[Senate Hearing 112-256]
[From the U.S. Government Printing Office]
S. Hrg. 112-256
THE HEALTH AND STATUS OF THE DEFENSE INDUSTRIAL BASE AND ITS SCIENCE
AND TECHNOLOGY-RELATED ELEMENTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON EMERGING THREATS AND CAPABILITIES
of the
COMMITTEE ON ARMED SERVICES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MAY 3, 2011
__________
Printed for the use of the Committee on Armed Services
Available via the World Wide Web: http://www.fdsys.gov/
__________
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COMMITTEE ON ARMED SERVICES
CARL LEVIN, Michigan, Chairman
JOSEPH I. LIEBERMAN, Connecticut JOHN McCAIN, Arizona
JACK REED, Rhode Island JAMES M. INHOFE, Oklahoma
DANIEL K. AKAKA, Hawaii JEFF SESSIONS, Alabama
E. BENJAMIN NELSON, Nebraska SAXBY CHAMBLISS, Georgia
JIM WEBB, Virginia ROGER F. WICKER, Mississippi
CLAIRE McCASKILL, Missouri SCOTT P. BROWN, Massachusetts
MARK UDALL, Colorado ROB PORTMAN, Ohio
KAY R. HAGAN, North Carolina KELLY AYOTTE, New Hampshire
MARK BEGICH, Alaska SUSAN M. COLLINS, Maine
JOE MANCHIN III, West Virginia LINDSEY GRAHAM, South Carolina
JEANNE SHAHEEN, New Hampshire JOHN CORNYN, Texas
KIRSTEN E. GILLIBRAND, New York DAVID VITTER, Louisiana
RICHARD BLUMENTHAL, Connecticut
Richard D. DeBobes, Staff Director
David M. Morriss, Minority Staff Director
______
Subcommittee on Emerging Threats and Capabilities
KAY R. HAGAN, North Carolina, Chairman
JACK REED, Rhode Island ROB PORTMAN, Ohio
MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia
JOE MANCHIN III, West Virginia SCOTT P. BROWN, Massachusetts
JEANNE SHAHEEN, New Hampshire LINDSEY GRAHAM, South Carolina
KIRSTEN E. GILLIBRAND, New York JOHN CORNYN, Texas
(ii)
C O N T E N T S
__________
CHRONOLOGICAL LIST OF WITNESSES
The Health and Status of the Defense Industrial Base and Its Science
and Technology-Related Elements
may 3, 2011
Page
Kendall, Hon. Frank, Principal Deputy Under Secretary of Defense
for Acquisition, Technology, and Logistics..................... 4
Lemnios, Hon. Zachary J., Assistant Secretary of Defense for
Research and Engineering....................................... 15
Lambert, Hon. Brett B., Deputy Assistant Secretary of Defense,
Manufacturing and Industrial Base Policy....................... 17
Augustine, Norman R., Retired Chairman and Chief Executive
Officer, Lockheed Martin Corporation........................... 30
Gansler, Jacques S., Ph.D., Director, Center for Public Policy
and Private Enterprise, University of Maryland School of Public
Policy......................................................... 37
Odeen, Philip A., Member, Defense Business Board, Task Group
Chair, Assessing the Defense Industrial Base................... 47
(iii)
THE HEALTH AND STATUS OF THE DEFENSE INDUSTRIAL BASE AND ITS SCIENCE
AND TECHNOLOGY-RELATED ELEMENTS
----------
TUESDAY, MAY 3, 2011
U.S. Senate,
Subcommittee on Emerging
Threats and Capabilities,
Committee on Armed Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:30 p.m. in
room SD-562, Dirksen Senate Office Building, Senator Kay R.
Hagan (chairman of the subcommittee) presiding.
Committee members present: Senators Hagan, Reed, Udall,
Shaheen, and Portman.
Committee staff member present: Leah C. Brewer, nominations
and hearings clerk.
Majority staff members present: Richard W. Fieldhouse,
professional staff member; Peter K. Levine, general counsel;
and Robie I. Samanta Roy, professional staff member.
Minority staff members present: John W. Heath, Jr.,
minority investigative counsel; and Michael J. Sistak, research
assistant.
Staff assistants present: Kathleen A. Kulenkampff, Brian F.
Sebold, and Breon N. Wells.
Committee members' assistants present: Carolyn Chuhta,
assistant to Senator Reed; Casey Howard, assistant to Senator
Udall; Roger Pena, assistant to Senator Hagan; and Chad
Kreikemeier, assistant to Senator Shaheen.
OPENING STATEMENT OF SENATOR KAY R. HAGAN, CHAIRMAN
Senator Hagan. The Subcommittee on Emerging Threats and
Capabilities will come to order, and I thank you for being
here. I do want to say that a vote has been scheduled at 3:30
today and, because of the nature of the vote, we have been
asked to actually sit in our chairs at 3:30. So we'll adapt and
see if the vote is on time. To be continued.
But this afternoon the Emerging Threats and Capabilities
Subcommittee meets to consider the health and status of the
national defense industrial base and its related science and
technology (S&T) elements. These have been the subject of
growing concern and will continue to be so as the Department of
Defense (DOD) faces increasing budgetary pressures on its
acquisition investments in the future.
Some of the key challenges include: the fragile nature of
the supply chain and limited competition within a heavily
consolidated defense industrial sector; growing global
competition; a loss of skilled domestic expertise and
manufacturing capability offshore; and the negative impacts
from an outdated export control regime.
In addition, there are challenges attracting and retaining
the best and the brightest scientists, engineers, and
technologists, who are key components of the science,
technology, engineering, and math (STEM) workforce, not only in
the industrial sector, but also within DOD as well.
Overall, S&T is a key foundational basis for our national
defense capabilities and the industrial base that produces
them. Sustained research and development (R&D) over the last
decades has allowed DOD, in close collaboration with the
defense industrial sector, to develop unparalleled military
systems from space to the depths of the oceans, and
increasingly, in cyber space.
It is essential to continue investment in R&D and to
strengthen the defense industrial base to preserve our
technological advantages on the battlefield. This priority has
been discussed in recent high-level policy documents such as
the National Security Strategy and the Quadrennial Defense
Review (QDR), as well as in studies by industry groups such as
the Defense Business Board.
The subcommittee is interested in understanding how these
policies and studies are translating into concrete strategies,
plans, and programs within the DOD, how effective they are, and
what actions Congress can take to assist in ensuring their
success. While we rightfully acknowledge the sacrifices and
service of our men and women in uniform engaged in operations
around the world, we must also acknowledge the men and women
who conceive, design, develop, and produce the extraordinary
technology and equipment that allows our military to be the
best in the world. They work in our diverse S&T, R&D, and
manufacturing communities, both within the DOD and also in our
universities, research laboratories, small businesses, and
large corporations. They are essential partners in our national
security, and we would not have had our remarkable military
today without their brilliance, creativity, and innovation.
This hearing will consist of two panels. The first panel
will consist of DOD officials responsible for monitoring the
status of and improving the health of the defense industrial
base, including related research, engineering, and workforce
activities. Mr. Frank Kendall is the Principal Deputy Under
Secretary of Defense for Acquisition, Technology, and Logistics
(AT&L). In this position, he supports Under Secretary Carter in
all matters relating to the DOD acquisition system, including
all research, development, test, and evaluation, as well as
manufacturing and industrial base policy matters. The
subcommittee looks forward to hearing about the DOD's
overarching strategies, plans, and programs to address the
challenges mentioned previously.
Mr. Zack Lemnios is the Assistant Secretary of Defense for
Research and Engineering. In this capacity, Mr. Lemnios has
broad oversight of DOD's research portfolios, new initiatives
in manufacturing, its STEM education and workforce efforts, and
the DOD laboratories that interact with the defense industrial
base.
Mr. Brett Lambert is the Deputy Assistant Secretary of
Defense for Manufacturing and Industrial Base Policy. This
position was newly created by Congress to provide a strong
focal point within DOD to deal with broad industrial policy
issues. These include assessing the health of the various
sectors of the defense industrial base, investing in new
manufacturing and defense production technologies, and helping
monitor independent R&D conducted by industry.
Then our second panel will consist of individuals with a
wealth of industrial and prior DOD experience. The subcommittee
is looking forward to hearing their views on the challenges
facing the defense industrial base and their assessments of
current DOD plans, programs, and initiatives designed to
address these challenges, as well as any additional ideas they
may have for progress.
Mr. Norm Augustine is the retired Chairman and CEO of
Lockheed Martin. He has extensive experience in both the
private sector and DOD and has been a keen observer of defense
acquisition trends. He recently led a National Academy of
Sciences report called ``The Gathering Storm'' that was
instrumental in raising the visibility of the broader national
challenges in S&T and our future STEM workforce.
Dr. Jacques Gansler is currently the Director of the Center
for Public Policy and Private Enterprise in the School of
Public Affairs at the University of Maryland. His prior service
with DOD included the position of Under Secretary of Defense
for AT&L, and he has been a thought leader on the broad
spectrum of topics we are going to be discussing today.
Mr. Phil Odeen is currently a member of the Defense
Business Board. He led a task force on the defense industrial
base last year that laid out a number of recommendations to
help the DOD sustain and improve the health of the defense
industrial base. We look forward to hearing in further detail
some of their recommendations and his assessment of how well
DOD is pursuing them.
We want to thank all of our witnesses for your service in
the cause of our national security and we look forward to your
testimony. In order for us to have adequate time to discuss a
broad range of topics, I ask that the witnesses keep their
opening remarks to no more than 5 minutes each.
As soon as Senator Portman comes in, I will certainly ask
our ranking member for his opening statement.
Senator Reed.
Senator Reed. Chairman Hagan, I'm going to be very brief.
First of all, I think we're all fortunate to have your
leadership on this important committee.
Senator Hagan. Thank you.
Senator Reed. Thank you so much. Your knowledge of these
issues and your engagement in these issues are remarkable.
I think my major task today is to admit that, despite his
youthful appearance, Secretary Kendall is my classmate from
West Point, and I'm jealous because he looks great and I--well,
anyway.
Mr. Kendall. I was going to say the same of you, Senator.
Senator Reed. I thank you. Thank you very much, Mr.
Secretary.
But I think this panel and the succeeding panel is vitally
important because, as Senator Hagan pointed out in her
statement, we're losing our competitive edge, in terms of not
just military technology, but so many technologies. We're not
attracting to the defense establishments, both corporate and
the government, the most talented individuals, as we once did
in the 50s, 60s, and 70s. We have a whole new dimension of
conflict, cyber conflict, which raises huge issues about not
only competitiveness in that dimension, but also protecting
what we have and thinking in an entirely new framework.
In fact, I feel sometimes like our predecessors must have
felt in 1920 about the airplane. They were born in 1845, they
were comfortable with the telegraph. Electricity, aah.
Airplanes? We have to deal with these issues.
So we look to you gentlemen and the succeeding panel for
the advice and the insights that are going to be absolutely
critical. This could be the most important topic we consider
long-term.
Thank you, Chairman Hagan. I will have to excuse myself.
Thank you.
Senator Hagan. Thank you, Senator Reed. I agree, this is
such an important topic, and I do thank all the witnesses for
being here.
Secretary Kendall.
STATEMENT OF HON. FRANK KENDALL, PRINCIPAL DEPUTY UNDER
SECRETARY OF DEFENSE FOR ACQUISITION, TECHNOLOGY, AND LOGISTICS
Mr. Kendall. Thank you, Chairman Hagan. I'd like to ask
that my written testimony be entered into the record.
The U.S. military's superior operational capabilities are
enabled by the application of innovative technologies and
products that assure our military dominance. These products are
designed and built by our defense industrial base under the
supervision of our government acquisition workforce. As Dr.
Carter, the Under Secretary of Defense for AT&L, mentioned
earlier this year, a strong, technologically vibrant, and
financially successful defense industry is in the national
interest.
Today I would like to summarize for you how DOD is
addressing the health and productivity of both the defense
industrial base and the defense acquisition workforce. I am
joined by Dr. Lemnios, Assistant Secretary of Defense for
Research and Engineering, and Brett Lambert, Deputy Assistant
Secretary of Defense for Manufacturing and Industrial Base
Policy. Together we will discuss policies and processes adopted
by DOD to actively engage with the source of innovation and
technology. This includes the defense industry, but also
commercial and for-profit industry, not-for-profit entities,
including Federally Funded Research and Development Centers, as
well as defense laboratories, academia, and university-
associated, affiliated research centers. These all sustain our
technological superiority and a healthy acquisition workforce
in both industry and government.
Let me start by saying a few words about the industrial
base. DOD relies on a robust and capable base to develop,
field, and maintain the high-quality equipment that is required
to meet our national security objectives. Our industrial base
today relies primarily on U.S. companies, but is also more
global, more commercial, and more financially complex than in
the past.
The defense industry, from prime contractors that work
directly with the government to their subsystem and component
suppliers, and even their raw material suppliers, is constantly
changing, constantly adapting to DOD's requirements, and, as is
to be expected, to the conditions in the marketplace.
In what Dr. Carter has called a new era for the industrial
base, that marketplace is changing, and DOD, like industry
itself, must adapt. DOD is doing so, but it should be clear
that, while we anticipate significant change from the
environment of the last decade or so, the sky will not fall on
our defense industry. The defense budget is no longer growing,
as it has for the past decade, and the President has charged
DOD to find additional savings over the next 12 years.
Secretary Gates is starting a comprehensive effort to carry out
that task. DOD has already undertaken an extensive review to
find efficiencies and we will redouble our efforts.
