLENGES TO DOING BUSINESS WITH THE DEPARTMENT OF DEFENSE

----------

House of Representatives,
Committee on Armed Services,
Panel on Business Challenges within the Defense Industry,
Washington, DC, Tuesday, September 20, 2011.
The panel met, pursuant to call, at 3:01 p.m. in room 2212,
Rayburn House Office Building, Hon. Bill Shuster (chairman of
the panel) presiding.

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

Mr. Shuster. The hearing will come to order.
Good afternoon. I want to take the opportunity to welcome
our three witnesses today. Thank you very much for taking your
valuable time and spending some of that with us here today and,
of course, those in the audience that are interested.
This is our first in a series of hearings this panel will
hold examining the business challenges in the defense industry
today. Chairman McKeon and Ranking Member Smith established
this panel to take a deep dive into the challenges facings
firms that already work with the Department of Defense and
those that want to do business with the Department. I am
honored that Chairman McKeon asked me to lead this panel,
alongside my good friend from Washington State, Rick Larsen.
And I might add for one of our witnesses, you may know the
town. As you drive to your farm in Bedford County, you may pass
through Everett. Well, that is the important Everett:
Pennsylvania. He is from Everett, Washington. So I am going to
keep making references every chance I get so I can elevate
Everett, Pennsylvania, to a rank above the great city of
Everett, Washington. But I am glad that Mr. Larsen is leading
this panel with me.
And rounding out our panel members are: Bobby Schilling
from Illinois, who I don't believe is going to be making it in
today. Bobby represents the 17th District in Illinois, which
contains Rock Island Arsenal. Bobby is a small-business owner
and has firsthand experience with the difficulties dealing with
the Government at all levels.
Betty Sutton, who represents the 13th District of Ohio. As
the co-chair of the Congressional Task Force on Job Creation,
Betty is dedicated to promoting good business practices and
creating American jobs.
Jon Runyan from New Jersey. Jon represents the Third
District of New Jersey, which contains Fort Dix and McGuire Air
Force Base, and has a vested interest in defense business
practices across the board.
Colleen Hanabusa is from the First District of Hawaii and
has been involved in Hawaii politics since 1998. With a large
defense presence in Hawaii, Colleen understands how important
it is to bring efficiency and effectiveness to the defense
industry.
And Allen West from the 22nd District of Florida. Allen
retired from the Army in 2004 after 22 years and brings a
unique perspective of experience on both sides of the table,
Government and industry.
Again, I want to thank everybody for being here today and
taking the time to lend your expertise to this effort.
We have all heard in our districts and across the country
from businesses that find it extremely difficult to
successfully navigate the DOD [Department of Defense]
acquisition system. This is particularly true for small
businesses and those involved in science and technology
efforts. While there are programs out there that assist
businesses in transitioning innovative ideas and technologies
to a final end product that satisfies a military requirement,
there are many obstacles in the way.
In these current economic times, we must make good use of
every tax dollar we spend on defense, and we can do this by
leveraging the heart of the American workforce: Small
businesses. By reducing barriers to entry, we can generate
competition, spur innovation, and stimulate the economy. So I
look forward to working with my fellow panel members here as we
move forward.
And with that, I will yield to the ranking member, Mr.
Larsen, if he has any comments.
[The prepared statement of Mr. Shuster can be found in the
Appendix on page 33.]

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

Mr. Larsen. Thank you, Mr. Chairman.
And I want to thank Chairman McKeon and Ranking Member
Smith, as well, for putting this panel together. In 6 months,
we will have substantive solutions to the challenges that small
and medium-sized businesses face when they approach the
Department of Defense.
The Federal budget is increasingly strained, and we have to
ensure that the needs of our military to provide for national
security and defense are not shortchanged. In order to
accomplish this, DOD will need to stretch their dollar and
maintain robust competition. Better contracting also offers a
chance for job creation and growth for companies that often
have the best products but find barriers in their path when
they approach the DOD. How to make and implement improvements
is something we will aim to discover over the next few months.
Small and medium-sized businesses need to be part of the
defense industrial base, and that means rethinking the current
model. Our goal must be to break down barriers and improve
competition for defense contracting to get better prices,
better products, and better services for the warfighter.
So I want to thank our witnesses for participating today to
help us understand their issues as well as the general
framework for the challenges that we are going to face as we
help identify solutions.
Last month, Bill joined me in Everett, Washington--which we
have heard so much about already, but I will tell you the truth
about it--which is in my district, where we held a roundtable
with about 20 local businesses. We spoke with them about their
successes and their failures in working with the DOD. One
individual spoke of having to outline technical specifics to
the DOD in order to have a proposal released, only then to have
the competition have access to those specifics. Another spoke
of the very simple issue of not receiving payment on time--a
serious concern for small companies who are not flush with
cash. We need to continue to talk and to listen to these
businesses and to find solutions for them.
So I want to thank all my colleagues for agreeing to serve
on this panel. I believe this entire group of Members brings a
diverse perspective on these issues. We are all here because we
want to improve the chance for competition, for job growth, and
for making certain our women and men in the military have the
best options and capabilities available to them.
Thanks again.
[The prepared statement of Mr. Larsen can be found in the
Appendix on page 35.]
Mr. Shuster. Thank you.
Before I turn to our witnesses, we have a piece of
administrative work that we have to take care of. So I ask
unanimous consent that the work plan for the panel, which has
been distributed to all members, be entered into the record.
And, without objection, so ordered.
[The information referred to can be found in the Appendix
on page 95.]
Mr. Shuster. Again, that will be an official part of the
record.
And we are going to get started here. And, again, I want to
thank our witnesses for being here today. I will introduce all
of you now and then go to each of you for your testimony.
First, Mr. A.R. ``Trey'' Hodgkins III, senior Vice
President for national security and procurement policy,
TechAmerica. Glad to have you here, and glad to know you have
some sort of roots planted in Pennsylvania.
Mr. Bradford L. Smith, Jr., President and CEO [Chief
Executive Officer] of Strategic Analysis, Incorporated. And,
again, Mr. Smith informs me that his family is from Butler
County, Pennsylvania. So, somehow, if I can just get some kind
of Pennsylvania--I can go back to my district and say,
everybody who testified in front of me today were
Pennsylvanians or had some connection.
Ms. Heidi Jacobus is the CEO of Cybernet Systems
Corporation. Thank you for being here.
I again welcome you all.
And we will turn to Mr. Hodgkins first, and you may
proceed.

STATEMENT OF A.R. ``TREY'' HODGKINS III, SENIOR VICE PRESIDENT
FOR NATIONAL SECURITY AND PROCUREMENT POLICY, TECHAMERICA

Mr. Hodgkins. Thank you, Mr. Chairman and Ranking Member
Larsen and members of the panel.
My name is Trey Hodgkins, and I am the senior vice
president for national security and procurement policy at
TechAmerica. I want to thank you for the opportunity to testify
about business challenges within the defense industry and
highlight tech-sector perspectives on those challenges.
Technology is ubiquitous in the missions of the Department, and
we believe it is a significant differentiator in the success of
those missions.
TechAmerica is a leading voice for the U.S. technology
industry, representing approximately a thousand companies of
all sizes from the public and commercial sectors of the
economy. Our members range from traditional defense industrial
base integrators, or DIB [defense industrial base] companies,
to the most innovative and agile of small technology firms.
They function as prime suppliers, subcontractors, and many are
commercial in nature and choose to operate entirely outside of
the Federal market.
Most have a commercial business model, meaning they offer
commercial items for sale around the world that are developed
and manufactured using a global supply chain. These conditions
impact how they view Government actions and whether or not they
are interpreted as barriers, impediments, or incentives.
When commercial companies choose to sell to the Department,
they rely upon '90s-era reforms that created a preference for
commercial items in Federal Government acquisitions. The same
laws require those transactions be as close as possible to
commercial transactions for the same items and not include
Government-unique requirements. These reforms gave DOD access
to commercial technology and innovation while driving savings
for the taxpayer.
Unfortunately, many of those premises have been forgotten
or abandoned, and doing business with DOD no longer bears any
meaningful resemblance to commercial business for the same or
similar items. The Federal Government and DOD market share is
also shrinking, and for many technology companies it now
represents 5 percent or less of their total global market.
Making the business case for accepting the conditions we
will discuss today is increasingly difficult in a global
company or a small business. This impacts DOD access to
innovation, competition, and mission success. For some
commercial companies, business with the Federal Government has
become too burdensome or too risky, and they choose to stay
out.
I would like to elaborate on some of those barriers and
will start with regulations and their burdens as an example.
A barrier to entry for innovation technology in small
businesses is the regulatory burden on companies that sell to
DOD. For example, TechAmerica identified an apparent increase
in the use of interim acquisition rules with immediate
enforcement requirements. The chart I included in my written
statement shows that there is a clear and pronounced upward
trend, from 8 cases in 2008 to 38 cases last year. This means
companies and agencies have less time to react to proposals and
respond to become compliant. It also means that public
participation is minimized in the process.
Another trend is the increase in acquisition regulation
reporting burdens. Waivers from the Paperwork Reduction Act
have become commonplace and fail to acknowledge the significant
cumulative and Government-unique burden these requirements
place on businesses. In calculating the reporting burden, the
methodology the Government uses only accounts for time to
complete the form, not the time needed to collect the data, and
we believe it is a gross underestimation of the burden on
industry.
DOD-specific regulatory trends are no better, with a marked
increase in the use of guidance as a replacement for what
industry feels should be promulgated regulatory actions.
Compliance burdens associated with guidance or regulations are
barriers to successful entry and sustainment in the DIB.
Other barriers are just as daunting and discouraging.
Commercial companies look at the levels of disclosure and
conclude with relative ease that they are a sufficient
deterrent to doing business with the Federal Government. This
apprehension is growing as requirements for reporting and
disclosure expanded to subcontractors and suppliers.
Another barrier is the 3-percent withholding tax on
Government contractors. TechAmerica commends the Armed Services
Committee for their leadership in the effort to repeal this
provision and encourage your continued efforts. The reduction
in cash flow as a result of this withholding often forecloses
considerations small businesses might have for bringing their
innovations to Government.
Long procurement lead times typically encountered at DOD
are also a barrier, particularly for commercial companies. They
are unaccustomed to such long lead times and usually operate in
environments using agile development in incremental models for
short cycles of 6 months to a year. The DOD's 24-or-more-month
lead times are not conducive to attracting the innovation these
companies could bring to bear.
I would like to turn to challenges to bringing innovation
to the public sector and DOD and point to Government-unique
requirements placed on companies. I have already touched on
some of those above. Others include the recent increases in
efforts to change the ownership of intellectual property when
companies sell to the Government. Governing laws in case
decisions define specific points when ownership changes, but
new proposals would blur those lines and make the Government a
part owner for even relatively minor investments into an
innovation for adoption by the Government.
Another impediment to effective adoption of technology and
innovation is the emphasis placed in acquisitions on ``lowest
priced, technically acceptable.'' The practice has become the
preference and now forces behavior that overlooks better or
more secure products to save on the price. There now exists an
aversion to consider for award products or services that are
not ``lowest priced, technically acceptable,'' even if the
offering is more innovative and is the real best value for the
taxpayer. An example where this policy is causing harmful
consequences is in the assurance of the supply chain for the
Department. TechAmerica supports a change to require that
acquisitions of information-technology hardware, software, and
services are limited to the original equipment manufacturers or
their authorized suppliers. But ``lowest priced, technically
acceptable'' does not support such a need.
I will close by touching on financial impediments to the
innovation adoption. TechAmerica believes the panel should
focus on how funding limitations frequently pose a far bigger
problem for transitioning technology for DOD. Current processes
require the identification of technology desired before
starting the multiyear funding request process. Frequently, the
product is several generations old before that process can be
completed. As was recommended in our GTO-21 [Government
Technology Opportunity in the 21st Century] report to OMB
[Office of Management and Budget], Congress should examine the
way it funds technology acquisition and deployment because it
is a real barrier to the successful adoption of innovation in
the Department.
Again, I appreciate the opportunity to raise these issues
for consideration with you this afternoon and look forward to
further engagement with you on these issues.
[The prepared statement of Mr. Hodgkins can be found in the
Appendix on page 36.]
Mr. Shuster. Thank you very much.
And, Mr. Smith, please proceed.