But at some point there is no alternative to reexamining
fundamental missions and force structure. However, even given
the reductions that the President has asked us to examine, we
believe that there will still be large and fairly stable
markets available for the defense industry. We do not foresee a
precipitous decline like the one DOD and industry experienced
at the end of the Cold War.
Today, unlike the end of the Cold War, we are not seeing a
fundamental change in the national security situation. We will
continue to face threats that range from emerging powers and
trans-national terrorists to rogue states. DOD's budget must
respond to these enduring threats and we must rely on the
defense industrial base to equip our forces.
As we enter a new era where defense budgets cannot be
expected to steadily increase, we do expect market forces to be
the primary mechanism by which industry responds to this
change. DOD will, however, be monitoring industry closely and
may sometimes in rare exceptions have to step in to protect
critical capabilities or to ensure competition.
At the top tier of the industry, we do not believe
additional consolidation would be in the interest of DOD or the
Nation. At lower tiers, we will be watching for the
anticompetitive situations or the loss of critical capability
on a case-by-case basis and for cases where we can improve the
acquisition strategy options available to DOD.
To be vigilant in this period of change, DOD has
significantly increased its efforts to address the potential
adjustments in industry. To begin with, DOD incorporated
industrial base considerations into the QDR that was released
last year. This was the first time DOD had brought the
industrial base into the QDR, its highest-level strategic
planning document. The industrial base will also be a factor in
the comprehensive review that the Secretary has now been asked
to conduct.
We have taken significant steps to address the changing
environment under the umbrella of Secretary Gates' overall
efficiency initiative. The Better Buying Power initiative that
Dr. Carter was tasked to implement is the centerpiece of this
effort. We engaged industry at the outset of this initiative
and received over 500 separate specific recommendations, many
of which were addressed. Better Buying Power began with 23
specific policy changes, but it is in fact an ongoing
continuous improvement program designed to increase acquisition
efficiency. Better Buying Power is moving both government and
industry into a new paradigm where financial incentives and
productivity gains will continuously drive out unproductive
costs.
We are also pursuing multiple concurrent efforts to map and
better understand the increasingly complex defense industrial
base so that we can deal with any problems that may emerge as
market players attempt to make adjustments. In contrast to
previous assessments, which were largely program or end
product-focused, we are assessing the industrial base sector by
sector and tier by tier to develop the data we need as the
basis for any needed interventions. Mr. Lambert will have more
to say on the industrial base and the steps we are taking
there.
So let me turn next to the source of all our innovation,
the Nation's scientific and engineering workforce in and out of
government, and challenges that we face there. As the person
responsible with Under Secretary Carter for the effectiveness
of the defense acquisition system, if there is one thing that
keeps me awake at night it is my concern for the capacity and
capability of our collective industry and government scientific
and engineering community, what Norm Augustine will refer to as
``human capital'' when he testifies later today.
As I review troubled program after troubled program and
consider my own over 35 years of experience in defense
acquisition, 16 years of which were in industry just prior to
returning to government a year ago, I have to conclude that our
capacity to deliver promised programs has atrophied to a
disturbing degree. There are still plenty of capable people
working in industry and in government, but the trends are not
positive and I believe that many of the problems we are seeing
in program management and execution are simply the result of
lack of adequate numbers of properly educated, trained, and
experienced professionals.
At the end of the day, delivering the products our
warfighters need is industry's responsibility, and in many
cases industry is failing. I believe there are many reasons for
this loss of capability: the drawdown after the Cold War, the
perception for 2 decades that the United States does not and
will not face a peer competitor, the shift in interest among
young graduates from aerospace and defense work to fields like
biotechnology and information technology, just to name a few.
Mr. Odeen will testify that he believes this trend is being
reversed, partly because of the current economy. I hope he's
correct, but I'm skeptical. The government certainly must
accept its share of the responsibility for this situation.
Government people set requirements, dictate contracting
strategies, impose cost and schedule constraints, and define
acceptable performance by industry, all of which impact program
performance. But industry has to design, build, and deliver the
product.
On the government workforce side, there was a dramatic
drawdown in the late 1990s, which we are currently trying to
redress through the Defense Acquisition Workforce Development
Fund and other measures. This will bring our numbers up. But
more has to be done to improve capability as well as quantity.
As the space-age baby boomers like myself age out of the
workforce, I fear this problem will only become more acute.
What can we do about this challenge? On the government
side, we can insist that our key acquisition professionals have
the education, training, and experience they need to attain the
level of proficiency needed for success. This is a business
that requires professionals. Key acquisition leaders in
program, technical, and contract management and their staffs
must be prepared to do their jobs and then be rewarded for
doing so successfully. On the industry side, we can provide
incentives to our suppliers to link successful performance on
contracts more tightly to financial rewards. This linkage of
profit to performance is one of the central tenets of the
Better Buying Power initiative.
Dr. Lemnios will describe some of the programs we have put
in place to encourage young people to enter science and
engineering fields and some of the steps we are taking to
support and encourage innovation in industry and government. We
have a lot of work to do in this regard. Dr. Carter calls the
acquisition workforce our number one program. It will be so for
the foreseeable future.
A competitive and robust industrial base gives America its
crucial technological edge. To this end, DOD does have
responsibilities for investing taxpayers' money, preserving
healthy competition, and managing across portfolios of defense
systems. DOD has no desire to replace industry's profit motive.
In fact, we need to use that motive as a strong incentive for
superior performance. We are in this for the long haul and we
need our suppliers to be in it for the long haul also with us.
The best strategy for all parties is to find win-win
outcomes. DOD's initiatives like Better Buying Power, the
sector-by-sector, tier-by-tier assessment of the industrial
base, and programs to promote STEM programs, and reinvigorate
defense R&D and the acquisition workforce in both industry and
government are designed to achieve just that.
Congress has been actively involved in shaping and
supporting DOD's initiatives. Your support in funding,
expedited hiring authority, workforce recognition and
incentives, and other human capital legislation has been very
important to our progress. Congress has also supported DOD's
engagement with industry, affording DOD the tools necessary to
maintain a healthy industrial base. We appreciate the support
and look forward to continued partnership to best serve the
taxpayers and our warfighters.
[The joint prepared statement of Mr. Kendall, Mr. Lemnios,
and Mr. Lambert follows:]
Joint Prepared Statement by Hon. Frank Kendall, Hon. Zachary J.
Lemnios, and Brett B. Lambert
introduction
Chairman Hagan, Ranking Member Portman, members of the
subcommittee, thank you for the opportunity to submit this written
testimony on the U.S. Department of Defense's (DOD) commitment to
maintain the health and productivity of the defense industrial base and
the defense acquisition workforce.
The Office of the Under Secretary of Defense for Acquisition,
Technology, and Logistics is the principal staff element of the
Secretary of Defense for all matters relating to DOD acquisition;
research and development (R&D), advanced technology; developmental test
and evaluation; production; logistics; equipment sustainment;
installation management; military construction; procurement;
environmental security; and nuclear, chemical, and biological matters.
I am the Principal Deputy to the Under Secretary of Defense for
Acquisition, Technology, and Logistics and I am joined today by The
Honorable Zachary Lemnios, the Assistant Secretary of Defense for
Research and Engineering and Mr. Brett Lambert, the Deputy Assistant
Secretary of Defense for Manufacturing and Industrial Base Policy.
Today, I will discuss the Department's activities to sustain the
health, vibrancy, and efficiency of the U.S. defense industrial base.
The U.S. military's superior operational capabilities are enabled by
our industrial base. For decades the United States has commanded a
decisive lead in the quality of defense-related research and
engineering conducted globally and in the military capabilities of the
products that flow from this work. However, the advantages, which have
enabled American pre-eminence in defense technology, are not a
birthright and they must be sustained. The U.S. defense industrial base
is critical to equipping our military with superior capabilities, as
recognized by Dr. Carter earlier this year: ``a strong, technologically
vibrant, and financially successful defense industry is . . . in the
national interest.''\1\
---------------------------------------------------------------------------
\1\ Ashton B. Carter, ``The Defense Industry Enters a New Era,''
Remarks at the Cowen Investment Conference, New York, NY, February 9,
2011.
---------------------------------------------------------------------------
I will discuss the policies and processes adopted by the Department
to actively strengthen the sources of science and technology--the
industrial base, defense labs and academia--to sustain technological
superiority, provide innovative capabilities and acquire dominant
warfighting weapon systems for our soldiers, sailors, airmen, and
marines.
the industrial base in a new era
DOD relies on a robust and capable defense industry to develop,
field, and maintain high quality equipment. America's industrial
capacity and our capability enabled victory in World War II, maintained
the technological edge against the Soviet Union, and today helps ensure
that our military personnel in harm's way have the world's best
equipment, supported by modern logistics and information systems. Our
technological dominance is what enables us to accomplish our national
security missions. To sustain this advantage, the Department must
continuously sustain and strengthen the key sources of militarily
relevant science and technology from its sources in the defense and
non-defense industry, government laboratories, and academia.
As the era of sustained growth in the defense budget comes to an
end, the Pentagon's stewardship task becomes more challenging. The
Department needs to adapt its industrial base considerations and
actions to the emerging reality of relatively flat defense budgets. In
the past 2 years, the Department has significantly increased its
efforts to address the implications of the changes in the arc of the
national security budget on our defense industry.
Our base today is more global, more commercial, and more
financially complex than it was in the past. The defense industry, from
the prime contractors that work directly with the government to their
subsystem and component suppliers and even their raw materials
suppliers, is constantly changing, constantly adapting to the
Department's requirements and to the conditions in the marketplace.
This natural evolution in the base is inherent in a free enterprise
system, but it can bring with it new challenges for a DOD that seeks to
sustain and grow a strong defense industrial base even as budget growth
declines.
Those challenges posed by a relatively flat defense budget vary
across the many sectors of the defense industrial base. The situation
for companies that offer platforms like ships and tanks differs from
the situation for companies in emerging sectors like unmanned vehicles
and cyber-defense. The situation differs at various tiers and with the
products produced. At some levels, a key supplier may make a truly
defense-unique product, while other suppliers at other tiers are
motivated primarily by their sales to commercial markets, offering
innovative products to the defense supply chain as a sideline--a
sideline for them, in terms of revenue, that may be vitally important
for the Department, in terms of military capability or cost control.
Understanding and reacting to this complexity in the industrial base,
the Department must increasingly tailor its relationships and policies
to specific circumstances. One area of particular concern is
maintaining adequate product ``design teams'' for the key weapons
systems product types that the Department procures. A long hiatus
between new program starts in a given area can call into question the
continued existence of experienced design teams and the body of
knowledge they bring to development of certain types of products. Once
lost, rebuilding this type of capability can take a generation or more
and the Department must be particularly vigilant about situations where
this can occur.
To understand this increasing dynamism and complexity the
Department is pursuing multiple, concurrent efforts to map and better
understand the defense industrial base. This approach is in contrast
with other more traditional narrow program-focused and product-focused
assessments. The Department will replace intuitive judgments about the
impacts of changing domestic demand, globalization, commercial-military
integration, emerging sources of innovation, and other issues with
data-driven industrial base evaluations. By continuously assessing the
industrial base on a sector-by-sector, tier-by-tier basis, the
Department will develop a reservoir of critical and actionable
information.
Looking ahead, this deeper understanding will be increasingly
important as the changing budget environment prevents the Department
from readily addressing program management and industrial base
challenges with the simple antidote of increasing expenditures. For the
fifth time since the Second World War, DOD is facing a significant
defense budget transition, in this case from a decade of rapid year-on-
year growth. Nevertheless, we do not expect the base defense budget to
fall precipitously, like it did in the post-Cold War transition. The
Department will still be a significant market for the industrial base,
will still support an innovative science and technology base, and with
appropriate attention will still maintain our technological advantages.
That said, we do need to manage our investments more effectively to
ensure a healthy industrial base. A decade of rapid budget growth
driven by pressing operational needs has fostered an environment in
which cost discipline has lost ground to the urgency of operational
needs and projections of rapidly evolving threats, both in government
and in industry. Greater efficiency is one answer. Secretary Gates'
efficiency initiative, which includes Under Secretary Carter's Better
Buying Power Initiative addressing the contracted expenditures of the
Department, is already helping adapt both the Department and our
industrial base to the new fiscal realities; but efficiency is only one
part of the solution set to the challenges we face.
a healthy industrial base
The industrial base equips our war-fighters. Industry makes the
products that our service men and women depend upon. America relies on
a defense industry that is healthy, robust, and innovative. A healthy
industry is one that on the whole makes a competitive profit. Companies
exist to make money, and without that potential no one would be
competing to win defense contracts. As a whole, most corporations in
our base fare well, particularly in comparison with other relatively
mature industrial sectors. In addition, our primes typically have the
advantage of strong backlogs and significant visibility into plans and
programs in the markets they serve. DOD will not deny the businesses it
deals with the opportunity to make a reasonable profit. Individual
companies, however, if they do not provide the government with quality
products that meet the Department's requirements on time and at
reasonable cost, should expect to make reduced or no profits. In the
high budget environments of the past many companies have grown to
expect high margins independent of the quality of their performance. As
budgets shrink this practice must stop.
A healthy industrial base is not just profitable. Being healthy
also includes being fit, or if you will, lean. Competition, disciplined
cost negotiations, and well structured contract incentives are the key
motivators the government can employ to ensure that our industrial base
is lean. Competition is one of the key drivers of productivity and
value in all sectors of the economy, including defense. Sometimes
competition is provided by having two or more providers of the same
thing go head-to-head, but where this is not possible we can still
harness this power through a wide variety of other competitive
strategies that create a competitive environment where companies are
not complacent about the work they will receive.
Contract incentives must provide rewards for good performance and
consequences for poor performance. Achieving this balance is a key goal
of the Department's Better Buying Power effort. As such, the Department
is pursuing initiatives to reward contractors for successful supply
chain and indirect expense management, such as increasing the use of
Fixed-Price Incentive Fee contracts where it makes sense, but not where
it puts unreasonable risks on industry.
As the budget environment changes, we expect companies to adapt to
this new era through both organic efficiencies and inorganic growth and
realignment. Successful companies are constantly trying to anticipate
market shifts and position themselves to be more competitive and to
achieve greater growth and profitability. In general this is a healthy
process. So readjustment to new technologies, priorities, and defense
budgets is likely to involve a normal course of realignment as
companies move to position themselves for growth, competitiveness, and
efficiency improvement.
The Department is very conscious that the top tiers of the defense
industry have already consolidated significantly, and we do not
anticipate it to be in the best interest of the warfighter or taxpayer
to see additional merger activity among the top prime contractors. But
we do expect some increased activity at the middle and lower tiers,
activity that we will monitor closely. We will be particularly
attentive and vigilant to vertical integration, especially when such
combinations capture key suppliers or technologies that may restrict
the availability of components and subsystems to multiple players on a
competitive basis. We have some tools to influence these activities,
such as the Department's roles in the Hart-Scott-Rodino and the
Committee on Foreign Investment in the United States processes, along
with some Defense Federal Acquisition Regulation Supplement regulations
concerning matters such as organizational conflicts of interest. In
this new era it is critical that the Department communicate clearly,
openly, and consistently about our concerns as early as possible. We
don't want industry wasting its time and effort on unacceptable
combinations or in pursuit of business arrangements that the government
will ultimately find objectionable. The Department understands that we
need to be transparent and consistent and avoid reversing direction
whenever possible.
Toward that end, we have publicly described our expectations, or
``guideposts,'' for any future industry rationalization and
consolidation. Dr. Carter laid out these guideposts publicly in a
speech he delivered in New York in February 2011. Well aware that each
suggested transaction must be examined on its own individual merits, we
have laid out the overall environment in which we expect this industry
to operate. From the Department's perspective, we need firms and
suppliers interested, as we are, in a long-term commitment to the base,
not short-term financial gains which may ultimately erode the viability
and vibrancy of our suppliers. In this respect, our viewpoint is
similar to long-term investors who pursue a balanced portfolio and
expect positive returns over time. This is a message we convey both
publicly and privately in our interactions with both industry and Wall
Street.
While working with our traditional suppliers as they reshape their
business models and practices, the Department also encourages new
sources of competition in the form of new entrants into our market. New
entrants renew and refresh the technology base and ensure that defense
is benefitting from the main currents of emerging technology,
particularly commercial technology and technology originating in small
businesses. We must redouble our efforts to lower the barriers to
entry. We are addressing many of these barriers--such as needless or
time-consuming paperwork--again as part of the Better Buying Power
Initiative, not just because they impose unnecessary costs but also
because we want to make it easier for companies to do business with us.
Our efforts to encourage competition in the industrial base build
on our commitment to gain insight about the state of the base's health
before dictating oversight--insight that the Department has
historically lacked, especially about the companies at the lower tiers
of the industrial base. We have undertaken an aggressive effort to map
and assess the industrial base sector-by-sector, tier-by-tier (S2T2).
The goal is to understand the gross anatomy of the industrial base.
Just as doctors do not seek to understand the functioning of every
individual neuron in the central nervous system, the Department does
not seek to know the exact details and reasoning behind every supplier
relationship. But we do need to better understand the industrial base's
nervous system, circulatory system, and bone structure.
Improved understanding of the structure of the defense industry
aligns with the Better Buying Power Initiatives. For example, the
Department expects to reward prime contractors for successful supply
chain management, efforts that add value to DOD by reducing the costs
of the components integrated further up the product stream.
Understanding subtier-level connections between the Department's
programs will improve our own supply chain management, helping the
Department's efforts to maintain economical and stable production rates
at multiple tiers. A better baseline of industrial base data will
assist programs' market-research efforts, including in the area of
contracted services, where market research needs particular attention
and where the Department tends to pay rates above commercial rates.
Comprehensive information about industry's deeper structure will help
program managers develop strategies to increase competition, as
directed under the Better Buying Power Initiative.
As the budget environment changes we expect that some niche firms
will have trouble staying in business due to temporarily decreased
demand. We expect these firms to be proactive about their concerns, but
the Department will be proactive also. We will attempt to identify
early warning signs of particular product niches that may get into
financial trouble due to temporarily decreased demand despite the fact
that they offer truly critical, unique and necessary capabilities.
While we anticipate these cases to be exceptions, we must nonetheless
be prepared on occasion to tailor our investment policies to preserve
essential capabilities. We need sufficient insight to make these
strategic investment choices.
The new S2T2 repository of industrial base data will also serve as
a jumping off point for future assessments by all Defense components,
ensuring that data collection and analysis cumulates, thereby
increasing the value of all industrial base assessment efforts. Having
one office in the Department leading this effort will prevent
duplication of effort that wastes the Department's resources and
harasses overworked program offices and contractors with multiple,
redundant requests. Sustaining and strengthening the data over time
will also contribute required insight to the Department's merger,
acquisition, and divestiture reviews and other industrial base
policies.
While the Department certainly needs more systematic insight into
the industrial base, we are already aware of the important outlines of
major changes, and we are implementing policies to address the new
realities. During the Cold War our industrial base consisted primarily
of US-owned and -operated private firms building defense-unique
products almost exclusively for the Department. This is clearly no
longer the case. We now find ourselves buying products from
international commercial and mixed defense and non-defense companies
that service many customers--both within and outside of defense
markets.
The Department has found that this shift from defense-unique to
commercial companies is typically in the best interest of the
warfighter and the taxpayer. Buying from commercial sources and taking
advantage of commercial technology in areas like information technology
incorporates more innovative products into the military's arsenal, and
it does so at a lower cost to the taxpayer. It also injects more
competition into our buying processes and allows for quicker
integration of technology improvements into weapons systems.
But buying commercial goods and services is not without risks and
complications as well as rewards. The commercial base has become
increasingly global in nature. It maintains global supply chains, gets
financing from global investors, and employs a global workforce.
Globalization poses numerous advantages and challenges. Foreign
competition pushes our domestic base to continue producing innovative,
cutting-edge products that can compete with new international entrants,
fomenting competition in price and capabilities throughout the vender
base. It allows the Department to benefit from a broader base of R&D
and capital investments, augmenting our own investments that draw on
the U.S. Government budget. Sharing technologies and processes among
allies also helps ensure that when we engage around the world, our
systems are interoperable to the greatest extent possible.
On the other hand, the benefits of globalization are tempered by
potential risks. Some foreign nations and non-state actors are
constantly trawling global supply chains, trying to gain access to
critical U.S. technologies and information on U.S. defense systems.
Similarly, the United States needs to address risks that counterfeit
parts or even components intentionally designed to subvert crucial
defense systems could slip in through the increasingly complex, global
supply chain. The Department is strongly committed to rigorous systems
testing and to our anti-counterfeit and program protection plan
initiatives. We also cooperate closely with other parts of the
government on some of these responses to globalization.
As a key example of the whole-of-government response to
globalization, DOD--along with the NSC and the Departments of State,
Treasury, and Commerce--is currently developing reforms to our export
control process to protect our most valuable technologies--our ``Crown
Jewels''--while also streamlining the process to make it easier for
companies to export parts or systems that are not critical defense
capabilities. Improving the U.S. defense industry's ability to export
is the necessary and expected flip side to our own increased openness
to globalization of the defense supply chain: as foreign firms inject
competition into the U.S. market, U.S. firms should gain equivalent
advantages in overseas markets.
Globalization also poses unique risks of supply chain disruptions.
Natural disasters can happen anywhere in the world, and even an
entirely domestic defense supply chain could face disruptions. But if a
disruption occurs at a domestic supplier, the Department can use
Defense Priorities and Allocation authorities under the Defense
Production Act to compel U.S. industry to prioritize DOD critical
orders. Those authorities do not extend overseas, so when disruptions
occur at foreign suppliers, the Department may have a more difficult
time adjusting. We are working to alleviate this challenge by
increasing the use of bilateral defense trade agreements and security
of supply agreements with our allies.
Finally in order to have a healthy industrial base the Department
must have an acquisition system that avoids false starts--programs that
are canceled after substantial investments, but before serial
production. We want our industrial base to produce high-quality systems
that are delivered to the Department and that serve our warfighters'
needs. The Department has a long history of beginning programs that we
ultimately discover are unaffordable to produce. This certainly doesn't
benefit the Department or the taxpayer and it doesn't benefit our
industrial base. For these reasons the Better Buying Power Initiative
stresses affordability as a key parameter of the defense acquisition
process. We are now forcing planners in the Department to confront
affordability constraints at the beginning of programs when
requirements are formulated and we are putting cost caps on all new
starts that we will enforce over the life of the program.
We must leverage creative innovation and turn it into real
products, meaning that we need to continue our efforts to strengthen
the focus on technology transition and manufacturing process
development. As a 2006 Defense Science Board Task Force study led by
Dr. Jacques Gansler concluded, use of immature manufacturing technology
and processes, particularly among lower tier suppliers, substantially
increases the cost of new weapon systems. The National Defense
Authorization Act for Fiscal Year 2011 presented new opportunities to
align assessments of subtier capabilities with programs like Title III
of the Defense Production Act, the Manufacturing Technology Program,
and the Industrial Base Innovation Fund that are geared specifically
toward addressing these manufacturing readiness concerns. Congress has
long championed these important programs, and we look forward to
continuing our partnership to support the warfighter at the best value
for the taxpayer.
sources of innovation in industry, academia, defense laboratories, and
federally funded research and development centers (ffrdcs)/university
affiliated research and development centers (uarcs)
The technologies that provide the basis for all our weapons systems
are created through a variety of mechanisms in industry, academia, and
defense laboratories. The Department maintains a strong relationship
with industry through a variety of programs designed to foster
collaboration and encourage innovation--Industry Independent Research
and Development (IR&D) programs; the Small Business Innovation Research
(SBIR) program; and Cooperative Research and Development Agreements
(CRADA). The Department's IR&D program encourages firms to pursue
innovative technological solutions to the most challenging operational
problems, both for near-term missions and to prepare a vibrant tech
base for an uncertain future. DOD reimburses approximately 1,200 firms
in the industrial base for IR&D efforts, thus providing opportunities
for innovation to both the large primes and the smaller mid and lower-
tier firms. The IR&D funding is critical to ensure a healthy talent
base in industry and to keep industrial design team skills sharp over
the long term.
The Department has recently launched initiatives to increase
communication with industry regarding technology needs and operational
requirements to ensure maximum return on industry's IR&D efforts, which
the Department reimburses as an allowable cost. For example, the
Department is preparing Vendor Communication Plans which provide clear
guidance and encourage communication between industry and government
about requirements and technology objectives. The Department is also
reaching out to industry to find new ways to collaborate through
sharing of detailed information about their IR&D projects and the
Department's technology roadmaps. We believe efforts like these will
encourage Industry to continue to invest in high-quality R&D projects,
and also help them identify the technical talent they will need for the
near and long term to be a successful source of innovative technology
for DOD.
The Department also uses its SBIR program to fund S&T talent at
small businesses. In fiscal year 2010 the Department issued
approximately 2,000 SBIR Phase 1 awards and approximately 900 Phase 2
awards. The Department also concluded approximately 2,500 CRADAs across
a broad industrial base. SBIR projects and CRADAs leverage the
innovation created by the industrial base talent to bring new ideas
into the Department. These vehicles provide support to small businesses
which are the greatest engines for innovation and growth in our
economy.
The Department's basic research program, primarily with
Universities, paves the way for our technological future--the
scientific discoveries it yields today provide the foundation for
tomorrow's capabilities. Given the increased global emphasis on R&D,
the United States cannot assume an assured technological superiority on
the battlefield: to do so it must remain on the scientific cutting
edge. The President's commitment to an appropriately funded basic
research program is reflected in the Department's fiscal year 2012
budget request. The budget requests increases the Department's basic
research accounts by $79 million to $2.078 billion, or 2.2 percent real
growth from the fiscal year 2011 President's budget request.
The Department also supports an extensive program to shepherd
discoveries into solutions to today's problems and to develop the next
generation of research leaders who will set the vision and exploit
opportunities. In order to increase the effectiveness and value of the
Department's basic research program, the research and engineering
enterprise has redoubled efforts that: attract and inspire the best
scientists to engage problems of defense importance, and to enable
those scientists to better interact with developers and users; improve
management practices and policies to enhance productivity and enable
scientists to better communicate and collaborate; identify emerging
areas of science with the potential for significance to defense
capabilities; and focus DOD basic research on specific domains of
defense interest, and on transformational scientific opportunities.
Basic Research is fundamentally about creating knowledge, and
innovation occurs when that knowledge is used in creative ways. The
Department believes sharing basic research information helps advance
the progress of knowledge and attracts the best talent. Last year the
Department reaffirmed and extended its policy towards removing
restrictions on publication of fundamental research results. We believe
this will encourage researchers to work in areas important to the
Department.
Another key source of technological innovation is the Department's
laboratories. The laboratories serve as the technical core of the
Department and encompass an important pool of talent and resources.