STATEMENT OF BRADFORD L. SMITH, JR., PRESIDENT AND CEO, CIVIL
SERVICES STRATEGIC ANALYSIS, INC.

Mr. Smith. I also want to thank you for the opportunity to
testify.
My name is Bradford Smith. My company, Strategic Analysis,
Incorporated, is a small to midsized company. We have been
providing professional services to Federal agencies. We are a
service-disabled, veteran-owned, founded in 1986, and have
approximately 250 employees. We have offices in Arlington,
Virginia; Washington, D.C.; Colorado Springs; and Dayton, Ohio.
And the types of services we provide are systems
engineering, advisory services, intelligence support services,
information technology, and conference planning. So it is a
variety of services for the Departments of Defense, Energy, and
Homeland Security. For most procurements, our 250-employee
company is considered a large business, so we must compete full
and open. For some, we are a small business. For SBIR [Small
Business Innovation and Research], for research work we do, it
is small.
I am making these comments after working in services for
these agencies and departments for about 38 years. And, again,
I understand that the format is to provide some brief comments
ahead of fielding questions, so I would like to raise a few
issues that I outline in my paper.
One specific concern of mine comes from the current trend
to using ultra-large, indefinite-delivery, indefinite-quantity
contracts for set-asides for very small businesses. The
tendency to bundle is both prevalent in full and open
competitions as well as in small-business set-aside. And,
likely, with the highly constrained environment, there will be
an increasing tendency to bundle. There are efficiencies from
the Government side.
I am very concerned that the very small companies that win
such ultra-large set-asides must focus resources on strong
proposal and program management capabilities--we have seen it
across the spectrum of competitions we have been involved
with--rather than on the unique skills and capabilities that
they bring to bear. From my point of view, this is a tremendous
deterrent to innovation in the sector of our industrial base,
where much of our innovation starts.
Secondly, as a midsized business owner, I am quite
concerned about being excluded from many set-asides or any set-
aside competitions as a prime contractor. As a midsized company
for almost all of the procurements that we go after, we compete
full and open. I find it hard to believe that a company with
250 employees is too big to compete for a $1 billion, 5-year
service contract. And that is the case today, with the
exception of the Air Force. The Air Force has set aside--has
created NAICS [North American Industry Classification System]
codes where larger small businesses--500, 1,000, 1,200--can
compete for service contracts.
For us, growth to midsize has been over a long period of
time. We are celebrating our 25th anniversary. We have done it
through vertical and horizontal movement to various client
areas. Our reputation precedes us into the marketplace. We have
not really been focused on set-asides, but we now find
ourselves to be in a position where, because of set-asides, we
find it more difficult to compete for the same work we have
been doing over the period of our life.
And, again, I have to say, many owners of companies in my
position now are choosing or have chosen to sell their
companies to larger firms. But I truly believe that the
Government is losing or could lose a significant sector in
midsized businesses. And I am a strong advocate of midsized
businesses because they have all the charm of small businesses
and they don't have any of the trappings and downside of larger
businesses.
And I commend to you a study done by David Berteau and his
team on the services industrial sector--I will leave a copy of
this--where it shows the trend of the sector in the middle--not
the small, not the large, but the medium-sized companies--as
being the one that has shrunk over the last 10 to 20 years.
Again, I can't reemphasize enough my belief that midsized
companies are a significant resource for the Department of
Defense. And, again, the differentiation of size is a
continuum: Small, medium, large. Midsized companies are as
innovative as small, I would argue; they are agile; and they
have significant potential to create jobs. The conventional
wisdom is that small businesses do that. I would argue that
midsized businesses do it better and can be a more effective
generator of jobs.
I want to highlight one specific regulation that makes the
problem worse for small business. I will call it the ``51
percent rule.'' Small businesses that win large prime contracts
or any set-aside contract are required to, themselves, execute
51 percent of the effort, even while they may be teamed with
other small businesses. And I do believe midsized companies or
other small businesses are much more effective at teaming with
small business than larger firms.
To get the work done, to get the small-business
contribution counted on their team, small businesses are forced
now to form joint ventures, which I view as a highly risky
endeavor for a small business. So you now are seeing greater
prevalence of joint ventures of small businesses going after
half-a-billion-dollar service contracts as a team. So you
create a new corporate entity.
The 51 percent rule is very inflexibly applied, at this
point. The Air Force, up until the GAO [Government
Accountability Office] decision several years ago, was allowing
the contribution of all the small businesses to be counted. And
in recent times, based on that case, everybody is strident
about it. Companies are disallowed unless their contributions
are going to actually not only bid but perform. And if you
have, I am going to notionally say, a half-a-billion-dollar
contract, that is $100 million a year. For a small business--
and I mean ``small'' meaning $4-million-revenue companies--it
is a huge extrapolation to perform that much work.
So I recommend that--in fact, what is interesting about
that is, it is frequent that such companies outgrow the ability
to compete for follow-on work. So if you have a small business
effectively performing a certain piece of work growing to the
size to provide the types of service needed, at the end of that
5-year, or 10-year potentially, contract, they are no longer a
small business and can't compete.
Although consideration of the definition of ``inherently
governmental'' is not specifically on your agenda, I recommend
you look at it. OMB recently issued a policy letter to attempt
to clarify the definition of ``inherently governmental.'' I
would suggest that the current FAR [Federal Acquisition
Regulation] definition, regulations, and policies that were in
place prior to that are quite effective.
The new policy defines not only ``inherently governmental''
but functions that are closely associated with ``inherently
governmental'' and functions that are ``critical.'' Not that
one can't define those, but what the net effect, I believe,
will be unnecessary insourcing and, for the Government and the
public, not necessarily the best value solution that comes from
competition.
My submission has a little bit more on each of these. I
would like to make just a few specific suggestions.
The midsized business ``squeeze,'' as I am calling it: I
suggest the panel explore ways of supporting midsized
businesses through, for example, creating a new set-aside
program; modifying the NAICS codes, the definitions--the
various--the fairly Byzantine NAICS codes set that are in place
today; or modifying the small-business size standard to
encompass midsized businesses.
I would suggest the business that we are in, which is
supporting Government agencies in a relatively close way--many
of our employees work on Government facilities--is a good place
to target for midsized businesses. Often, the agencies are
needing more capacity, a broader set of technical skills, and
strong program management capability, which one doesn't
typically find in a small business. You find that typically in
a large business, but you can also find it in a small. And
where you have strict constraints on organizational conflicts
of interest, midsized companies can be quite effective at
mitigating any concerns about organizational conflicts of
interest.
On the subject of very large, multi-award, indefinite-
delivery, indefinite-quantity contracts that are set aside for
small, I recommend that that is a poor choice for small
businesses and that the panel look for other types of contracts
that more effectively capture the strength of small business:
Their innovation, their specific unique charm, the people.
And then, lastly, I recommend you look at the new policy
letter on ``inherently governmental.'' And I think the best
solution would be for something akin to the A-76 [OMB Circular
No. A-76 on ``Performance of Commercial Activities''] process,
where the Government can truly determine what is the best
value. As soon as we start defining ``inherently
governmental,'' ``close to inherently,'' ``slightly close to
inherently governmental,'' we are into increasing the size of
the Government staff--and not that you shouldn't. If it is the
public trust that needs to be protected, if it is inherently
governmental, it should be done by a Government employee.
Anything else should be up for grabs as to whichever is the
best value to the Government.
Thank you.
[The prepared statement of Mr. Smith can be found in the
Appendix on page 49.]
Mr. Shuster. Thank you, Mr. Smith.
Ms. Jacobus.

STATEMENT OF HEIDI JACOBUS, CHAIRMAN AND CEO, CYBERNET SYSTEMS
CORPORATION

Ms. Jacobus. Mr. Chairman, Ranking Member Larsen, other
members of the panel, thank you for the opportunity to speak to
you today.
I have submitted my written statement for the record. That
may----
Mr. Shuster. It is going to be in the record, your full
statement. But I would ask you to summarize it, keep it to
within 5 minutes or so.
Ms. Jacobus. Thank you.
Mr. Shuster. Thank you.
Ms. Jacobus. I am Heidi Jacobus. I am the founder, CEO, and
majority stockholder of Cybernet Systems, a small business in
Ann Arbor, Michigan.
Twenty years ago, I started Cybernet on the basis of a
single Department of Defense SBIR contract. That is the Small
Business Innovation Research program. And during the question
period, please ask me any questions about the structure of
SBIR, because I have 20 years of experience and know a lot
about it.
I am an unlikely entrepreneur. I am an unlikely Department
of Defense contractor. I was born to parents who didn't have
any high school education. My mother was an immigrant from
Germany and couldn't speak English when I was born. My father
was a first-generation American. He dropped out of high school,
joined the CCC [Civilian Conservation Corps], then the Army,
and worked in factories.
They valued education, and I complied. I was very fortunate
to have obtained a very good education by scholarships, work-
study programs, and my parents' sacrifices, of course. I went
to graduate school at the University of Illinois, Champaign-
Urbana, where I studied computer science. I got my master's
degree and worked for 3 more years towards my Ph.D.
Then I got married, moved to Texas, worked at Texas
Instruments in the research lab, and had children, dropped out
of my research for a while, and a few years later picked up my
research again.
When I was at the university engineering library, I opened
up a book, and the book was an RFP [request for proposal] from
the Department of Defense, and there was my research topic in
the SBIR book. DARPA [Defense Advanced Research Projects
Agency] was asking for a proposal on something I had been
working on for the last 9 months. So I was pretty excited,
because I had a 40-page working paper on the topic. I shaved it
down to 25 pages, submitted it as an SBIR. And a few months
later, I got a phone call from a DARPA colonel who said it was
the best proposal he had ever read.
So, I was up and running. I went in, I quit the university,
I hung up a shingle, I moved my daughter into her brother's
bedroom, and the first Cybernet was there.
Now, we had to deal with regulations, and, having a German
mother, I had to deal with the rules of the contract. And so
when I got a contract that said ``FAR clause so-and-so, jewel
ball bearing,'' I had to drive to a Federal library to find out
what that meant, because I wasn't going to sign the contract
asserting something about jewel ball bearings that I couldn't
feasibly understand without the reference.
I didn't know what the word ``overhead'' meant. I was a
technology person, I was an engineer--9 years of college, 5
years in computer science. I didn't know about business or
business structure. So I figured it out. And SBIR is a
beautiful program where small businesses can slowly take their
technology and create a business structure. The guidelines are
very clear. The initial contracts, the Phase I's, are very
small. And the forms are easy to fill out. So, for overhead, we
measured the square footage of my daughter's bedroom, divided
it by our house square footage, and there was my overhead rate.
So I learned by doing.
And now, 20 years later, I have 60 employees. We have 35
patents issued. We have SBIR equipment that comes, actually,
from a Picatinny Arsenal SBIR and is now in Kuwait. It has been
there 6 years, and it is still very productive, saves the Army
hundreds of millions of dollars. A four-star general who has
visited the project many times--he is now retired--said at an
AUSA [Association of the United States Army] conference that
our machine saved the Army $27 million in its first 4 months of
operation. Six years later, you can multiply. That is an
extremely good investment for the Army to have made in that
Picatinny Arsenal SBIR that, over some years, turned into this
wonderful piece of equipment in the field called ATACS
[Automated Tactical Ammunition Classification System], which is
an ammunition sorter.
I am nearly out of time, so I would like to stop.
Mr. Shuster. We will have plenty of time to ask you some
questions.
Ms. Jacobus. Thank you.
[The prepared statement of Ms. Jacobus can be found in the
Appendix on page 65.]
Mr. Shuster. Very interesting, the founding of your
business.
One question I have: Isn't Cybernet--isn't that the company
on ``Terminator''?
Ms. Jacobus. No. It is----
Mr. Shuster. Just want to clarify that----
Ms. Jacobus. I was actually on ``Squawk Box'' last year in
August before Mark Haines passed away, unfortunately, and Mark
Haines asked me the same question. And I said, ``Mr. Haines, we
are ahead of `Terminator.' Cybernet was formed a year before
the `Terminator' movie came out.''
And, actually, at the time, Cybernet had a Humvee, borrowed
from the Marine Corps Arsenal in Detroit, that we were
retrofitting with robotic controls.
Mr. Shuster. Really?
Ms. Jacobus. So I think we were a little bit ahead of the
curve.
Mr. Shuster. I hope you got some money since they stole the
name of your company and put it in the movie. But, anyway,
thank you again for your testimony.
Ms. Jacobus. Thank you.
Mr. Shuster. We are going to go through questions. I am
going to start with a couple of questions.
First, Mr. Hodgkins, you talked about the burdens and you
said ``risk.'' I don't know if you really touched on the
``risk'' part, of why it is risky. Can you go through some of
the things you see out there that are risky dealing with the
Department of Defense, specifics of why you consider it risk?
Because a lot of people would consider doing business with the
Federal Government not very risky. Very burdensome, but----
Mr. Hodgkins. Sure. I touched on a few that businesses do
see as risks. For example, the potential loss or partial loss
of intellectual property because they do business with the
Government. Many companies will walk away from the business on
that basis alone. And the changes that are being proposed
simply blur the lines. If you have a small business, as Ms.
Jacobus described, some of those things can be impenetrable or
very difficult to determine. And the idea that you would
potentially forfeit your intellectual property by doing
business with the Government makes many companies see that as
an insurmountable risk.
Another example would be in the disclosures that I talked
about. Many of the things that the Government asks companies to
disclose, either as part of the ordinary acquisition regulation
reporting burden or as some of the contractor databases that we
have built, things like that, some companies see that data as
propriety, or certainly bordering on it. And the disclosure of
what they team to be the secret sauce of the success of their
company on a public Web site or in some form of a database that
their competitors may see it, they see that as a risk that is
just too big to overcome. And so they choose not to face those
challenges, and face the commercial market instead.
Mr. Shuster. Intellectual property rights, is that
something you are talking about?
Mr. Hodgkins. Yes. Correct. I mean, you wouldn't want to
develop a great software program but when the Government wants
to buy it, they want me to modify it, using their money, to
include some encryption capability, for example.
Mr. Shuster. Right.
Mr. Hodgkins. It is our interpretation of the proposals
that are on the table that the Government would own part or
more, a significant part, of that software and the intellectual
property involved in it. And companies look at those reasonable
conclusions and say, it is just too risky; I don't want to give
up my intellectual property and the products that I have
developed.
Mr. Shuster. Right. And your association, you represent
small companies, medium-sized, and large?
Mr. Hodgkins. Absolutely.
Mr. Shuster. And do you find--some of these things are
across the board, they affect. But focus on those small and
medium-sized. Do you find it a much greater problem for your
members that are smaller members, like Mr. Smith or Ms.
Jacobus?
Mr. Hodgkins. Absolutely. The small or midsized companies,
usually, you know, they have a collection of patents, as was
noted, that to lose their rights in those patents would mean
the company is gone.
The larger companies face similar challenges and certainly
don't want to lose the intellectual property they have
developed, but their business with the Government is more
diverse. It covers more of the sectors of the defense market
and the industrial base, and so they are better able to deal
with those challenges. They also have more sophisticated
administrative capabilities and legal staffs that can address
and, you know, interpret those things for them.
Mr. Shuster. Thank you.
And, Ms. Jacobus, you said you had a lot of experience with
the SBIR program.
Ms. Jacobus. Yes, indeed.
Mr. Shuster. Can you tell us some of the hurdles you face
and some of the things you see, as a small-business owner, that
we could look at improving the program to make it easier for
smaller companies?
Ms. Jacobus. Right. Well, stemming off of Mr. Hodgkins'
statement about the intellectual property, SBIR is an extremely
good balance to the intellectual property program. Under SBIR,
we have data rights. And it is balanced by the fact that we, as
technology companies doing very special things for the Defense
Department, we are overkill for the commercial market. So the
machines we build would not be attractive to some factory
automation, because factory automation is really easy compared
to what we do in the field in Kuwait.
So we have to have a good relationship with our Government
customer. And I think, under SBIR, the intellectual property
system has worked very well for 30 years now, and----
Mr. Shuster. Good.
Ms. Jacobus [continuing]. I hope it continues.
But one of the biggest challenges for SBIR companies is
that the technology we develop is new technology. And so, in
the military, there is a metric called technology readiness
level, TRL, and it defines what a technology readiness level
is. If something is on a piece of paper, it is 1. And if
something is, you know, shrink-wrapped, off-the-shelf, tested,
it is 10.
The SBIR Phase I's and Phase II's, because what we are
doing is new, the only reason we got an SBIR is that product or
system could not have been purchased commercially. Everything
innovative is new. And that is why SBIR companies get so many
patents. We are automatically doing something new.
SBIR funding takes us to Phase IV, TRL level IV. So we are
not over the hump yet. What is needed for V, VI, and VII is
testing and evaluation. And in the case of a Navy product we
have developed, we had to take the product out to sea trial,
which involves sending two engineers on a ship with Marines and
using it out at sea. It is expensive. We had to drop it in
saltwater, shake it. And you can imagine the rigor that has to
be gone through for a military product compared to something
that is a disposable, something at a big-box store.
So the conundrum for small businesses is that there is
literally no funding source anyplace for the test and
evaluation.
Now, there is something new on the horizon, the RIF
program, the Rapid Innovation Fund. And that has promised that
it can serve as a competitive way to try to get some test and
evaluation money so that you can bridge TRL levels V, VI, VII,
and then get to the end, where you can literally field it and
sell it to the military. That is a good goal. But the RIF
program is very small, it is not yet activated, it is only
partially announced, and it is really uncertain how many
projects it will be able to fund.
Mr. Shuster. Right. And I am not even familiar with the RIF
program
Mr. Shuster. We will get into that. I am going to--my time
has expired. We are going to stay on the 5-minute clock, but we
can do a couple rounds of questions because I think we have
plenty of time.
So, with that, I will yield to Mr. Larsen for a question.
Mr. Larsen. Thanks.
Mr. Hodgkins, with regards to your testimony, on page 6 I
think it is, you said, ``TechAmerica members are on record
supporting a change in policy to require that sourcing for
acquisitions of information-technology hardware, software, and
services are limited to original manufacturers or suppliers who
are authorized by those manufacturers.''
Can you go into a little more detail on why that is and why
that would be helpful?
Mr. Hodgkins. Well, we believe it is a policy challenge the
Government faces where it potentially conflicts with small-
business incentive programs that you have, particularly when
you look at things like the GSA [General Services
Administration] schedules and acquiring products those people
may be reselling.
The problem the Government is faced with--and, certainly,
as members of this committee, you have probably had briefings
that I don't have access to regarding the challenges with
counterfeits and other malicious products that are successfully
or unsuccessfully inserted in the DOD supply chain. There are a
number of legislative and regulatory initiatives that are
attempting to address that. And this committee has generated a
couple of those.
The problem we see is that the Government--and when you
couple it with the ``lowest price, technically acceptable''
preference I discussed, the acquisition community's behavior is
to go out and find ``what can I get at the lowest price''
versus ``what can I get that I know actually came from that
vendor, and I have some degree of assurance that there is not a
counterfeit chip in it or some malicious code in the firmware
that would give access to someone else.''