This footprint includes 67 DOD laboratories dispersed across 22 States
with a total workforce of 60,000 employees; 35,400 of whom are degreed
scientists and engineers who conduct DOD-relevant research leading to
key technology demonstrations and publish thousands of reports and
peer-reviewed technical papers. In many cases, this community defines a
technical field with seminal work and leads the industrial base in
their respective areas.
This highly skilled workforce and associated unique infrastructure
perform state-of-the-art basic and applied research; respond to rapid
need requests (prototyping, equipment modifications, etc.), support
acquisition programs and the deployed forces. The defense industrial
base looks to the DOD labs for new ideas and concepts for next
generation weapon systems while academia works closely with the labs to
transition new concepts into the military technical community.
Through special direct hiring authority granted by Congress, we
have the ability to rapidly hire new graduates in emerging critical
areas for the Department.\2\ As a result of this authority lab
directors have latitude to implement personnel policies to hire,
reward, and train the talent necessary for them to execute their
respective missions.
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\2\ Science and Technology Reinvention Laboratory (STRL, also known
as ``Demonstration Labs'')
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This authority has enabled lab directors to replace engineering
staff lost through attrition and quickly respond to changing technology
requirements. In fiscal year 2010 the labs used this authority to hire
114 qualified staff.
A source of unique capabilities in many areas where the government
cannot attract and retain personnel in sufficient depth and numbers is
the FFRDCs. FFRDCs operate in the public interest, free from
organizational conflicts of interest, and can therefore assist DOD in
ways that industry and for-profit contractors cannot. Our FFRDCs
maintain long-term capability in core competencies in domains that
continue to be of great importance to the Department, such as analysis,
engineering, acquisition support, and R&D. I view them as a vital
component of the overall acquisition workforce.
UARCs provide an effective conduit for capturing diverse
university-based engineering and technology capabilities that are
essential to the DOD. They advance DOD operations via application of
leading edge research, development or engineering in specific domains
and maintain core competencies in those domains for the benefit of all
DOD components and Agencies.
strengthening the government's acquisition workforce
The Department is committed to a strong acquisition workforce in
industry and government. Competitive pressure is used to motivate
industry to increase its scientific and engineering capabilities. DOD,
with assistance from Congress, is in the midst of rebuilding its own
scientific and engineering workforce. Without a strong professional
technical workforce the government cannot effectively define, evaluate,
and manage the defense contractors who develop products for the
Department. This workforce was downsized dramatically during the 90s
and we are in a rebuilding phase that needs to continue. While we have
made progress in restoring the workforce size, our single greatest
concern is building the human capital available to DOD inside and
outside the government. Talent matters! We need people with the right
ability, training, and experience to take on major responsibilities for
stewardship of the taxpayers' investments in a broad range of national
security systems. We are concerned about our program management,
engineering management, and contract management capabilities. Our
industry partners share identical challenges. We must actively attract
talent (enrich the pipeline) and then support the newly hired
acquisition workforce--build on their talent with key experience and
training--engage, motivate, and retain. We must help the mid-career
workforce prepare to lead the 21st century DOD acquisition mission as
the ``space age'' workforce enters retirement.
This mid-career workforce is one fifth the size of the senior
experienced workforce. We must deliberately provide opportunities to
them to get the experience they need to take on major responsibilities
and lead into the future.
In authorizing the Defense Acquisition Workforce Development Fund,
Congress recognized the importance of training and developing the
acquisition workforce. Anticipating the recruiting of new talent and
the need to improve training, we have added faculty to the Defense
Acquisition University, particularly in contracting, but also in the
management and engineering disciplines. The training will equip the
workforce to apply their skills and energies to managing their programs
and the contractual efforts that deliver goods and services in support
of national defense, to do so efficiently and effectively, and to
eliminate wasteful effort which is spent, in effect, on managing the
internal bureaucracy.
Strengthening the Department's Systems Engineering Workforce
A key focus within the Department's research and engineering
enterprise is to ensure that the Department's engineering workforce is
trained and experienced enough to meet the needs of complex systems
engineering efforts, test and evaluation efforts, and ensure a future
supply of talent, both for the Department and the industrial base. To
ensure we are on the right path, the Department has launched a
comprehensive survey of the Department's Systems Planning, Research,
Development and Engineering-certified engineering workforce. This
survey will assess the current competencies and identify any skills
gaps that may exist between the workforce's current capabilities and
those needed to meet current and future mission requirements. This
assessment and resultant gap analysis will help shape future workforce
development and human capital planning initiatives.
We have established several engineering workforce development
initiatives to address the growing department and industry challenge of
attracting and retaining the most qualified systems engineering
technical leaders to address defense acquisition challenges. These
initiatives include implementation of the engineering portion of the
Key Leader Professional Development program, working with the defense
industry and engineering professional organizations on education and
training initiatives, and conducting national and international
workshops that explore lessons learned in systems engineering
education, training and experience development. One such initiative is
the Systems Engineering Capstone pilot program, which is designed to
increase systems engineering skills in engineering students, and
increase the pipeline of systems engineers available to DOD. The
program inspires students to solve the types of system engineering
challenges evident among DOD programs. Three hundred undergraduate and
graduate students at 14 educational institutions, including Service
Academies and graduate schools, currently participate in this program.
Future Science and Engineering Talent; Science, Technology,
Engineering, and Math (STEM) Programs
The Department's STEM Programs are focused on growing the pool of
talent to replace the aging workforce. The Department requires specific
expertise in established and developing disciplines. We continue to
foster a strong relationship with future scientists and engineers.
In May 2010, the Department submitted to Congress its STEM
Education and Outreach Strategic Plan. This plan, developed by 27
senior leaders from across the DOD, lays out our vision to develop a
diverse, world-class STEM talent base by. The implementation strategy
strengthens our STEM education and outreach portfolio and provides for
specific processes and measurement criteria. The strategy includes a
STEM governance architecture consisting of a DOD Executive Board, and
links to the newly formed National Science and Technology Committee
(NSTC) on Education and a defense industry forum. The STEM Board of
Directors will meet later this spring to discuss the Implementation
Strategy.
Core to the strategy is the National Defense Education Program
(NDEP). NDEP invests in inspiring, developing, and attracting the
current and new generation of STEM talent. NDEP also enhances students
and world-class researchers' interest in DOD by offering opportunities
for direct engagement with DOD labs and Component technical staff.
NDEP's K-12 program enhances STEM education through public-private
engagement between DOD and local schools and organizations. DOD
research and engineering professionals serve as direct conduits for
inspiring students to learn STEM and, in the process, motivate many to
pursue STEM careers. Currently, 1,750 DOD scientists and engineers in
26 States have engaged 180,000 students and 8,000 teachers.
The Science, Mathematics and Research for Transformation (SMART)
program funds 670 undergraduate, graduate, and doctoral students in 19
DOD-relevant fields of study. SMART is a scholarship-for-service
program--participants commit to 1 year of DOD employment for each year
of academic support received. Since 2006, nearly 300 students have
transitioned into the DOD workforce. The program is popular--we
received 2,800 applications earlier this year and selections will be
made soon.
The National Security Science and Engineering Faculty Fellowship
(NSSEFF) focuses on distinguished scholars and graduate students. The
program awarded long-term funding to 29 distinguished university
faculty members to conduct basic research on topics essential to
national security. Connections to the faculty enable the program to
leverage more than 150 students and postdoctoral scholars serving on
research teams. The NSSEFF enables partnerships between the faculty and
their research assistants with scientists and engineers in the DOD
laboratories, providing us opportunities to identify and recruit top
talent.
conclusion
We do not have, nor do we desire, an arsenal system. Today, a
competitive and robust industry makes the weapons and support systems
that give the U.S. military its crucial technological edge. Companies
use their understanding of technology and business to choose
investments, key technical talent, the best supplier networks, and
other business strategies, and they can earn respectable profits from
reliably delivering high-quality products. The Department has no desire
to replace or reduce industry's profit motive, a strong incentive for
good performance of which we intend to take more effective advantage.
The Department has its own key roles: responsibly investing
taxpayers' money, preserving healthy competition, and managing across
portfolios of defense systems where individual contractors cannot know
how progress on one system will affect industrial capability to support
another system. Fortunately, leaders in both the DOD and the defense
industry widely recognize their coincident long-term interests in
supporting the warfighter and protecting American national security.
But the leaders also recognize the key differences in their
interests, too. We are buyers, they are sellers, and we both hope to
negotiate good deals in our self, and collective, interests. The best
outcome is to find win-win strategies, where contractors earn profits
for superior performance and the Department gets quality products for a
fair price. The Department's initiatives like Better Buying Power, the
sector-by-sector, tier-by-tier assessment of the industrial base, and
programs to promote STEM and reinvigorate defense R&D should position
us all to find more win-win situations in the future.
Congress has been actively involved in shaping and supporting the
Department's initiatives. Your support in funding, expedited hiring
authority, workforce recognition and incentives, and other human
capital legislation has been very important for our current success.
Congress has also supported the Department's engagement with industry,
affording the Department the tools necessary to maintain a healthy
industrial base. Complete success will not be achieved overnight. As
Secretary Gates has stated, ``there are no silver bullets.'' Dr. Carter
and I appreciate this support and look forward to continued partnership
to best serve the taxpayer.
Senator Hagan. Thank you, Secretary Kendall.
Secretary Lemnios, and due to time constraints, if you
could limit it to about 5 minutes. Thank you.
STATEMENT OF HON. ZACHARY J. LEMNIOS, ASSISTANT SECRETARY OF
DEFENSE FOR RESEARCH AND ENGINEERING
Mr. Lemnios. Chairman Hagan, Ranking Member Portman,
members of the subcommittee, thank you for this opportunity to
discuss DOD's research and engineering activities that foster
innovation and our progress in growing our engineering
workforce.
The defense industrial base, our defense laboratories, and
our Nation's research universities are the envy of the world.
They have consistently provided DOD with a wealth of ideas,
research and engineering resources, and capabilities that give
our men and women in uniform a decisive tactical edge. DOD
maintains a strong relationship with the defense industrial
base through programs designed to deliver capabilities and
foster collaboration and encourage innovation.
The industry's Independent Research and Development (IR&D)
investments, which DOD reimburses to over 1,200 firms at a
total of approximately $4 billion annually, has resulted in
acceleration of capabilities breakthrough in a number of
tactical areas. We're also relying on our small business
community to provide additional avenues of innovation. Our
small business innovation research program and DOD's
cooperative R&D agreements with industry have a successful
track record of driving innovation and transitioning concepts
to capabilities.
In fiscal year 2010, DOD awarded approximately 2,000 phase
one and 900 phase two Small Business Innovative Research (SBIR)
awards and has over 3,200 contract R&D agreements with small
businesses across this Nation. This provides an entire avenue
of critical technology capabilities.
DOD's laboratories are another source of innovation and
they serve as the technical core of DOD. This enterprise
includes 67 laboratories across 22 States, with 60,000
employees, of which 35,000 hold degrees in science and
engineering. These laboratories provide a unique opportunity
for academia and industry to develop and test new ideas, new
concepts, in operationally relevant environments.
DOD's basic research program has a strong coupling with
academia and with industry and paves the way for the future.
Today's scientific discoveries provide tomorrow's capabilities.
The President's fiscal year 2010 budget request for basic
research funding is just over $2 billion for precisely that
reason.
But in the light of this current environment, characterized
by global R&D, reverse talent flow, and economic pressures, our
challenge is to realign this tremendous research base to better
meet the current and future needs of DOD. We must add depth and
capacity to the acquisition workforce. We must communicate
effectively with the S&T workforce to ensure that their
products align with DOD's needs, and we must incentivize the
defense industrial base. All of these topics you will hear
about today.
The health of these three sources of innovation--the
defense industrial base, the defense laboratories, and our
universities--relies primarily on the talent they employ and
those they can access. In each of these domains, talent
matters. Our acquisition workforce is in the early stages of a
revitalization. This is where we need immediate depth and
understanding to develop and execute programs that deliver
capabilities for DOD on schedule and within budget.
In authorizing the Defense Acquisition Workforce
Development Fund, Congress recognized the importance of
training and development. This last year we added 484 key staff
in each of these areas to our Department's workforce.
We've also added faculty at our Defense Acquisition
University to provide DOD with a workforce of continuing
education and opportunities for many. In fiscal year 2010,
Defense Acquisition University trained 46,000 classroom
students, 193,000 web students, and delivered over 2 million
hours of online content.
We've established several engineering workforce development
initiatives, including systems engineering capstone courses.
This has allowed us to connect with leading systems engineering
universities to train an entirely new cadre of systems
engineers for DOD and eventually for the defense industrial
base.
Congress has granted our laboratories special authority to
rapidly hire new graduates to replace the scientists retiring
from their work in critical areas for DOD. In fiscal year 2010
we used this authority to hire 114 first-rate staff in
critically significant areas across our defense laboratories.
Our STEM programs are focused on growing the research and
engineering talent for DOD's future. Our national defense
education program is targeted to attract and develop new STEM
talent. Through this program, 1,750 DOD scientists and
engineers in 26 States have engaged 180,000 students across the
Nation and 8,000 teachers to inspire young students to join the
ranks of the defense industrial base in DOD's key mission
areas.
Our science, mathematics, and research for transformation
program, our SMART program, funds currently 670 undergraduates,
graduates, and doctoral students.
Senator Hagan. Mr. Lemnios, if you could wrap up in about a
minute.
Mr. Lemnios. Absolutely.