So we have supported the concept that, for purposes--
certainly, for critical systems like we might find at DOD, the
Government should look at a policy that says, we are only going
to buy from trusted sources like the original equipment
manufacturer, people they have authorized to resell their
products. And there are a few other programs where vendors can
go through and be certified as a trusted source.
Mr. Larsen. Okay.
Can you explain, in your testimony, on page 2--or, maybe
not explain--provide an opinion about why, in TechAmerica's
view, we drifted away from the Clinger-Cohen reforms, focusing
on off-the-shelf, commercial technologies, into what you are
describing today?
Mr. Hodgkins. I think there are a lot of reasons.
Some of the issues that I also discussed drive us--
reporting requirements, for example. In a commercial
transaction, I wouldn't have the kind of reporting requirements
I would have if I wanted to do business with the Government.
Much of that is understandable; the Government has a different
set of shareholders, if you will, and so there are different
things we have to disclose if we are doing business with the
Government.
But the idea that I am buying generally commodity items,
now, even, we have to make disclosures about what is my price,
how did I arrive at that price. That is a perfect example.
Generally speaking, when I have a commercial item acquisition,
if I go out and buy something that is offered out in the market
and I buy it for whatever the price it is offered for in the
market, then it is automatically presumed I got a fair price,
because the market has set that price.
We have seen a drive at DOD and other agencies to, even
though it is a commercial item, we want you to now share with
me information about how you built that price. What are your
personnel rates? What are you are compensation package
components? What are the other things that you are including in
that price? Which gets us away from the tenet of the Clinger-
Cohen era, was that if I buy a commercial product from the
commercial marketplace, I am assumed to have achieved a fair
and reasonable price.
Mr. Larsen. How would you address that, say, in a situation
like with Ms. Jacobus, where the technology of the product
maybe doesn't have the commercial application as clearly as
another product?
Mr. Hodgkins. Well, I think her example was a good one. I
would point to, actually, the reverse as a good model. And we
see this a lot, whether we are dealing with innovative research
all the way up to the largest integrations of weapons systems,
where you have a lot of commercial products are now--the
preference for many of the functionalities and capabilities in
the weapons systems or in the research that we may be
deploying.
So you look at data capabilities for deployed soldiers. We
are looking at commercially available handheld devices and how
do we get the data to them on an iPhone or an Android phone.
When you look at a weapons platform on aircraft, you are
probably assimilating commercially available guidance systems
or radar systems, communications systems. Even some of the
sensor systems are now commercially available. And so you have
an amalgamation of those.
And it is the practices and policies around the Government-
unique elements of a weapons system that are now bleeding over
into incorporating those commercial things. And the benefit
those commercial things brings is that the private sector paid
for all that innovation and research and you are getting the
benefit of commercially available products at a price that is
set by the commercial market, not a price--if you had to build
those radar systems or com systems or guidance systems from
scratch based on Government specs, it would be far more costly
than the same systems you could get at a commercial variant.
Mr. Larsen. Uh-huh.
Mr. Smith, can you explain a little bit more, on page 1 of
your testimony, the last couple of lines of the second-to-last
paragraph there, the concern that the small companies that win
the ultra-large set-asides must focus their resources on strong
proposal and program management capabilities rather than their
unique skill sets and people? Could you explain to me why that
is a problem?
Mr. Smith. Over the last several years, as we have grown
out of the ability to compete for contracts that have been set
aside, we have necessarily joined teams of other companies,
many of whom are small businesses who are primes.
We have seen very innovative companies. Again, we are
service providers; we are not creating intellectual property
except associated with the delivery of service. We have seen
these companies have to hire program managers, people from
larger firms. And, frequently, as contracts are set aside for
small, the incumbent larger firms are offering mentorship and
assistance and personnel to come in to help them manage what
will be large contracts for them.
And the larger service contracts do have a fairly large
regulatory burden associated with them. You would have a
fiduciary responsibility to make sure that the service provided
is actually provided and is of the quality that you are
expecting out of your own company. And when you build larger
teams, as opposed to nurture a particular small business, the
skill set is different.
I think it is bad because you are losing the up-close
innovation, the agility of smaller firms. You are turning
smaller firms, who don't have even the strengths of larger
firms, into management organizations rather than innovative
organizations.
Mr. Larsen. Thank you.
Mr. Shuster. Mr. Runyan.
Mr. Runyan. Thank you, Chairman.
And thank all of you for being here.
It is kind of a general question for all of you, if you
want to. I think we are kind of touching on it. But, as a
Federal Government, do you feel we have a coherent industrial
policy to actually, look at our national security?
Ms. Jacobus. No.
Mr. Runyan. No?
Ms. Jacobus. No. And I think there are lots of studies that
have been done that say that we don't value our defense
industrial base like other countries do.
For example, there was a procurement for the newest,
greatest ground vehicle, called the Ground Combat Vehicle. The
solicitation came out 2 years ago. I was at the meeting of AUSA
in Fort Lauderdale when it came out, 11 o'clock on a Thursday,
and everybody in the room jumped up, went out and got their
cell phones, downloaded the proposal. It was so eagerly
anticipated. Nine months later, the Government pulled the
contract, the RFP. It just vaporized. It was gone. So, for 9
months, the defense industry of this country had been spending
enormous amounts of their brain power working on this proposal
to design and build the next class of ground vehicles.
Well, that wasn't the end of it. We had teamed with a large
company on that proposal. So the large company was spending, I
would guess, tens of millions of dollars. We were spending
hundreds of thousands of dollars. Two months later, the next
new GCV [Ground Combat Vehicle] instantiation comes out, the
new proposal. And it is not that different than the first one,
but it is different enough that we work for another 9 months,
everyone spending lots of money, lots of time.
One prime contractor at a conference in Warren, Michigan,
said that 30 percent of their engineering time had been spent
addressing, writing to this RFP. Now, we have a limited amount
of scientists and engineers in this country. If a massive
number are writing to RFPs that get pulled and get turned into
nothing or, as GCV worked out, the three selections that were
on the board turned into two, there is a lot of work that went
into designing and doing something.
And that is more and more for the large companies. Before
you do something new, you have to build it and show it and then
sell it. It is not really a design contract. So we are losing
the competition and innovation for new systems. And I think
that is a policy issue.
Mr. Runyan. Thank you.
Mr. Smith. I would say the principal dysfunction is the
adversarial relationship that is evolving between companies who
do business for the Government and the Government. I think
there is a fiduciary responsibility that the Government
employees have to live up to. All of the disclosures associated
with doing business with the Government, for us, are associated
with the fact that there is a lack of trust.
Ms. Jacobus. Uh-huh.
Mr. Smith. And there has to be a better environment,
where--you know, some baseline information needs to be
disclosed. Service providers for Government, we are probably
the most highly regulated industry in the country. And there is
not one fact about me, my finances, the company's finances that
isn't known and soon won't be disclosed publicly. And I think
that is all based on a lack of trust between the companies and
the Government.
Mr. Runyan. Thank you.
Mr. Smith, just talking about growing from small, medium,
to a large company, have you or anyone you know ever thought
twice about getting into a contract, with fear of climbing that
ladder too fast?
Mr. Smith. That thought never crossed my mind. I know there
are people with whom we do business that are small, a company
that is 50 people, about the size of Cybernet, that because of
the regulatory environment, there is some 50-person threshold,
they won't hire more than 50 people.
But I think, typically, company owners don't think that
way. They just grow into whatever they grow into. And then, all
of a sudden, you look back and you can't do what you did
before.
Mr. Runyan. And it looks like once you take on the big
contract, like you said, 5, 10 years down the road, I am not at
a place to where I can get any of the small business, but I am
not big enough to compete at that higher level.
Mr. Smith. Right. The midsized companies are a very
interesting and dicey place to be. We just happen to be there
now at a time when the budgets are constrained, and, you know,
the environment is not exactly conducive to where we are right
now. But I am really positive. I actually believe small and
midsized companies have a lot to contribute to this Nation. And
I encourage you to think about not only small but midsized
companies.
Mr. Runyan. Chairman, my time has expired. I yield back.
Mr. Shuster. Thank you.
Just to clarify, you are considered a small business, not
because of the number, because 500 is one of the metrics. How
much money and what is the dollar figure that puts you over the
top?
Mr. Smith. In many procurements, surprisingly, it is either
$4.5 million or $7 million.
Mr. Smith. So we are far over it.
Mr. Shuster. Right. And 250 employees.
Mr. Smith. By definition, if you have technical people--our
staff is technical, our staff is administrative. But, by
definition, if you have that many people, you are operating
revenues, unless you are losing money, that are more than the
$7 million.
The service-disabled, veteran-owned program that the
Veterans Department has just begun a certification process for
is $7 million. So even though we are a service-disabled,
veteran-owned company, we are not small by the VA's [U.S.
Department of Veterans Affairs] definition.
Mr. Shuster. Right. Okay, thank you.
Ms. Hanabusa.
Ms. Hanabusa. Thank you, Mr. Chair.
Let me begin with Mr. Hodgkins. I am curious about your
description throughout your testimony about your members. And,
also, in your disclosure, you don't seem to have any contracts.
So can you tell me who your members are and how you come to be
able to testify about the problems you are facing with military
contracts?
Mr. Hodgkins. Sure. My members are manufacturers and then
distributors and resellers and integrators of information
technology hardware, software, and then the services necessary
to put those things together, build those things, and then
operate those things. They also include companies that are
working around those others.
They range from the largest integrators selling the largest
IT [information technology] systems to the Federal Government
down to one-, two-, three-man shops in Silicon Valley writing
software--very unique, very specific analytic software that
might be used in the intelligence community, or they may be
selling commercial products like laptops or software that run
those laptops.
Ms. Hanabusa. So what I am trying to understand is, as you
come here and you testify and you submit testimony to us, I
want to know, what is it that you do for your members that
gives you the insight to come here and to tell us about the
shortfalls of the system?
Mr. Hodgkins. Sure. Well, we are a trade association, so we
represent the corporations. Those corporations, hundreds of the
members of our total member base, are Government contractors.
And we have centers of focus within the trade association that
look at the issues they raise with us of being of concern, and
they range from regulatory, legislative, and administrative
initiatives.
Ms. Hanabusa. So this is really something that you are
garnering from what they have told you as their representative,
and----
Mr. Hodgkins. Yes.
Ms. Hanabusa [continuing]. That is what you are relaying to
us?
Mr. Hodgkins. And then my interactions on their behalf in
those arenas.
Ms. Hanabusa. But you, personally, do not have any
experience in terms of actually submitting a proposal like Ms.
Jacobus?
Mr. Hodgkins. No. I work for a trade association, and we
don't--we are not Government contractors.
Ms. Hanabusa. I just wanted to be clear as to what your
format was.
Mr. Hodgkins. Sure.
Ms. Hanabusa. And, Mr. Smith, one of the things that you
said that was very interesting is you made a distinction that
you are a service provider and you are not, like, a creator. So
I believe Ms. Jacobus is sort of in a different category from
the two of you.
So when you say you are a service provider, and you were
complaining about the 51 percent rule in particular, what
exactly do you mean when you say you are a service provider and
not an intellectual property creator?
Mr. Smith. We do generate, create intellectual property
associated with services.
And, again, if we are--I will take systems engineering as a
service. I am an electronic engineer. I also went to school in
Pennsylvania; I am a Carnegie Tech grad. But we provide advice
on an hourly, time-and-materials basis, often, to agencies that
do R&D [Research and Development] management: DARPA, the Office
of Naval Research, organizations in other departments, as well,
that do research. They seek support in making sure they are up
on the right technologies. They seek support in evaluating the
progress of an R&D endeavor. They seek support for judging
whether a particular R&D provider has satisfactorily met the
terms and conditions of a contract from a technical point of
view.
So we have engineers and scientists in specific disciplines
that change over time because the areas of interests of
different agencies change over time.
Ms. Hanabusa. Can you tell me what kind of contract you
would be bidding for with the Government?
Mr. Smith. Well, the term of art--the two terms of art that
we use are ``SETA'' and ``A&AS.''
``SETA'' is systems engineering and technical assistance
contracts. Many acquisition organizations in the services or in
OSD [Office of the Secretary of Defense] or defense agencies
have competitions to seek companies to provide systems
engineering. So we will help them from a technical point of
view or--again, we run meetings. We actually have a very strong
capability in conference coordination. So we help bring
together and facilitate meetings of technical folks, with the
end objective of the particular meeting to bring diverse
technologies together and come up with a common vision for how
to proceed forward or a common approach to a particular
problem. So, SETA is one nature of a contract we go after.
A&AS is the other, advisory and assistance services
contracts. And these can range from studies; what is the
balance of the requirements versus technological capabilities
in a particular area of emphasis by an agency of the Department
of Defense? What are the trends? We often look at worldwide
technology trends. What other countries are doing research in a
particular area of interest to the Department of Defense, and
how does our research stack up against their research?
Program managers--DARPA is a somewhat unique agency in that
they bring in program managers for a relatively short period of
time, 4 to 6 years. So we help program managers in the process
of learning about acquisitions, we help program managers in the
process of creating programs that are good and executing and
monitoring programs that are good.
Ms. Hanabusa. Thank you.
Thank you, Mr. Chair.
Mr. Shuster. Thank you.
I am going to next turn to Mr. West, but before I do, since
I have a core of the committee here, we are looking at having a
field hearing--I should have said this in the beginning--
October the 7th, if we get five Members. Votes are on a
Thursday night, and then Friday morning flying out to Quad
Cities, Rock Island. We will get mil air and be back the same
day. So I just wanted to alert everybody to that if your
schedule so fits. I know that Mr. West has a very important
speaking engagement in Pennsylvania on Thursday the 6th.
Mr. West. At your request.
Mr. Shuster. But, with that--again, I just wanted to bring
it to Members' attention so you heard it firsthand.
And, with that, I will turn to Mr. West.
Mr. West. Thank you, Mr. Chairman and also Mr. Ranking
Member.
I want to look at this from a different perspective
because, as you said, I spent 22 years in the military. So, you
know, I remember going out as a battalion commander in 2003 in
Iraq and a lot of things that we did not have and wish we did
have.
My question is, you know, as we start to look at rapid
force initiatives and off-the-shelf type of technologies and
innovations, there are a lot of documents that get produced,
you know, lessons learned, things of that nature. Do you feel
that you have a good relationship with the military as far as
getting a lot of those lessons-learned documents being tied in
with the rapid force initiatives that we have I know definitely
in the Army and maybe in the Marine Corps?
And then, also, do you have a time with the combatant
command so that--you know, I was there at Fort Lauderdale when
that happened. You know, you get these blasts on the email, you
kind of get an understanding of, you know, some of the needs
and trends that are happening. Instead of that long procurement
system, maybe we can look at some off-the-shelf type of
technologies that can be rapidly developed. Is that type of
relationship out there?
Ms. Jacobus. It is not easy for a small business that has
one or two locations to be at every military base so that we
know when people come out, you know, the door and go to the
coffee shop that we can talk to them about what their problems
are. It is even harder for us to get on a base and talk to a
group of operators.
And, really, the whole issue with SBIR is that we create
magnificent technology at the request of the Army. They have
put those RFPs.
Mr. West. Yeah, I understand.
Ms. Jacobus. They put the requests in because they need
something, and we have technology that can address their need.
But they don't know the whole range of technologies that can be
applied, and we don't know what is the issue in the field.
Mr. West. The demand versus the supply.
Ms. Jacobus. Right. So having a good relationship with a
customer--and in the SBIR case that we had from Picatinny
Arsenal, we had good relationships at Picatinny. We were in the
labs, we were picking up mortars, we were using them for test
objects. And then when we went to design the ATACS machine--and
we designed it in 90 days. That is essentially off-the-shelf.
Mr. West. Uh-huh.
Ms. Jacobus [continuing]. Even though it is brand-new
technology, because it takes 90 days to do an NDA [non-
disclosure agreement] at a large company.
So the rapid response capabilities of the agile small
businesses really should not be overlooked. So when soldiers
have a problem, we should know about it and brainstorm about it
and try to help.
I gave a talk at the Army War College on small-business
acquisition. I used the same example of the machine. And after
my talk, the group of 300 06s, typically, came up to me and
said, I have never heard of a contractor who was good; you
know, our feelings about contractors is that they are all bad
people who don't give us, you know, water bottles or whatever.
They were shocked that here was something that worked the way
it was supposed to work.
Now, the SBIR that turned into the ATACS was a fluke. It
wasn't planned. We had no idea the problem existed in the
field. But because we had a little blurb that the SBIR puts on
the Web--and we don't mind having those abstracts public--they
found us. And we got this phone call from a sergeant who said,
we have a problem; can you solve it? And we did. So if there
was more of looking at what the small-business capabilities are
and for us to be able to understand and bridge, it would be
great.
But we have no money for the transition. We have R&D, and
then somehow it is procured with procurement funds. Big
companies have gigantic budgets in their cost structure. I
talked about overhead. But they have something called IR&D,
internal research and development. So if they make a $3 billion
thing, they get a percentage that is audited for the dollar
amount that says they can use so much of their cost structure
for internal research and development. They can do anything
they want with it, including ruggedizing equipment, getting it
ready to be purchased.
We small businesses have none of that. Historically, it is
just a fact, many of those transitions have been handled by
congressional interest money, because we had customers who were
military who needed something and had no budget for it. When
something is new technology, it outpaces the financial
structure, the POM [Program Objective Memorandum], the
description of what pays for what.
And I will give you a really poignant example of what
happened with the ammunition machine. So we got it done, we
wanted to make more, and it turned out that there was no budget
for it. But what we were replacing was a hundred people sitting
in a warehouse doing, very expensively, the task. But the money
was a different color. It was Operation and Maintenance Army
money, OMA dollars. And there was no way heaven and earth could
move that money to be able to purchase a machine for us that
would do it in, you know, whatever percentage of the time and
money--couldn't be done. It took 2 extra years before we were
able to get language in the POM cycle where our machine is now
recognized.
So the small advanced businesses are absolutely in a lurch
when we have something new that hasn't been described, there is
no funding for it. Now we have no congressional interest
funding to help us, because it is very transparent. We have
done something, competed it, won contracts, built something. We
have an Army customer who needs something who will answer the
phone and say, ``Yes, indeed, I have seen the prototype. We
really need it.'' And that is gone. That is gone. And so, I
really fear for all that technology that has been developed and
may be on the shelf.
Mr. West. My time is up, Mr. Chairman. I yield back.
Mr. Shuster. Thank you.
And just so I am clear on that, you have a new technology
which would have replaced a hundred people working?
Ms. Jacobus. Yes.
Mr. Shuster. And your technology would have done it by--
automated it, and it couldn't get the money?
Ms. Jacobus. Absolutely not.
Mr. Shuster. Okay. Thank you.
With that, Ms. Sutton.
Ms. Sutton. Thank you very much, Mr. Chairman.
Mr. Shuster. Your mic.
Ms. Sutton. Thank you very much.
And thank you to the witnesses.
Just a point of clarification. Ms. Jacobus, when you talk
about congressional interest money, are you talking about
earmarks?
Ms. Jacobus. I am talking--we call them plus-ups.
Mr. Shuster. We call them earmarks.
Ms. Sutton. We call plus-ups, earmarks.
Ms. Jacobus [continuing]. It is not the money that was
budgeted someplace for something.
Mr. Shuster. We have to get a new name.
Ms. Sutton. All right.
Ms. Jacobus. That is the name.
Ms. Sutton. I understand. I just want to make sure I am----
Ms. Jacobus. But it has been a critical part of small
businesses' being able to put things in the field. I mean, it
is just not realistic for us to do all that test and evaluation
ourselves.
Ms. Sutton. I understand. I appreciate that.
Okay. If we could just go back for a moment to another
example I think that you speak of on page 3, because I think it
really laid out the case pretty well. I am going to just sort
of paraphrase here, and you tell me if this is right.
Your testimony reads, ``The large companies that desire the
forward-looking work can apply massive internal research and
development funds (IR&D or `IRAD') which are for the most part
also repurposed federally funds (allocated to the prime by
overhead allowable funds that come with their large program
work like the F-22 or Ground Combat Vehicle).
And you also speak of the fact that they have marketing
people everywhere and inevitably are connected, right? They are
connected and know more about the project than you can ever
know from openly published information sources. ``Even in the
case of a small `starter' contract of several hundred thousand
dollars, a larger prime can apply `loss-leader' funds and
`special knowledge pertaining to the bid' to its bid-and-
proposal-funded effort. The result is the smaller businesses
won't win, even when they are lower in cost and may have a
technical edge.''
And at the end of that page, you say, ``As I understand it,
what is done with that IR&D pool is not required to be
delivered as part of a contract. Effectively, the Government
provides pure investment money without strings to primes.''
Ms. Jacobus. That is what it seems.
Ms. Sutton. Okay.
Would you all agree with that?
Mr. Smith. We actually have, as a service provider, have an
IR&D program. So, actually, it is a budgeting issue. Bid-and-
proposal money and IR&D are classified in a similar way in our
accounting system and the way you account for costs. And if
there is not a huge flurry of proposals that you have to do
that particular year, you can take time to do innovation.
And I think it scales totally with the amount of money that
is coming in. If you are a huge company, you have a larger pool
to draw from. It is discretionary. It is their rules. In the
FAR associated with IR&D, it has to be relevant to the mission
of the agencies for whom you are working. So it is not without
regulation, but it is possible to do some as part of your
indirect cost structure in the course of normal business.
Ms. Sutton. And, Ms. Jacobus, it gives the big guys more
opportunity to do flashy presentations?
Ms. Jacobus. Right. When it says ``full and open
competition,'' we sometimes gathered up resources and put
together these plain paper proposals, only to be faced with
somebody who has made a movie with Hollywood actors in it
showing the product in use. That is a true example. So you can
only imagine.
We compete in SBIR with companies 500 or under. So that is
a pretty big range, 1 to 500. And we compete very fiercely for
this. But the reason SBIR was put into place was that someone,
30 years ago, smartly and bravely recognized that we would
never have a chance to get these big R&D contracts. And the
data showed close to 50 percent of scientists and engineers
worked for small businesses. Small businesses, as a total, get
4 percent of R&D. That means there is a lot of people who are
trained scientists, trained university graduates who are not
using their brains to support the problems of the military.
Ms. Sutton. And, Ms. Jacobus, somewhere in your testimony I
believe I read something that led me to believe that, in some
cases, those who are actually winning these contracts are
developing technology that actually already exists out there,
but they do it this way because then they can own it. Is that