The key point here is that with DOD's investments in these
STEM initiatives driving new areas for work in critical
technology areas, we're strengthening the work of DOD, we're
building the defense industrial base that's structured in new
technical areas, and we're driving new concepts that will
eventually find their way to support the programs within DOD.
We recognize that we're early in many of these phases. It's
an effort that requires alignment across the defense structure
and the private sector and this is something that we're
absolutely committed to.
I thank you very much for the opportunity to address you
this afternoon.
Senator Hagan. Thank you.
Secretary Lambert.
STATEMENT OF HON. BRETT B. LAMBERT, DEPUTY ASSISTANT SECRETARY
OF DEFENSE, MANUFACTURING AND INDUSTRIAL BASE POLICY
Mr. Lambert. Chairman Hagan, Ranking Member Portman, thank
you for the opportunity to be here today.
As Mr. Kendall noted, DOD is reliant on having a robust and
capable defense industry. The base does not exist in abstract.
It's comprised of thousands of highly skilled workers pursuing
advanced technologies, some of which are seemingly
unimaginable, all in support of the warfighters.
What's often overlooked is that the goods and services that
DOD relies upon reach far deeper into the overall U.S. economy
than most appreciate. In many cases, such as the price of oil,
steel, or the increasing cost of health care, DOD's challenges
mirror that of the overall U.S. economy. In short, we don't
operate in an economic vacuum. While there are unique items
produced solely for DOD and other Federal agencies, even these
items often rely upon a complex supply chain of product
providers which, if restricted at the second, third, or even
fourth tiers, would jeopardize seemingly pure industrial
players' ability to support the warfighter on an ongoing basis.
Understanding these structures and tiers, their
interdependence to one another and the programs they serve is
central to pursuing an effective and sustainable industrial
policy. Toward this end, we believe it is essential to gain
insight into our base before dictating any oversight. Combing
through the industrial base sector by sector, tier by tier,
under the Security Standards Transition Team (S2T2) initiative
outlined by Mr. Kendall will help us develop a reservoir of
critical and actionable knowledge.
The improved understanding of the structure of the base
aligns nicely with DOD's Better Buying Power initiatives. For
example, DOD plans to reward contractors for successful supply
chain management. The incentive can be informed by the
examination now under way.
Likewise, understanding the sub-tier level connections
among DOD's programs and across the Services will improve our
program management and help DOD's efforts to maintain
economical and stable rates of production.
The new S2T2 repository of industrial base data can also
serve as a jumping-off point for future assessments of all
defense components, ensuring that the data collection and
analysis cumulates over time and thereby increasing the value
of all industrial base assessments as we move forward.
Sustaining and strengthening the data over time will
contribute to the required insight to DOD's merger,
acquisition, and divestiture reviews, as well as other
industrial base policies. Greater depth and breath
understanding of our entire base will increasingly be important
as the changing budget environment prevents DOD from readily
addressing program management and industrial base problems with
the simple salve of additional resources. That solution is
simply no longer an option as the double-digit year over year
growth that characterized the past decade is gone for the
foreseeable future.
Greater efficiency is one answer in the new budget reality
and DOD's efficiency initiative, including the Better Buying
Power, is already helping adapt both DOD and our industrial
base to the new fiscal realities. But efficiency through
process improvements is only one part of the solution. We must
also examine how the structure of our industrial base can
impact costs without sacrificing critical capabilities. As Mr.
Kendall stated, DOD is very conscious that the top tiers of the
defense industry have already consolidated significantly. That
said, we do expect more activity at the mid and lower tiers,
activity which we will monitor closely. We will be particularly
attentive and vigilant to vertical integration, especially when
such combinations affect key suppliers or technologies that
could be denied to other potential competitors or where lower-
tier firms would be denied opportunities to offer their
components or subsystems to multiple players on a competitive
basis.
In addition to guarding against constraints on competition
within the existing base, DOD also encourages new sources of
competition and new entrants to our market. New entrants renew
and refresh technology and ensure that the defense is
benefiting from the main currents of emerging technologies. We
must redouble our efforts to lower the barriers to such entry.
We're addressing many of these barriers, such as needless
and time-consuming paperwork, not just because they improve--
they impose unnecessary costs, which are ultimately passed on
to the taxpayer, but also because we simply must make it easier
for innovative companies, particularly advanced technology
companies, to do business with DOD.
We must also better leverage creative innovation and turn
it into products, meaning that we need to redouble our focus on
what in the commercial environment is referred to with
``bringing product to market.'' This requires technology
transition and manufacturing capacity development. Use of
immature manufacturing technologies and processes, particularly
among the lower tier suppliers, brings with it a multitude of
inefficiencies and substantially increases the cost of new
weapons systems.
The National Defense Authorization Act for Fiscal Year 2011
offered new opportunities to focus on sub-tier suppliers as
well as manufacturing capabilities. Congress has long
championed these important efforts and we look forward to
continuing our partnership in these matters.
Thank you for the opportunity and I look forward to your
questions.
Senator Hagan. Thank you, and thank you for all of your
testimony.
Ranking Member Portman, if you have an opening statement.
STATEMENT OF SENATOR ROB PORTMAN
Senator Portman. Thank you, Chairman Hagan, and I
appreciate my colleagues being here. What I'd like to do is
make a brief opening statement and then forego my questions
until after the other members have had a chance, including you,
to ask questions, because I have a lot of them. I thank you for
holding the hearing today and I thank our panel and I look
forward to the second panel as well.
I'm sure you did this at the outset already, but I just
want to start, as we must today, congratulating your
colleagues, the men and women in uniform who performed so
admirably over the weekend, and of course our intelligence
services. We are so grateful to them. This is a moment we've
long awaited.
It also doesn't mean that al Qaeda and its affiliates are
not going to continue to create enormous difficulties for us as
a country and for the world. They were not dependent on one man
and so we must remain vigilant.
We also have to be cognizant of the fact that we are in a
difficult time around the world in so many respects. I just got
back from a trip to Asia, Korea and India, and military growth
by states in Asia and the Pacific continues to alter the
regional balance of power, and certainly what's happened in the
Mideast with the Arab spring has altered the way we look at the
Middle East and North Africa. We are still engaged in this
battle with so many extremist groups that want to kill
Americans by any means possible in places like Iraq and
Afghanistan, but all around the world.
We have great challenges. As we've heard from the panel
today, Chairman Hagan, we remain a dominant military force, the
dominant military force, but we also have big challenges being
able to maintain our superiority, our qualitative technological
superiority, without driving our Nation further into debt and
without depriving DOD with necessary funds in other areas that
would compromise our security.
This is going to be a difficult process going forward and
we appreciate your input. Having a robust defense industrial
base is going to be critical to have the tools to do the job. I
also believe that having an industrial base that has some
diversity is critical to be able to maintain competition. One
of the concerns I have with the consolidation that you,
Secretary Lambert, were just talking about. Of course, our
military base, our industrial base, hasn't been immune to
everything else that's been happening in the economy and we do
have a changing defense marketplace.
I recently read that the Chief of Naval Operations said he
believes the defense industrial base today is as fragile as
it's ever been. That's a pretty strong statement. Certainly you
talked about the consolidation, the exodus of some companies
from the sector, and the international marketplace being
incredibly competitive these days.
Our workforce is aging in the industry, as you all know.
Some of our brightest minds are exiting the stage. We still
have too few students entering into the STEM disciplines, which
are so critical to our national security. I know we're going to
talk more about that in the questions, I hope. Of course, we
have students from overseas still taking advantage of our
superior educational opportunities here, but increasingly
they're returning home. Some of the data I saw in preparation
for this hearing, Chairman Hagan, about the degree to which
Indian and Chinese students believe they have a better chance
creating and starting a company and pursuing their dream back
in India and China is concerning for the U.S. industrial base.
We have challenges we need to address. We need to ensure
our competitive advantage is not reduced at this critical time.
I realize some of these are going to take time to solve and I
appreciate the remarks already and look forward to questions on
that topic.
I will now defer to you, Chairman Hagan, and other members,
and come back for my questions.
Senator Hagan. Thank you.
I did want to update. I said earlier there was going to be
a 3:30 vote. Now it looks like it's been postponed to 3:45.
I wanted to ask a question to you about the future
scientists and engineers that we're all concerned about for DOD
and the defense industry, following up on what you also said,
that the majority of graduates from our universities with
advanced degrees in the STEM fields are now, many of them, non-
U.S. citizens. In the past, many would remain in the United
States to pursue their careers in their fields of study. But,
however, increasingly they are now returning to their home
countries.
Mr. Lemnios, do you believe that it would be in our
national security interest for DOD and the defense industrial
base to have access to this talent pool, and is it in our best
interest to develop a pool of highly educated scientists and
engineers who will then go back to their home countries and
actually end up competing against us?
Mr. Lemnios. Chairman Hagan, that's one of the things that
keeps me up at night. At the end of the day, we need the best
minds and we need the best ideas. As I look--and I've visited
many universities. In fact, just last week I was at a Big Ten
conference of university provosts to discuss exactly that
issue.
There are really two parts of that discussion. The first is
where do the ideas actually reside. They reside in the
departments that exist within our universities, and so we have
programs and efforts in place to really bolster those concepts.
But they also reside in the students. In that area, we have--we
are in fact funding U.S. students and foreign students in our
basic research program, and we have very few avenues to correct
the issues that you discussed.
So I'm concerned about it. We're using the avenues that we
have, and the connection between our universities and our
service laboratories provides one avenue to get those ideas out
of the university into another organization that allows those
transitions to occur.
Senator Hagan. What sort of authorization would we need to
employ non-U.S. citizens with advanced degrees? Could the
current military accessions vital to the national interest
program that targets non-U.S. citizens with critical foreign
language and medical skills also be applied to STEM-related
fields and for DOD civilians? Feel free, all three of you, to
please comment on this.
Mr. Kendall. Chairman Hagan, I think there is some real
potential there. I went to graduate school at Caltech in the
1970s and about a third of the students with me in graduate
school in aerospace engineering were foreign students. Almost
all of them stayed in the United States. Many of them got jobs
in the defense industry or something related to the space
program and so on. Today that's not happening.
It's not happening for a variety of reasons. One is the
economic opportunities that they now have at home, which is
understandable. But we're also not making it easy for those
people to stay here. We're not making it attractive.
The United States is a very attractive place to live. Once
you've come here and gone to grad school, it shouldn't be that
hard to convince people that this is a place they would want to
stay. But we need to remove some of the barriers to that. So I
would be very much in favor of a program that allowed us to do
that.
Senator Hagan. How about the suggestion to staple a green
card or a certificate of citizenship to the doctoral diploma of
a graduating non-U.S. citizen who has studied in a field that's
of importance from a national security perspective and is
willing to commit to a certain time period in employment in the
defense industrial sector or the DOD? Obviously, security
clearance issues would also come up.
Mr. Kendall. I'm not sure of the exact mechanism because I
haven't really looked into this or the options carefully, but
in general I think that's an attractive proposition.
Senator Hagan. I will comment that one of my daughters also
graduated from Caltech. Good school.
Mr. Kendall. Great.
Senator Hagan. What we're going to do is take a round of 6-
minute questions. Let me ask one more and then we'll move on.
The secrecy that was essential to the success of the
counterterrorism operation that killed Osama bin Laden
highlights the critical requirement for our information
technology and telecommunications network to be well protected.
According to a report last year by the Defense Business Board's
task group on assessing the defense industrial base, the
services sector has grown rapidly over the past 15 years, with
the number of companies involved nearly tripling and the dollar
value of contracts more than doubling to over $80 billion per
year.
Two of the key sectors are information technology,
telecommunications, and the intelligence, cyber area. Given the
rapid growth in IT networks and companies involved in their
operation, how is DOD ensuring that its network operations are
secure and, with the DOD's recent efforts to in-source various
activities, what do you think's the right balance in the
information technology sector between in-sourcing and out-
sourcing?
Mr. Kendall. There are a large number of activities ongoing
right now about cyber security. Dr. Lemnios and I are involved
in several of them. We are looking at consolidating some of our
IT. Our new CIO, Teri Takai, is working on that. We're trying
to impose standards that are stronger across DOD. Because of
the size of our enterprise, it's very hard to get everything
under control, if you will. But we're making positive steps in
that direction.
We're also trying to do a lot more on the S&T side of the
house so we stay ahead of the threats. CYBERCOM, as I think you
know, Cyber Command, has been stood up and is taking some
strong actions in this regard as well. So DOD is addressing
this on a number of fronts. We recognize it is certainly a
major problem. Bringing in talent here is as important as
anywhere. This is where--people my age generally do not
understand this problem very well, very deeply, and we need
people who are much younger and much more experienced in this
world to come in and help us out. We're trying to get those
people on board.
Mr. Lemnios. I would add that, again, there's a near-term
operational challenge, which is the one that you have
mentioned, but then there's a long-term challenge of what are
the new ideas that would help us protect future networks? How
do we think about the protection of large quantities of
information? Certainly in the university environment
information technology is one of those few areas that really
attracts young minds. The other one, of course, is robotics.
But when you look at--when I visited first-rate schools, I
spend time in the computer science departments, I spend time in
the robotics departments. We have a set of challenges that DOD
poses to these schools. We're attracting first-rate students,
but it's going to take some time to build that cadre of
engineers.
The K through 12 programs that we have are doing just that.
They're doing that in partnership with the private sector. The
undergraduate and graduate funded efforts are starting to show
some light as we're graduating first-year students in those
areas.
Senator Hagan. Thank you. Senator Udall.