correct?
Ms. Jacobus. We believe that. We believe that is true.
Ms. Sutton. Okay. Thank you.
Mr. Shuster. We are going to go to a second round of
questions, and I would like to just shorten them to 3 minutes.
And if anybody--we will keep going as long as anybody wants.
First, I just want to know if all of you agree, the sense
that Mr. Smith brought out there, the trust. There doesn't seem
to be--the Department of Defense is looking at you like, ``You
guys are going to get us, but we are not going to let you get
us.'' And it seems to me, as being a small-business owner
myself in my past, my suppliers were my partners. I mean, I
needed them to be. And I trusted them until they gave me reason
not to trust them.
So, do all of you agree, do you get that sense that your
association, your members are coming in there saying, they are
looking at us like we are committing a crime before we even
committed--do you all agree with that? Is there an agreement?
Ms. Jacobus, yeah.
Ms. Jacobus. Sometimes we have to sign disclosures that are
very complicated pieces of paper.
Mr. Shuster. Right.
Ms. Jacobus. For example, an unfunded requirement that we
have as an SBIR company is that, 10 years later, we are
supposed to report the commercialization and impact of that
technology. And that means we have to go to the open literature
and see what other public companies--who don't, of course,
disclose the details, and we have to make a best estimate of
what the impact of our early innovation was. That form sets
criminal penalties if you get it wrong.
Mr. Shuster. Right. I have seen those.
And, Mr. Smith, being in a midsized company, there are some
out there that argue that we need to change the sizes and
things like that to maybe smaller business or bigger. I mean,
these things are based on numbers from probably 20 years ago
when they first laid them out. And there is the other
alternative, is, as you go from a small business to a midsized
business, maybe you reduce the protections, you reduce the set-
asides, so that small business can grow.
Which of those would you think is a better route to go?
Mr. Smith. I totally understand your question. I actually
would argue that you should relook at the NAICS codes and the
relatively Byzantine way that we categorize small businesses.
And I know the Small Business Administration does that
routinely.
Mr. Shuster. Right. That is not this committee's
jurisdiction.
Mr. Smith. Right. Right.
Mr. Shuster. But I just wanted your input.
Mr. Smith. So I think, somehow, set-asides that are
designed from where the Government thinks or you think that
midsized businesses contribute. If midsized businesses--we
necessarily now are going to compete for larger contracts.
Mr. Shuster. So your preference would be to look at and
say, let's resize----
Mr. Smith. Yes.
Mr. Shuster [continuing]. Our metrics----
Mr. Smith. Correct. Correct.
Mr. Shuster [continuing]. And, you know, if it is 600 jobs
or $17 million. Okay. All right.
Mr. Smith. And one of the other interesting things we found
with contracting offices, not just Department of Defense but
others, is there is a tendency to pick the size standard that
is the smallest that the contracting office believes will
satisfy. And that has led, for me, to situations where we can't
compete.
Again, I come back to a $5 billion procurement set-aside
for $4 million companies. The numbers don't compute, in my
mind.
Mr. Shuster. Thank you very much.
With that, Mr. Larsen.
Mr. Larsen. Thank you.
Mr. Hodgkins, a couple of solutions, if you can help us
out. You mentioned some of the problems. One is the forfeit of
IP [intellectual property] in order to do business with DOD. We
actually heard something similar from a business in my district
that is doing some work for one of the services, writing up the
specs so they can go out and compete for the job that the
military wants them to do for them, meanwhile just basically
opening up their books to everybody else who now wants to
compete.
What is the alternative, or what is the solution to that?
Mr. Hodgkins. Well, we have advocated a couple of
alternatives to the way the Government and DOD approaches
contracting. We think, as Mr. West noted, that we can be more
effective in a two-way communication: Knowing the problems in
the field and then having companies, whether they are large or
small, understand those problems and identify solutions to
those problems.
That communication is not as effective as it could be. And,
as Mr. West probably experienced in the service, when we
translate those things into requirements and it gets handed off
to a different community, there is frequently a disconnect
completely.
So we would propose that the Government look at more agile
activities, certainly in the technology arena, that they look
at doing things in a more rapid fashion, in a more agile
fashion, in smaller increments, and you build capabilities in
incremental fashions.
For the contracting process itself, we think that there are
ways that the Government can share--and there are other models
that are used; British Columbia has an example as one--where
the problem is provided to the community, the community
responds, and pretty quickly the Government reviews those
initial reactions, and they down-select to two or three
companies they want to work with that they think actually offer
something that they can achieve and they can afford.
So there are models out there where you can more rapidly
get to the solution; you don't expose.
And the lead-time issue, of course, is another one, where
you are left out there trying to support, in the case of a
small or midsized business, a maybe longer lead time than you
have capital for. You are expected to hire people and keep that
team in place while the Government makes these decisions, but
you may have no income from that program yet. And that becomes
very difficult.
So, trying to do things more rapidly, in a more agile
fashion, in a more incremental fashion. And the funding issue
is also important that I raised, because if we have a 3-plus-
year process of identifying what I want and then getting the
money for it, that means that those companies are left hanging
and the combatant commands are not able to deploy the
technologies as quickly as they would like. So it is a
combination of a number of things I have touched on that I
think could improve the process.
Mr. Larsen. Great. Thank you. If you could get us some more
detail on that question in your response in writing, I would
appreciate it.
Mr. Hodgkins. Certainly.
[The information referred to can be found in the Appendix
on page 99.]
Mr. Larsen. Thanks a lot.
Mr. Shuster. Mr. Runyan.
Mr. Runyan. Thank you, Mr. Chairman.
Ms. Jacobus, you talk about the SBIR getting you to level
IV. Can you give us, in your scenario, the hurdles that you had
to jump to get to the next level, just so the panel can have an
idea of what we have to go through?
Ms. Jacobus. Well, one of the reasons the ATACS ammunition
machine worked was that there was a crisis over in Kuwait. It
was not an important or regular problem for an operator. It was
a mountain of ammunition that was being backed up, with the
supply chain clogged as well. So it was an urgent problem, and
I think people were willing to work with me. So we got some
swept-up money to start the first machine. And we put a mod on
an active SBIR at Picatinny Arsenal to do it.
But then when the new money came in to build it, I am sorry
Mr. Schilling from Rock Island isn't here, but the people at
Rock Island do essentially no R&D, zero. So they didn't even
know how SBIR worked. And, luckily, with lots of phone calls, I
found a gentleman at Picatinny who was able to take over the
procurement, to put us on contract for that.
And I think it was a special case because of the urgency,
because we were able to put it in the field. We tested it along
the way. But the Army had a safety feature, in that they had a
full-time quality-control person, a QUASAS [Quality Assurance
Specialist Ammunition Specialist], it is called, operator with
us at the machine. So we actually did have, you know, doctrine
of following the inspector being there.
Since then, we have gone through the, you know, millions of
rounds of testing and done what, in the normal process, would
have been done before we put it in the field. So it really is a
great example of how quickly things can be done if people are
motivated and they need it. And I am just really sorry that
there must be hundreds of other companies out there that have
solutions to problems, who really don't have the way to
transition them into the field.
But for normal things, that lack of TRL-level test and
evaluation money is a gigantic barrier for small businesses--
gigantic.
Mr. Runyan. Thank you, Chairman. Yield back.
Mr. Shuster. Thank you very much.
Ms. Hanabusa for questions.
Ms. Hanabusa. Thank you, Mr. Chairman.
Maybe this question is for Mr. Hodgkins. We have heard
recently the whole concept about the fact that the DOD is not
going to let contract bundling take place. Can you tell me how
contract bundling has hurt the small businesses?
Mr. Hodgkins. Well, contract bundling has been a practice
that--the intent is to move together and buy, as the Government
is trying to do in a number of areas, in bulk things that are
related.
What has come out of it, and I would identify as one of the
conflicts in our socioeconomic policies, is that when you
bundle things, as Mr. Smith noted, sometimes the job gets too
big for a small business. And so--or they are moved into
performing some unnatural role that they didn't start the small
business to do.
So I think the bundling practice has pluses and minuses.
What we have to figure out is the balance on how to do that in
a way that we get efficiencies of scale for acquisition for the
Government, perhaps for commodity items, but find ways for
small businesses to compete in those.
Ms. Hanabusa. Mr. Smith, do you want to add anything on
that?
Mr. Smith. No. I think we live with it as a fact of life.
And I actually believe, with the budget constraints we are
likely to see in the next 10 years, there will be more of it.
And the only thing I would seek your thoughts on is how to
allow for some of the procurements to be set-asides in ways
that are logical for small and midsized companies to compete
for. There is a lot of value--the personal touch of a small
business or the personal touch of a midsized business can lead
to a building of trust that is, I think, healthy, and the ebb
and flow, arm's-length relationship between companies and the
Government. The larger the contracts, the more fiduciary
responsibility, the more distrust, the more regulation.
Ms. Hanabusa. So you actually feel that bundling has a role
in the future as we start to cut the budget. You think that
that is something that should be kept.
Mr. Smith. I think it is a fact of life. I don't know if it
should be kept. It is efficient, from the Government's point of
view. As the budget is cut, they are going to have fewer people
to acquire on the acquisition side. That means fewer contracts,
which means each of the individual contracts are bigger.
I think it is not preferable. I think more defined
contracts, smaller contracts are preferable, from the
Government's interest point of view.
Ms. Hanabusa. Thank you.
Thank you, Mr. Chair.
Mr. Shuster. Ms. Sutton.
Ms. Sutton. Thank you, Mr. Chairman.
Mr. Smith, if you could just help to clarify. I know that
you point out in your testimony that the lack of clarity
regarding inherently governmental functions is a problem. So
could you just expand on what you think those governmental--how
that should be defined?
Mr. Smith. I actually think it is very adequately defined
in the FAR today, prior to the issuing of the policy letter
that just came out within the last week or two. I think the
definitions--you or I would probably agree that something is or
is not inherently governmental. I don't think that is the
issue.
When you add other layers, things that are closely
associated with you, it seems to me that you are no longer
putting yourself in a position to look at something from what
is the best thing for the Government. I mean, if companies are
better at doing certain services, why would the Government not
buy from them? Or if they are any less expensive for doing
certain services at the same quality, why would the Government
not want to buy from a company?
Companies come and go. Companies do not have the long-
term--necessarily have the long-term tale of Government
employees. So I see it as an advantage to the Government, to be
able to buy something now and be able to stop buying it later.
When you build an employee staff, I think you don't have that
flexibility. You don't get the change of disciplines you might
want. You are interested in biology today; you are going to be
interested in electronics tomorrow.
Ms. Sutton. Thank you.
I yield back.
Mr. Shuster. Thank you very much.
And I want to thank all of you again for being here today.
We appreciate you spending your valuable time. And I know small
and medium-sized businesses or wherever you are--I mean, it is
confusing to you, dealing with the Government. I know. But I
appreciate you taking the time, and I know how valuable that
time is to you.
And also to you, Mr. Hodgkins, and your association for
letting you come here today and sharing your insights with us.
So we appreciate it.
For the members of the panel, tentatively October 7th. If
your staff hasn't been contacted, they will be contacted. And
if you could, in rather quick form, yea or nay, that will make
it easier for us to decide to move forward or not.
Also, on October the 11th, that is the Tuesday after the--
after the 10th?--Columbus Day, we are going to have another
hearing here with the panel. And your input--certainly we will
be talking to the committee staff to get your input on that
hearing also.
So, with that, again, I thank everybody for coming today,
and this hearing is adjourned.
[Whereupon, at 4:30 p.m., the panel was adjourned.]
?

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A P P E N D I X

September 20, 2011

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PREPARED STATEMENTS SUBMITTED FOR THE RECORD

September 20, 2011

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Statement of Hon. Bill Shuster

Chairman, Panel on Business Challenges
within the Defense Industry

Hearing on

Challenges to Doing Business
with the Department of Defense

September 20, 2011

Good afternoon. I'd like to welcome everyone to the first
of a series of hearings this panel will hold examining business
challenges in the defense industry. Chairman McKeon and Ranking
Member Smith established this panel to take a deep-dive into
the challenges facing firms that already work with the
Department of Defense and those that want to do business with
the Department. I'm honored that Chairman McKeon asked me to
lead this panel alongside my friend from Washington State, Rick
Larsen.
Rounding out the panel membership are:

LBobby Schilling, from Illinois. Bobby
represents the 17th district of Illinois which contains
Rock Island Arsenal. Bobby is a small-business owner
and has firsthand experience of the difficulties
dealing with Federal and State Governments.

LBetty Sutton represents the 13th district of
Ohio. As co-chair of the Congressional Task Force on
job creation, Betty is dedicated to promoting good
business practices and creating American jobs.

LJon Runyan from New Jersey. Jon represents
the 3rd district of New Jersey which contains Ft. Dix/
Maguire AFB and has a vested interest in defense
business practices across the board.

LColleen Hanabusa is from the 1st district of
Hawaii. She has been involved in Hawaii politics since
1998. With a large defense presence in Hawaii, Colleen
understands how important it is bring efficiency and
effectiveness to the defense industry.

LAllen West from the 22nd district of Florida.
Allen retired from the Army in 2004 after 22 years and
brings a unique perspective of experience on both sides
of the table--Government and industry.

I want to thank all of the members of the panel for taking
time to lend their expertise to this effort. We've all heard,
in our districts and across the country, from businesses that
find it extremely difficult to successfully navigate the DOD
acquisition system. This is particularly true for small
businesses and those involved in science and technology
efforts. While there are programs out there to assist
businesses in transitioning innovative ideas and technologies
to a final end-product that satisfies a military requirement,
there are many obstacles in the way.
In these current economic times, we must make good use of
every tax-dollar we spend on defense and we can do this by
leveraging the heart of the American workforce--small
businesses. By reducing barriers to entry, we can generate
competition, spur innovation, and stimulate the economy. I look
forward to working with Rick and the other members of the panel
to find ways to do just that.

Statement of Hon. Rick Larsen

Ranking Member, Panel on Business Challenges
within the Defense Industry

Hearing on

Challenges to Doing Business
with the Department of Defense

September 20, 2011

I want to thank Chairman McKeon and Ranking Member Smith
for putting this panel together. In 6 months we will have
substantive solutions to the challenges small and medium-sized
businesses face when they approach DOD.
The Federal budget is increasingly strained, and the
military is not immune to cuts. However, we must ensure that
the needs of the military to provide for national security and
defense are not shortchanged.
In order to accomplish this, the DOD will need to stretch
their dollar and maintain robust competition. Better
contracting will also offer a chance for job creation and
growth for companies that often have the best products but find
barriers in their path when they approach DOD. How to make and
implement improvements is something we will aim to discover
over the next few months.
Small and medium-sized businesses need to be part of the
defense industrial base, and that means rethinking the current
model. Our goal must be to break down barriers and improve
competition for defense contracting to get better prices and
better products and services for the warfighter.
I thank our witnesses for their participation today.
Understanding the general framework of the challenges we face
will help identify solutions.
Last month, the Chairman joined me in Everett, Washington,
in my district when I held a roundtable with local leaders. We
spoke with them about their successes and their failures in
working with DOD. One individual spoke of having to outline
technical specifics to DOD in order to have a proposal
released, only to then have the competition have access to
those specifics. Another spoke of not receiving payment on
time--a serious concern for small companies not flush with
cash. We need to continue to talk and listen to these
businesses and find solutions.
I want to thank all my colleagues on this panel. I believe
this entire group of members brings a diverse perspective on
the issues. We are all here because we want to improve the
chance for competition, for job growth and for making certain
our military and our soldiers have the best options and
capabilities available to them.

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DOCUMENTS SUBMITTED FOR THE RECORD

September 20, 2011

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WITNESS RESPONSES TO QUESTIONS ASKED DURING

THE HEARING

September 20, 2011

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RESPONSE TO QUESTION SUBMITTED BY MR. LARSEN

Mr. Hodgkins. [The information was not available at the time of
printing.] [See page 25.]
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QUESTIONS SUBMITTED BY MEMBERS POST HEARING

September 20, 2011

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

QUESTIONS SUBMITTED BY MR. SCHILLING

Mr. Schilling. How can we help industry deliver vital innovation
and cutting-edge solutions?
Mr. Hodgkins. [The information was not available at the time of
printing.]
Mr. Schilling. What measures can we take to ensure that the best
and brightest our national STEM [science, technology, engineering,
mathematics] efforts have to offer find opportunities inside the
national defense industrial base, and overall national industrial base?
Mr. Hodgkins. [The information was not available at the time of
printing.]
Mr. Schilling. United States manufacturing exports create good
technology jobs across the country. What can be done to support foreign
military sales that benefit job growth and make the U.S. industrial
base more competitive globally?
Mr. Hodgkins. [The information was not available at the time of
printing.]