Senator Udall. Thank you, Chairman Hagan. Thank you for
holding this important hearing today. Before I direct some
questions to the panelists, because the schedule is a bit up in
the air, I wanted to acknowledge a native Coloradan, Norm
Augustine, who's here and will testify on the next panel. He's
an exemplary American when you look at his service record, both
in DOD and in the private sector.
I'd also like to associate myself with the remarks that
Senator Portman made in the context of the war on terror and
recommend to all of us that we look at the Hart-Rudman report
one more time, on which Mr. Augustine served. It was a seminal
work. It was a prescient work. It predicted the events of
September 11, not the exact events, but the threat that we
faced.
Norm, if I remember, I think you made five recommendations,
which hold today and are appropriate to the hearing we're
having. I think you said for America to prevail we needed to
invest in a comprehensive energy policy, that was an all-of-
the-above approach; that our diplomatic efforts, number two,
needed to be more people-to-people-based than embassy-to-
embassy based; that our national security policy, third, had to
be focused on what we now call counterterrorism and
counterinsurgency, CT and COIN; and that in the end we needed
to be tough and smart.
The fourth recommendation was to invest in our
infrastructure, which I take to mean including our
manufacturing base; and then fifth, that we needed to focus in
a targeted way on R&D and STEM.
I think those recommendations all hold fast today and we
would be well served as we face this continuing threat that
Senator Portman outlined, to re-engage with all those
recommendations.
Thank you for that important work and thank you for your
continued involvement in keeping our country great.
Gentlemen, let me turn to you and start with the
International Traffic in Arms Regulations (ITAR), which I think
ties to the fourth and fifth recommendations that the Hart-
Rudman Commission made. I've heard about it for the 12 years
I've served in Congress. I'm increasingly frustrated. There's a
crazy quilt of oversight. I think it puts us at a competitive
disadvantage with nations like India, China, and France. I
think that our efforts, well intended as they are, to prevent
sensitive technology from falling into the hands of people who
would do us harm are actually too complicated and they're
actually hindering technological progress, and therefore we're
falling behind in the very cause that we have, which is to be
as smart as we possibly can about our national security needs.
So, I'd like to hear from each of you briefly, if I could,
about ITAR, how we could improve this and do it as quickly as
possible, because I think the sand is really running out of the
hourglass.
Mr. Lambert. I can speak from the industrial perspective;
you're absolutely right. We are losing opportunities not just
for exports of our products, but for increased competition
domestically. If you have two weak competitors because both of
them are unable to export, it makes their capability to service
DOD as a whole much less attractive for DOD.
There has been a lot of activity. I think for the first
time that I've been following it for 15 or so years as well, we
have somewhat of a perfect storm in that there's a lot of
motivation both within DOD at the Secretary's level as well as
the Secretary of State and the administration, at the White
House. So there has been a lot of activity.
We're making progress on the four firsts that you may have
heard of. I don't know exactly where that stands now. It's
being worked in the policy area. But I know in my
communications with industry that is one of the major areas of
concern that they raise. In our organization, we tend to work
on a case-by-case basis, but it needs a comprehensive solution.
I'm hopeful that, at least in certain areas, you'll start to
see progress maybe as early as this summer in terms of
recommendations from DOD.
Mr. Kendall. Let me just add that there is a lot going on
right now. Secretary Gates has taken a leadership role in this
area, particularly in export control. The four firsts are all
still being actively worked. I think the single licensing
agency is moving forward; single-pallet possibility as well as
some others.
We're also taking some steps to relieve the burden or the
time at least that it takes to clear things for export. We've
recently reorganized or added some additional streamlining, if
you will, to the way we do that in DOD for the reviews that we
conduct for security clearance. So that should have an
immediate impact in terms of the time lines that people have to
wait for approval for export from DOD for the things that we
watch.
Mr. Lemnios. I would simply add that export control is one
part of the issue. I think there's a bigger issue, and that is
how do we address globalization of a whole range of
technologies. So while we talk about export control at the
system level, we've all seen examples of foreign-produced
components that are very much on par with the best in class
components we have in this country.
So we also have a challenge of producing the best in terms
of performance and competing really at the global scale.
This is something that is indeed troubling. Again back to
what do we see in our research community, driving our research
community to build new capabilities that are unmatched globally
is really where we need to be. You see a few examples of that.
You see some of those examples in nanotechnology. You see some
of those examples in microelectronics in selected fields. You
see some of those examples in imager technology, where we have
capabilities that are really second to none.
So rather than making sure we have a perimeter defense
around a class of capabilities that we want to protect, we also
need to couple that with making sure we excel in areas where we
really do have leadership.
Senator Udall. Thank you for those insights. I can't again
overemphasize the sense of urgency I feel and my commitment to
doing everything possible to change what's in effect is an
internal intra-government set of regulations that hamstrings us
from all of the potential advances in national security and
products and services and economic growth that would come from
a liberalization of ITAR.
Thank you.
Senator Hagan. Senator Shaheen.
Senator Shaheen. Thank you, Chairman Hagan, and thank you
for holding the hearing today.
Thank you all very much for being here to testify. I would
like to follow up on Senator Udall's comments about ITAR and
our export control system in general, because I met not too
long ago with New Hampshire's High Technology Council and one
of the things I heard from the members was their frustration
with ITAR and their inability to compete with companies in
other parts of the world.
You have talked about your commitment to address this. I
know the administration's committed to addressing it. I know
that there's some work going on. But why are we continuing to
see obstacles to moving forward? I guess that's my first
question.
Second is, what are we doing to solicit feedback from
companies who are frustrated about the current system, who
would like to weigh in and have ideas about how to streamline
it? I'll throw it up to whoever would like to answer that.
Mr. Kendall. I'll take the first half and ask Mr. Lambert
to take the second half. On the streamlining side, from DOD's
perspective what we're doing is trying to get greater control
over the many different areas of technical review that we have
to do, so that we can control that process and not have a
system of a product going through one review and then discover
we have to take it through another review in sequence.
So we identify early the cases that may be difficult and we
get them into the right streams to review as quickly as
possible and then we force them through in a timely way, so
that there's some predictability and a reasonable span of time
there for industry. We have heard industry loud and clear on
that and we're reacting to that.
I'll turn it over to Brett to talk about the other effort.
Mr. Lambert. To Mr. Lemnios' point, from an industrial base
perspective, we have to realize that globalization isn't really
an option; it's a reality. The more we try to wall ourselves
off from the rest of the world, the more we hurt our own
companies' innovation, but as well as we in essence are giving
passive support to foreign companies that can compete
internationally when we can't.
Having been involved in many of the meetings about the
reform, I would have to say that, since this hearing is largely
about people, this is largely a people issue. It's inertia,
it's the way we've done things in the past. So when you're
asked to protect the crown jewels, the definition of ``crown
jewels'' sometimes becomes animal, vegetable, and mineral, and
you can't start with that.
So I think this has been a leadership question, and I've
seen more movement in the last 12 months from the leadership of
all of the involved departments, not necessarily the
departments themselves but the leadership, than I've seen in 15
years. So I'm optimistic on this front.
Senator Shaheen. Well, that's encouraging. If there are
ways that I or I'm sure this committee can help, we would very
much like to do that.
Mr. Lemnios, I was very pleased to hear you talking about
the importance of robotics as you were talking about STEM
education. I have some legislation that would encourage robotic
competitions and other kinds of extracurricular ways to get
young people involved in the STEM subjects, recognizing that,
as you pointed out, that there are a lot of students who don't
learn by the traditional methods and therefore don't get
excited about those subjects.
So I'd be very happy to have the endorsement of you or any
of the members of DOD for that legislation and to talk about
how we can promote it through policy means. That's just a
little commercial there.
Under Secretary of Defense Carter recently stated in an
interview with Bloomberg that small and medium-sized companies
are centrally important in a healthy nuclear base. So how much
would you say that the defense industrial base in this country
relies on those small and medium-sized companies?
Mr. Kendall. Senator Shaheen, we rely on them extensively.
Approximately 22 percent of the work that we contract goes to
small businesses. That's direct contracting out. That does not
include all the small business work that's done by
subcontracting, which is another very large fraction of what we
do.
We're very actively engaged in promoting small businesses
right now. Dr. Carter, as you mentioned, was just in Detroit
for a day-long session with small businesses out there. I think
there were hundreds of businesses that actually came to that
event. We're doing a lot of outreach to small businesses. We're
encouraging it very much throughout our acquisition system.
These businesses are the source of a great deal of our
innovation. Programs like the small business innovative
research project and so on contribute a great deal to the
Department. So we're doing everything we can to involve them.
Senator Shaheen. I was really pleased to hear you mention
SBIR because that's a program that I have heard from so many
companies in New Hampshire that they've benefited from and it's
resulted in the development of new technological advances, new
products that have been very important, not just to the
military but also for commercial use.
What would happen if Congress is not able to get SBIR
authorized, reauthorized in this session? How much of an impact
would that have on those small and medium-sized companies that
you are looking to to produce the technological innovation of
the future?
Mr. Kendall. It would have a substantial impact. Those
early awards through small business innovative research
programs are really very important to startups. I've worked
with startups in my previous life, and they give you a cachet
that you've been recognized by the government as having a
technology that might be of interest. The initial money isn't
very large, but the subsequent rounds can be very critical to a
company that's just starting to get going.
It's a competitive process and there's some recognition for
that for those who make it through that successfully. We're
trying to streamline it a little bit because it takes a little
bit longer than we would like. But we think it would have a
very negative impact on small businesses if that program went
away.
Senator Shaheen. Thank you.
Mr. Lemnios. I absolutely agree. My experience with the
small business community is there's innovation you see there,
where there are companies who are willing to take some risk in
areas where larger companies just, for whatever reason, just
don't. You mentioned robotics, I mentioned robotics. I spent a
day at Deka and I spent a day with Dean Kamen, and----
Senator Shaheen. Who is a New Hampshire resident.
Mr. Lambert. Who happens to be from New Hampshire.
But you know, you spend a day with a small business like
that and your mind explodes with new ideas. I don't see that in
lots of companies. I see it in a select few, and protecting
that and finding ways to transition that innovation into the
large-scale is really the challenge that we have. So this is
something that we absolutely need.
Senator Shaheen. Thank you all very much.
Senator Hagan. Ranking Member Portman.
Senator Portman. Thank you, Chairman Hagan.
Again, gentlemen, thanks for your testimony today. I'm
going to go quickly here because there is so much to go over
and so little time. But first is on the direct hire issue.
Congress has to reauthorize, because it sunsets in 2013. So I
would ask you, given the challenges we've heard about the DOD
laboratories with regard to hiring, a shortage of engineers and
scientists in particular, do you think that the direct hire
authority has helped to be able to waive some time-consuming
restrictions or not? If you think it has helped, are you
supportive of its reauthorization and do you have any
suggestions for improvement?
Mr. Lemnios. So it has helped. There's no other way to say
it. We've hired 114 staff as a result of that authority. It
probably could go faster. I'm not sure what the barriers are.
But you've given us the authority. We're starting to use it.
We had a similar situation with the other transaction
authorities that DOD has. There were few agencies that
understood the value of other transaction authorities and once
we sort of figured it out that's now being used broadly. So
this is something I think is critically important.
Senator Portman. Any other comments? Secretary Kendall?
Mr. Kendall. I'd just like to add that anything that gives
us flexibility to bring talent into the workforce is good. Mr.
Augustine once worked in the Secretary of Defense's office, my
former office before my time there actually, where he was the
director, I think, for land systems, if I recall correctly. It
was the tactical warfare programs office. He was able to come
in as an expert, work there for a relatively short period of
time--I think 2 years, or 3.
Mr. Augustine. 4 years.
Mr. Kendall.--4 years, and then go back out to industry.
Having that kind of talent available to come into the workforce
and then go out again is enormously beneficial to DOD, and it
rarely happens today.
Senator Portman. Mr. Augustine, are you ready to suit up
again? Udall needs you. [Laughter.]
Senator Portman. Secretary Lambert.
Mr. Lambert. The ability--we find it in the workforce just
in our small office, but the ability to bring in talent from
outside quickly to tackle some of the challenges we have,
especially at the lower tiers, is essential, and without these
authorities it's difficult.
Senator Portman. Would you please in writing--and maybe,
Secretary Lemnios, maybe you're the right one, according to
this. Just give us any suggestions on improvements, as it
sunsets in 2013. My understanding is the House is working on
this already and the Senate needs to get busy on it. We'd love
to have your input on the subcommittee.
[The information referred to follows:]
The Services are effectively utilizing the Demo Lab authorities
within the established limits of Title 5 statutes. My assessment is
that these authorities provide the necessary flexibility to develop and
preserve our technical workforce within the labs. The pay for
performance system is a significant contributor to retaining our
talented technical personnel and the direct hire authority ensures our
labs can rapidly target and hire talented graduates as they enter the
job market. Within the Department, the Under Secretary of Defense for
Personnel and Readiness governs personnel policy, instructions, and
directives and maintains an ongoing dialogue with the Services,
specifically the labs, to ensure authorities are implemented and
exercised to their potential.
Senator Portman. I wanted to ask a little bit about
competition. I talked earlier about what I believe is an
important need to have a robust industrial base, not just to
have consolidated strong companies, but to have enough
companies that they compete with one another, both on the
operational side and the qualitative side and on the cost side.
Do you have thoughts about that in general? Where are we in
terms of real competition in our industrial base?
Mr. Kendall. Senator, one of the central tenets, as I think
I mentioned, of Better Buying Power, Dr. Carter's initiative,
is creating and maintaining a competitive environment for
industry any way that we can. There is absolutely nothing more
effective in motivating industry than competition, absolutely
nothing.
We can rarely have real competition in terms of two sources
of a product throughout the entire life cycle of a product. One
of the things that John Young, who was the predecessor to Dr.
Carter, did was to change the system a little bit to allow
competition to go further into the design process, to
preliminary design review. That allows us to very cheaply carry
competitors further and get more mature designs and reduce risk
before we go into the rest of design for production and
production.
That's a good thing, but it only gets us so far. We want to
do things beyond that. We want to do things where people are
always looking over their shoulder a little bit at the guy
who's going to come take their business away. You can do that
with alternative types of systems. You can do it sometimes at
the component level or the subsystem level. There are varieties
of ways to try to get competition into programs. We are
actively driving all of our program managers and program
executive officers to try to find ways to do that in our
programs across DOD right now.
Senator Portman. Mr. Lambert?
Mr. Lambert. I would just add that in the industrial policy
world we try to broaden a bit the definition of competition.
There's a tendency to think of it in terms of pure peer-to-peer
competition, one ship and two suppliers, or something of that
nature, when the fact that it's much--you have a lot of other
tools at your disposal. You have portfolio competition, a
system to compete against a different system that can do the
same thing. Our program managers have to be educated to think
in terms of a portfolio competitive system.
Then even when you get down to a single supplier, you have
other levers, as some have learned, where we're not necessarily
hostage. You always have termination and looking at another
portfolio, or you have, as I think Dr. Gansler has pointed out
repeatedly, you have the competition for recompetes in
contracts, particularly in the services sector, and that's an
effective lever that can be used.
Senator Portman. I will say, Secretary Lambert, it's tough
to have termination or recompetes that are really effective
when there is not again an alternative out there. It maybe
won't surprise you, but I have strong feelings on this in terms
of the second engine on the Joint Strike Fighter (JSF). I am
distraught by the fact that we are going into a 30-year program
with one manufacturer, as good as they might be, for the very
reasons Secretary Kendall talked about: Quoting him here,
``There's nothing that motivates private sector people more
than competition, someone looking over their shoulder.'' This
notion that you could terminate or recompete when there's no
base there to do it is distressing to me, and I wish the
Secretary and DOD would relook at that issue, because it's such
a huge part of what we'll be doing over the next 30 years in
terms of our weapons systems, hundreds of billions of dollars,
and the opportunity to have multiple domestic producers it
seems to me is critical.
But I won't ask you to comment on it because I don't want
to get you in trouble, because I know you agree with me.
How about on the--how about on the tracked vehicles? Your
report in 2010, Mr. Kendall, Mr. Lambert, the annual industrial
capabilities report, says that the ground vehicle sector--your
summary there said that, with the exception of the
Expeditionary Fighting Vehicle (EFV), there are no major
tracked vehicle programs under development or production.
However, the industry maintains a significant amount of tracked
vehicle overhaul work now. Your assessment concludes that the
health of the industrial base for this critical military
capacity depends significantly on EFV and continued upgrade and
reset work for the Abrams tank.
With the cancellation of EFV and what I perceive to be a
multi-year gap in the Abrams program in the upgrade work, what
are we going to do? Do you stand by your assessment from last
year that this will significantly affect the health of this
vital part of our military industrial base?
Mr. Kendall. Go ahead.
Mr. Lambert. We do have some programs that are getting
started. We are looking at what to do about the EFV mission now
that the program's been cancelled. We're starting the Ground
Combat Vehicle program for the Army and there's a program to
upgrade the Army's artillery piece, the Paladin. So there are
some things ongoing. I think there's some continuing work on
Stryker as well. It's not to the volume that we might like to
have, but we think it's enough to sustain the base.
Senator Portman. You think it's enough to sustain the base
even if there is this gap in the Abrams Main Battle Tank reset
work?
Mr. Lambert. There is a concern about the plant in Lima,
which I think is what you're referring to.
Senator Portman. Yes.
Mr. Lambert. It's not clear that we can keep that plant
open at this time.
Senator Portman. Well, again that concerns me greatly, not
just because it happens to be in Lima, OH, but because again it
has this incredible workforce and capability that you can't
suspend temporarily. Those people will leave, just as the
engineers at GE will leave, and go off to do other things, and
we lose an incredibly important industrial capability.
So I hope you'll work with us on that. I know that there's
the Ground Combat Vehicle program coming up and maybe there's a
way to ensure that we don't have that vulnerability.
With that, I'm over time here. I have so many other
questions I'd love to ask, but I appreciate your being here
today, and I apologize that our voting schedule is going to
make it hard for us to stay for all the questions for the
second panel. Thank you.
Senator Hagan. Thank you.
Obviously, due to the vote, what I'd like to suggest is
that we reconvene at the second panel as soon as this vote
takes place. This is a resolution that we're putting forward
honoring the excellent mission that our Special Operations
Forces have just done, and we certainly want to honor all of
the individuals and agencies that were involved.
So what I'd like to do is thank you for your testimony and
we will have a recess, and as soon as we come back--I hope some
of our members can come back--we will then start with the
second panel. I envision it will probably be 15 minutes or so.
Thank you.
Mr. Kendall. Thank you, Chairman Hagan.
Senator Hagan. Thank you. All the questions that we have
not been able to ask the first panel, we will submit those
extra questions to you in writing. Thank you. [Recessed.]
I will reconvene our hearing. Once again, I apologize for
the delay, but I could think of no better reason for the vote
that we just took, and it certainly did pass unanimously for
all the members there. I really do want to praise our military
and in particular our special forces for the carrying out of
that incredible mission.
If we could go ahead and start with our opening testimony
for this panel, Mr. Augustine.
STATEMENT OF NORMAN R. AUGUSTINE, RETIRED CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, LOCKHEED MARTIN CORPORATION
Mr. Augustine. Thank you, Chairman Hagan, members of the
subcommittee. I'm pleased to have this chance to describe to
you my thoughts on the defense industrial base and particularly
to do it in the company of two long-time dear friends. I would
like to submit for the record a written statement, if I may.
Senator Hagan. Please.
Mr. Augustine. I should also note that I am here
representing myself and not any firm or organization with which
I have been associated.
I would like to begin by asserting that in 21st century
conflict that a strong defense industrial base is every bit as
important; to have a strong Army or Navy or Air Force or Marine
Corps or Coast Guard. Today there are about a quarter million
people from our industry in Afghanistan and Iraq. Last week,
sadly, two of them from the company I used to serve were
killed.
At the end of the Cold War, it was generally agreed that
America had the finest military equipment that was to be found
in the world. I believe that to be true in general. I think the
reason for this was that we have chosen to use the free
enterprise system as best we can to supply our military forces,
as opposed to adopting an arsenal system such as was done in
the Soviet Union and many other countries.
However, this is an unusual free enterprise system. It's a
system characterized by a monopsony at the top, with monopolies
embedded in it for specific items of equipment. That means that
this is a free enterprise system, or version of it, that
requires very great responsibility on the part of both the
buyer and the seller.
It has now been 20 years since the so-called ``Last
Supper,'' at which DOD gathered about a dozen of us who were
running the major defense contractors at the time. We were told
that the DOD was going to be buying less equipment, given the
end of the Cold War; that DOD had no intention to pay for
overhead for a lot of companies with half-full factories and no
money to invest in R&D; and that it would be up to those of us
from industry to solve the problem, DOD wasn't going to do it
for us.
I still remember a chart that was shown on that occasion of
16 different categories of military equipment. In five of them
the DOD said they could only afford two industrial participants
and in six of them they could only afford one participant.
Shortly thereafter, 5 years later, 75 percent of the companies
were gone, as were nearly half the people in the industry,
about three-quarters of a million people.
The question arises, was that a good thing? The question
would be is it better to have 15 strong competitors in a sector
than 2? Unquestionably, in my view, the former is. But that
wasn't the choice. The choice was to have 15 weak competitors
or 2 strong competitors, and in that case, clearly the latter
in my judgment is a better outcome.
As we then turn to today and look at the major resources it
will take to have a strong defense sector, I believe there are
really five categories that need to be addressed. The first of
these is financial capital. We sometimes forget that our
defense sector has to compete with all the other industries in
this country and in the world in fact for equity and for debt
capital. Without that, they cannot modernize their facilities
or run their businesses. There's no place in the Wall Street
Journal listing where there are asterisks that say ``This
company is excused; it's a defense company.''
Second and probably the most important is human capital,
where our companies again have to compete with other companies
in the country, whether they're in the defense business or not,
and now have to compete with firms all around the world for
people. Today 75 percent of the people who get Ph.D.s from U.S.
engineering schools are not U.S. citizens. Half the bachelor's
degrees in engineering or equivalent that are awarded in the
entire world are now being awarded in China. Our K through 12
education system, particularly in STEM, is among the worst in
the world on average. DOD confronts these same issues in terms
of building an industrial base and maintaining it as the
economy as a whole does, except that the DOD and the defense
contractors require clearable people, by and large, and that
poses a major challenge.
Third is knowledge capacity. Knowledge comes from basic
research. There was a study released, a respected study, in the
last 2 weeks by an organization in the United Kingdom that
rather convincingly shows that China will surpass the United
States in 2 years from now in terms of the number of technical
papers published in respected journals. We all know the impact
that technical breakthroughs coming from research can have in
the outcome of warfare, whether you go back to the stirrup or
the long bow or the rifle or the machine gun, the tank, the
airplane, and so on. They can be decisive factors.
Fourth, there is the state of the manufacturing capability
of this country. We now are down to 11 percent of the gross
domestic product in manufacturing, 80 percent in the service
sector. I would submit that it may be possible to build a
prosperous nation with only a service sector or primarily one,
but I would doubt very much that one can win a war with a
service sector economy.
Many companies are leaving this country, putting their
manufacturing abroad, and their research is following, or
leading. I would commend to the committee the ``Rising Against
the Gathering Storm'' condensed version that just came out,
that has the reasons rather clearly stated as to why companies
are doing this.
Fifth and finally is the ecosystem that pertains to the
defense industrial base. There's a lot that could be said. Let
me just say that the turbulence in that base in terms of
schedule changes, requirements changes, budget changes, people
changes, makes it almost impossible to manage the industrial
base efficiently and effectively.
With that, Chairman Hagan, I'll close and turn to my
colleagues. I'll be happy to answer any questions you might
have.
[The prepared statement of Mr. Augustine follows:]
Prepared Statement by Hon. Norman R. Augustine
introduction
Senator Hagan, Senator Portman, members of the subcommittee, thank
you for this opportunity to share my views regarding the state of our
Nation's defense industrial base. It is a particular privilege to sit
alongside such distinguished colleagues and long-time friends as the
other members of these panels.
In the way of background as to my perspective, I should note that
my career has included 10 years' service in the Department of Defense,
30 years in the aerospace industry, a few years in academia, and
participation in over 500 board meetings of commercially-oriented
Fortune 100 companies.
Hopefully, my ``retired'' status permits me to take a somewhat
detached, yet informed, view of the challenges confronting the Nation's
defense industrial base. I should emphasize that I appear before you as
a private citizen and that the opinions I will express are entirely my
own and do not necessarily reflect those of any organization with which
I have been affiliated.
Following a few introductory remarks, I would like to address five
specific categories of issues and then offer a few suggestions
regarding the path forward. The categories I will consider are
Financial Capital, Human Capital, Knowledge Capital, Manufacturing
Capability, and the Defense Industrial Ecosphere.
perspective
In our Nation's early years, defense needs were primarily satisfied
by what has generally been referred to as the arsenal system.
Government-owned and operated engineering and manufacturing facilities
fulfilled the relatively limited categories of needs of our Armed
Forces. This is in fact the system that was employed by the Soviet
Union throughout the Cold War and is still employed by the United
States for a few items of uniquely military equipment.
As America began to build a broader and stronger commercial
manufacturing capability and as military equipment became increasingly
diverse, the Nation moved away from what was in essence a socialist
system towards a free-enterprise approach to provisioning our Armed
Forces--and in my opinion realized many of the same benefits following
that transition that have been realized by the economy as a whole.
Following the collapse of the Warsaw Pact, leaders in our
government concluded that there were too many firms supplying America's
defense needs and that paying the overhead costs associated with such a
structure was not in the Nation's best interest. This led to a dinner
meeting in the Pentagon involving the senior leadership of both the
Defense Department and major defense firms. The following day, in
response to a reporter's question, I referred to the event as ``The
Last Supper''--a sobriquet that has stuck over the years.
During that meeting Secretary Les Aspin, Secretary Bill Perry and
Director of Defense Research and Engineering John Deutch made
unmistakably clear to those of us present from industry that there were
more firms supplying the Nation's defense needs than the Nation could
afford, and that it would be up to the industry to solve that problem .
. . and this would be done with the government's support but not its
direct involvement. At the meeting a chart was shown--a copy of which I
have retained to this day--which indicated that a massive downsizing of
the industry and a concurrent increase in efficiency was expected.
Interestingly, in the case of 6 of the 16 equipment categories cited in
the chart, the Department of Defense said it could support only one
industrial participant. In five other categories it indicated it was
prepared to support only two suppliers.
A massive structural reengineering of the defense industrial base
soon began. It ended about 5 years later with 70 percent of the
companies or major elements of companies that supported national
defense no longer in business . . . along with fully half of their
workers no longer employed in the industry. I am unaware of any other
industry in our Nation's history that has undergone such a massive
change in so short a period of time--and done so with as limited
disruption as occurred. Literally billions of dollars were saved by the
Department of Defense, savings that continue to this day, according to
the government's own independent audits.