Mr. Schilling. How can we help industry deliver vital innovation
and cutting-edge solutions?
Mr. Smith. I am answering this question from the vantage point of a
Federal professional services provider who has primarily supported
clients in the science and technology (S&T) domain. Strategic Analysis
Inc. (SA) is lucky enough to have been part of many programs and
contracts that have delivered vital innovation and cutting-edge
solutions as: A consultant to the Government, advising on the ideas and
efforts of other businesses and organizations, both large and small;
and as a developer of innovation and cutting-edge solutions ourselves.
The challenges to delivering innovation begin with simply trying to
``get in the door'' to understand the needs of a Federal client or
identify if a technology or idea could apply or be useful to a Federal
client. When my company started, companies had the ability to offer
innovative ideas to potential buyers of services. Government managers
that sought contractor support were willing to discuss their
requirements as well as to listen to innovative ideas, tools and
methodologies. Companies such as mine were willing to offer proprietary
approaches hoping that the discussion might lead to procurement
opportunities and knowing that their innovations would be protected
from competitors.
Today, discussions with program managers are limited any time a
procurement is anticipated. New contracting constraints are being
practiced and concerns of unfair competitions that could lead to a
protest have resulted in limited scope Task Orders that are awarded on
a lowest-price technically acceptable basis with no room (both within
the scope of individual Performance Work Statements and the overall
scope of the base contract) to do more than what is ``technically
acceptable.'' Contracting officers are very reluctant to have the
program managers entertain innovative ideas for fear that it would give
a company a competitive advantage. The approach is either to
communicate the entire discussion between the program manager and the
contractor, compromising any proprietary information discussed, or to
prevent the discussion from occurring altogether. Overall, companies
have become more in the dark on what their clients might need and more
reluctant to share their ideas. Many companies now worry that ideas
discussed will be compromised during the procurement process. This
concerns companies because they might no longer have the differentiator
that wins the next award.
In general, the conversations not only need to be allowed but even
encouraged. To level the playing field, the process has to be open to
everyone and each organization needs to identify a process for keeping
ideas coming in the door. This does not mean just more industry days.
It means allowing companies the opportunity for 1-on-1s prior to
finalizing any particular solicitation. This also could include easier
base access, open access to program managers and/or their staff
representation, and training, when needed, of individuals involved with
a procurement. The U.S. Government should allow for the opportunity to
discuss innovations without fear of compromise during the procurement
process.
For 25 years as a consultant to the Government, SA has provided
advice and expertise that has supported decisions by the Government to
fund, not fund, continue funding or terminate programs and projects
that develop the next generation of technologies. One of the greatest
challenges for moving new technology from the R&D phase to the hands of
the operators is technology transition. Many technologies do not find
an operational home because of a mismatch of what the operational
community needs or wants and what they get. What we believe will help
is to continue to increase the number of opportunities to expose
industry, academia and other Federal organizations to the end-user to
provide them with the opportunity to understand what is really needed.
The DOD should facilitate meetings with DOD users to understand gaps
(there are very few DOD organizations that facilitate face-to-faces
with the decision makers); and provide visibility of funding to help a
small business know where to focus. The SBIR and STTR programs are
invaluable in this regard with early seed money as well as funding
through TRL 4.
Internally, SA has also developed cutting-edge solutions. We have
done so for two reasons: To develop innovations that reduce the cost of
services while not diminishing vital mission support such as through
business process re-engineering; and developing solutions that answer
technical problems our clients are trying to solve including submitting
ideas through Federal BAA and SBIR programs. Government services
contractors can be a significant contributor to innovation if allowed
to do so through the procurement system. But, there are now significant
deterrents to innovation within the DOD acquisition system for
professional services, such as those imposed as a result of new
contracting practices and organizational conflict of interest (OCI)
implementations.
For a service provider such as my company, innovation can be a key
differentiator among the many companies competing for work. We have
developed innovations internally primarily through independent research
and development (IR&D). To do so, we have looked at our client needs
and have identified modest investments that solve or try to solve
specific problems that they have expressed to our employees. We are
small, but we have exceptional people in support of our clients. They
see opportunities for improvement. We are not contractually tasked with
such IR&D. We do it in order to add value to our clients. Our solutions
have included innovative office automation approaches and tools tied to
the specific business processes of the offices where we work. All in
all, we have tried to capture the best ideas from our staff. Our
clients have found the result of such investments quite valuable.
Innovative solutions can be achieved through changes in business
processes, through creative re-engineering of an organization and
through the introduction of new ``solutions.''
The challenge that we have recently encountered is the difficulty
in providing such innovations under the contract that it was identified
for. We are finding that in order to help our clients by offering
solutions, we have to provide the solutions under an entirely different
contract vehicle. We believe the contracting environment has become
hypersensitive on compartmentalizing functions to the point of
deterring new ideas or pursuit of the ``best'' ideas. Further, we have
become reluctant to invest in innovation as it no longer can be a
discriminator in contract awards. The requirements for services have
become stylized descriptions of labor categories and the competitions
become all about the lowest price offerings, leaving, once again, no
room or rewards for innovation. We recommend strongly that, in S&T
environments, lowest-price contracting strategies be avoided because
you will get what you pay for. Additionally, we believe all contracts
should put in place options for innovation even if not funded on Day 1.
SA has and continues to develop ideas through the Federal BAA and
SBIR programs. When a conflict of interest poses a threat to the
viability of the idea, SA has either spun off an R&D company or
terminated the pursuit. Spinning off small subsidiaries in specific
technology areas and facilitating their success through investment has
enabled the technology to be investigated free of any restrictions.
Even as a small company, we have employed this approach, sometimes
successfully; sometimes not. In each case, the seed of the technical
innovation was an employee with an idea and the motivation to carry it
further. Our innovations have included software, advanced sensors,
renewable energy study methodologies and novel materials ideas. Two of
the companies remain viable today. There has been one business that had
to be closed because of OCI issues in a zero-tolerant environment to
affiliates.
OCI is one area that has become much more restrictive to companies
providing both technical consulting and developing technical solutions
to the same clients. While a clean line reduces even the appearance of
impropriety, it also may prevent ideas from being fully explored.
Companies will simply not invest their intellectual capital on a path
that might lead to a contract that has the appearance of an OCI
concern. They see no return on their investment. For a small business
with a limited set of clients in their portfolio and a limited set of
assets, hitting a dead end with a client because of a possible OCI
could mean death to the idea. We have many smart people with good ideas
that will lay dormant over this concern.
Mr. Schilling. What measures can we take to ensure that the best
and brightest our national STEM [science, technology, engineering,
mathematics] efforts have to offer find opportunities inside the
national defense industrial base, and overall national industrial base?
Mr. Smith. We believe that the STEM issue is a National Security
issue. Without a workforce properly trained in STEM domains, we will
not have the warfighters needed to defend our Nation on the next
generation of battlefields, battlefields that include the cyber domain.
Industry has always been challenged with providing a workforce that
supplements the Federal Government's workforce providing expertise that
can ebb and flow with the fluctuations of needs. Industry has just as
much interest in addressing the STEM negative trend as the Federal
Government. Industry invests in training, education and charitable
contributions to STEM initiatives. Industry organizations such as NDIA
and WID have implemented scholarship programs and funded and supported
initiatives in the different communities where their chapters reside.
Businesses have also put aside hundreds of thousands of dollars towards
STEM initiatives nationwide including scholarships and grants.
Competitions, conferences, classroom lectures and financial donations
to schools are all ways that industry is addressing this issue. The
Department of Defense has significant ongoing programs aimed at
fostering STEM education. The DOD Science, Technology, Engineering, and
Mathematics (STEM) Development Office focuses on education and outreach
to inspire, develop, attract, and retain highly-qualified, diverse,
world-class STEM talent to meet the DOD and the Nation's current and
future complex scientific and technological challenges. Many such
programs fall under the National Defense Education Program (NDEP),
outlined below.

K-12 teachers and students: NDEP's K-12 Programs tap
into educational innovation. NDEP has cast a nationwide net in
search of some of the best and most innovative K-12 science and
engineering education initiatives in the country.

Undergraduate and graduate students: The Science,
Mathematics And Research for Transformation (SMART) Scholarship
for Service Program supports undergraduate and graduate
students pursuing degrees in STEM disciplines. The program aims
to increase the number of civilian scientists and engineers
primarily working at DOD laboratories.

World-class university researchers and their
students: The National Security Science and Engineering Faculty
Fellowships (NSSEFF) program provides extensive, long-term
financial support to distinguished university faculty and staff
scientists and engineers to conduct unclassified, basic
research on topics of interest to DOD.

R&D programs aimed at STEM: There are also R&D
programs to develop tools and techniques in support of STEM
education. The DARPA Computer Science in Science, Technology,
Engineering, and Mathematics Education (CS-STEM) program is an
example.

With all things being equal, the solution, we believe, resides
somewhere in the collaboration of Government and the defense business
sector. The U.S. Cyber Challenge Coalition is a great example of how
Industry and the Federal Government can successfully partner to tackle
one area of the STEM domain without the ``your money'' or ``my money''
driving the dialogue. However, one partner that is not apparent in many
initiatives is the educators and educational administrators. The
educational domain has to be part of any solution, idea or initiative
that is proposed. In the end, the teachers and other educational
professionals carry the weight of any successful model every day and
they should be enlisted to fight this battle. We believe DOD should
increase its emphasis on fostering enthusiasm and interest in STEM at
an early age. Research is clear that the earlier one can reach a child
in their educational development, the more lasting the effect. In fact,
our family feels so strongly that more needs to be done in this area
that we started a non-profit organization in 2010 that is beginning a
research and mentorship thrust in middle school STEM education, The
Leadville Institute. This organization has starting by supporting
specific STEM programs in the two communities where we are located,
Arlington, VA, and Colorado Springs, CO. We are taking small steps in
2011, with aspirations to gain broader support from the defense
industrial community, particularly small and midsize companies.
So what more can DOD undertake? DOD and its contractor base should
be partners in local communities across the country. A coordinated
outreach and mentorship program would pay significant dividends in
addressing emerging defense workforce gaps. The huge projected
shortcoming in computer sciences is such an area. We recommend
initiatives that reach middle school students and include participants
from both Government and the private sector. DOD might find unique ways
of challenging youth such as through ``Grand Challenges,'' focused
games, on-line games like FoldIt.it and technical competitions. Many
such competitions exist on a national scale. We need competitions aimed
at younger students, as well. There is a critical need to reach younger
children--give them a challenge to overcome and then empower them with
a sense of ownership in their successes.
Mr. Schilling. United States manufacturing exports create good
technology jobs across the country. What can be done to support foreign
military sales that benefit job growth and make the U.S. industrial
base more competitive globally?
Mr. Smith. Since my company is a service provider, not a
manufacturer, with facilities and staff all located inside the CONUS, I
cannot provide any personal experience or analysis to fully address
this question.

Mr. Schilling. How can we help industry deliver vital innovation
and cutting-edge solutions?
Ms. Jacobus. [The information was not available at the time of
printing.]
Mr. Schilling. What measures can we take to ensure that the best
and brightest our national STEM efforts have to offer find
opportunities inside the national defense industrial base, and overall
national industrial base?
Ms. Jacobus. [The information was not available at the time of
printing.]
Mr. Schilling. United States manufacturing exports create good
technology jobs across the country. What can be done to support foreign
military sales that benefit job growth and make the U.S. industrial
base more competitive globally?
Ms. Jacobus. [The information was not available at the time of
printing.]