But, all things considered, was the downsizing a good thing? In my
opinion, as painful as it was to implement, it was the only thing to
do. Would I prefer an industry with a dozen strong competitors to one
with only two or three? Of course. But that was never the choice. The
choice was between an industry sector composed of a dozen weak
competitors with high overheads and largely unused factories and little
money to invest in research or talent on the one hand, or an industry
consisting of two or three strong competitors operating efficiently on
the other. In perhaps familiar words, what resulted was not the best of
all worlds . . . it was merely the best of all possible worlds.
I would hasten to add that I believe there is a major discontinuity
that appears when one drops below two suppliers for a given category of
equipment. I believe strongly in competition whenever it can be made to
make sense--which is usually but, unfortunately, not always the case.
With but one supplier, nationalization of an industry cannot be far
behind . . . and with that the loss of free-enterprise market pressures
in favor of a demonstrably less effective socialistic approach that has
failed throughout much of the world in the commercial sphere. As
capable participants are added, competitive pressures grow--but this is
governed by the law of diminishing returns. In short, there is a level
of defense spending within any category of equipment below which
competition simply cannot be sustained. Even in this case it may be
possible to maintain competition at the lower supplier-tiers which
represent roughly half of defense procurement dollars.
It also needs to be recognized that the defense industry operates
in a strange sort of free-enterprise system: a monopsony with
occasional monopolies embedded within it. Further, it must be
recognized that for so-called ``defense firms'' to raise the capital,
both human and financial, needed for their continued survival and
contribution to the Nation, they must compete with every other firm in
the country--not just other so-called ``defense firms.'' The rating
agencies and equity markets make no concessions because a firm is in a
business that happens to be critical to our national interests. Thus,
defense suppliers, if they are to survive, must earn--and I do mean
earn, as in deserve--returns commensurate with the firms with whom they
compete in the financial and talent markets.
With this as background, it is particularly important to note that
America can no more conduct a 21st century military operation without a
viable defense industrial capability than it could without a viable
Army, Navy, Air Force, Marine Corps, or Coast Guard. Indeed, the
``defense industrial base,'' as diffuse as it may be, is in effect one
more ``branch'' of our Nation's Armed Forces.
I would now like to turn to the five categories of issues that I
mentioned in my introductory comments.
financial capital
If defense-oriented firms are to modernize their factories and
expand their capabilities when called upon to do so, those firms must
have access to financial capital. This in turn implies that the firms
must generate a risk-adjusted total shareholder return that is
competitive not simply in comparison with other defense firms but in
comparison with all firms, both domestic and abroad. In today's
financial markets money moves literally at the speed of light as it
seeks opportunity--with little regard for geopolitical borders or
government needs.
Thus, firms engaged in defense procurement are a microcosm of U.S.
industry as a whole--and face many of the same challenges that are
encountered by other U.S. firms, plus some that are unique to their
activities.
human capital
Throughout the Cold War the most attractive option for a scientist
or engineer who wanted to work at the leading edge of science and
technology was to work either in national defense or in the Nation's
space program. Defense companies at that time had no difficulty
attracting their share of our Nation's best and brightest. Today, young
people aspiring to that same goal have far more options available to
them, ranging from the biosciences to info-sciences to nano-sciences
and more. In recent years one-fourth of the graduates of MIT are said
to have opted to go to work for financial firms on Wall Street. Many
others find their way to Silicon Valley or to the Nation's great
biological research laboratories.
America's science and engineering enterprise would barely function
today were it not for foreign-born individuals who came to our country
to attend our world-class colleges and universities and remained here
to build careers. Fully three-fourths of the Ph.D.s in engineering
granted by U.S. universities are awarded to non-U.S. citizens--a group
that is increasingly returning home a few years after acquiring their
degrees. The implications of this for the defense industry, with its
dependence upon clearable employees, is evident.
Further, the Defense Department and its suppliers are not immune to
the near-disastrous situation prevailing in our Nation's 14,000 K-12
public school systems--particularly with regard to STEM education. The
U.S. status in this regard has been thoroughly documented in a number
of reports including the ``Gathering Storm'' series prepared by the
National Academies.
In short, in seeking and retaining talent, defense suppliers face
many of the same challenges as the Nation's industrial firms as a
whole--but to a magnified extent. This is not to suggest that there are
not many highly capable and dedicated individuals serving within the
defense industry today; indeed there are. But this group is
increasingly narrowing itself to those individuals who just happen to
have a special commitment to national security or a particular
excitement for state-of-the-art rockets, aircraft, ships, and the
likes.
knowledge capital
New knowledge capital is largely derived from basic research.
Ironically, the ultimate applicability of that research is often not
evident, even to those who pursue it. It is doubtful, for example, that
those working in solid state physics many decades ago had in mind
building iPods, iPhones, iPads, GPS, precision-guided ordnance or night
vision devices. Nor is it likely that the Russian mathematician working
during the Cold War on equations characterizing the reflection of
electromagnetic waves realized that his work would give America the key
to building stealth aircraft.
Throughout history the course of conflicts has been tipped by
technological breakthroughs--from the stirrup to the long-bow to
gunpowder to the rifle to the machine gun to the tank to the aircraft
to the ballistic missile to the nuclear weapon to spacecraft to night
vision to precision guidance . . . and more.
Unfortunately, America is losing its lead in science and
technology. A recent report by the U.K. Royal Society projects quite
convincingly that China will overtake the United States in science
articles published in respected journals just 2 years from now. This
relative decline of the U.S. position impacts firms supplying defense
materiel to the U.S. Government just as it impacts every other U.S.
firm competing in the high-tech arena. Further, U.S. industry as a
whole, responding to the pressures of the financial marketplace, has
largely abandoned its efforts in basic research in favor of
development, and especially systems integration.
With respect to the state of applied technology, perhaps there is
no better indicator of health than the number of new aircraft types
that have been developed each decade since the 1940s. Those figures
have continued to drop precipitously until today an engineer would be
fortunate to work on two new aircraft types in his or her career. I
once asked Kelly Johnson, head of the iconic Skunk Works, how many
different aircraft he had worked on during his career and as I recall
he said ``32.'' The implications of this shrinkage with regard to the
experience level achieved by today's engineers as they pass through
their careers can be profound. Add to this that China is now graduating
half the world's new engineers vs. the United States' 5 percent and it
is not difficult to see where current practices are leading.
manufacturing strength
The U.S. economy is now 11 percent manufacturing and nearly 80
percent services. While it is arguably possible to prosper economically
with a pure service economy, the likelihood of winning major wars with
a service economy seems remote. When U.S. firms weigh the benefits and
liabilities of expanding their activities in research and development
as well as in manufacturing, either in the United States or abroad, the
answer is increasingly becoming to move abroad. It is generally
considered that the more critical elements of those firms that serve in
national defense must remain in the United States--for reasons that are
presumably evident. This pressure does not, however, apply to the
component supplies who, though not generally considered a part of the
``defense industrial base,'' are indispensable to it. A consequence is
that the manufacturing surge capacity that the Nation has available
with which to quickly expand its Armed Forces is rapidly diminishing.
To its credit, the United States has sought to reduce the loss of
life among those serving in our military focus by placing increasing
dependence on technological capability. Unfortunately, along with the
latter have come increased unit costs . . . and further declining
production volumes . . . still further exacerbating the industry's
dilemma.
While such topics as contract-type and the preservation of
competition deservedly receive a great deal of discussion in the
manufacture of defense systems, other often overlooked factors can
swamp the above issues in terms of impact. Prominent among the latter
are:
Unrealistic initial estimates of the size of the total
production buys and production rates--which lead to excessive
tooling costs and amortization penalties.
Cutbacks in planned annual purchases--which diminish
the significant gains that can otherwise be realized by moving
down the learning curve.
Uncertainty in year-to-year funding--which precludes
efficient purchasing-quantities, discourages contractor
investment in productivity measures, and leads to cancellation
or renegotiation of sometimes thousands of subcontracts.
Failure to discount future cash flows--something that
would never be permitted in the private sector.
Failure to provide reserves in proportion to the risk
entailed in a task--again, something that could never be
tolerated in the private sector.
defense industry ecosystem
National defense today depends not only on companies generally
associated with national security but also on the thousands of
subcontractors and suppliers who provide the larger firms with
everything from castings and forgings to microchips and lasers. Many of
these smaller firms do not possess the financial staying-power or
resiliency of the larger firms and are thus even more vulnerable to
turbulence in the procurement process.
Viewing the environment in which both large and small U.S. firms
operate today, the outlook for our Nation's security, let alone the
economy as a whole, is not reassuring. American firms spend over twice
as much on litigation as on research. They commonly spend more on
healthcare for their employees and retirees than on the basic material
that go into their products. They are subject to the second-highest
corporate tax rate in the world. They are motivated by the tax laws not
to return foreign earnings to be reinvested in the United States. The
patent system is ponderous and the export laws were designed for
another era. The immigration laws discourage much-needed talent from
remaining in our country. The prevailing tax and market structure
encourages a short-term outlook and disincentivizes long-term
investment--for example, research. The demise of the iconic Bell
Laboratory, home of the laser, transistor and many Nobel Laureates, is
but one example of the latter. If current plans are carried out the
government will soon have the equivalent of two Army divisions
overseeing defense procurement. While oversight is indispensable, the
question of balance is nonetheless present--particularly when
industry's response is likely to be to match that number of overseers
within its own firms as a defensive measure.
the way forward
The first step in assuring a strong and efficient industrial
capability with which to supply our Armed Forces is to take steps that
will make American industry as a whole competitive. These include
repairing our public schools; particularly in math and science;
investing more in scientific research; controlling healthcare costs;
reshaping our tax structure and encouraging; not discouraging,
immigration of talented individuals in fields where America has
legitimate needs.
Within the defense arena, useful steps include:
Return to the practice of the 1960s, promoted by Dave
Packard, to build prototypes of advanced systems--even though
most of them may never be procured for operational use. This
preserves the Nation's critical engineering design teams and
advances the state of the art at a relatively low cost.
Make it extremely demanding to begin new engineering
development programs--and equally demanding to change or stop
them, eliminating a primary contributor to waste.
Invest in manufacturing process technology, much as
manufacturing product technology has been supported in the
past, with a focus on flexible, low-rate production.
Establish practices that enable the Department of
Defense to fulfill some of its needs by drawing upon the
capabilities of commercial producers. An example from the past
was paying commercial airlines the marginal cost of
incorporating extra-wide doors in passenger aircraft that could
then accommodate military materiel, if that should be needed.
Make it practicable once again for people with
industrial experience to serve in senior positions in
government functions that require a knowledge of industrial
practices.
Seek to maintain competition in development and
procurement to the maximum extent practicable.
Rewrite the export laws, including those applicable to
deemed exports, to reflect the global economy as it exists
today, not 25 years ago.
Standardize equipment across the Services and our
allies wherever practicable so as to permit manufacturers to
exploit the benefits of higher volumes further down the
learning curve.
Continue to purchase in very limited quantities those
few truly critical items that are required to sustain key
elements of the defense industrial capability--even if their
immediate operational need may be questionable. This is akin to
paying the premium on an insurance policy.
Utilize multi-year procurements or unit buys whenever
needs are clear.
Continue efforts to fix the defense procurement system
by repairing the requirements process; providing program
stability; including Reserves in budgeting; and more.
Strengthen the government's ability to serve as an
intelligent buyer . . . but have the government itself engineer
or manufacture only those items that the private sector is
incapable of--or unwilling to--provide. This is, of course, the
basis of the free enterprise system, a system that has shown a
strength vastly exceeding that of any other systems yet
conceived.
The above is a long and demanding list, yet it is only a partial
list.
Nonetheless, the task to be accomplished is critically important.
Thank you for affording me this opportunity to share my concerns
regarding the defense industrial base. I will of course be pleased to
address any questions you might have.
Senator Hagan. Thank you.
Dr. Gansler.
STATEMENT OF JACQUES S. GANSLER, Ph.D., DIRECTOR, CENTER FOR
PUBLIC POLICY AND PRIVATE ENTERPRISE, UNIVERSITY OF MARYLAND
SCHOOL OF PUBLIC POLICY
Dr. Gansler. Thank you very much for inviting me to this,
what I think is critically important topic, and I appreciate
your holding these hearings. As you're well aware, the national
security environment for the 21st century has totally changed
from that of the 20th century. However, the U.S. industrial
base that supports it has simply been consolidated from around
50 major suppliers to a half a dozen. A 2008 Defense Science
Board task force that I chaired concluded: ``The Nation
currently has a consolidated 20th century industry, not the
required and transformed 21st century national security
industrial base that it will need in the future.''
Now, unfortunately, in the 3 years since that report, while
there have been some positive steps taken, there has not been a
noticeable improvement. In fact, in many areas the trends are
actually adverse to the need. We have rising costs for
equipment and services, stretched-out schedules, undesirable
shifts in acquisition and procurement practices.
Let me give you a couple of examples. I'd like to have my
complete text part of the record and I give a lot of examples
there. But for example, a noticeable shift from what used to be
best value awards to making awards on the basis simply of low
bid, technically acceptable.
Another example is in-sourcing of non-inherently
governmental work. Another area, stopping--Congress has
actually stopped--public-private A76 competitions for non-
inherently government work that's currently being done in
house, even though the results of the competitions
overwhelmingly show that we get higher performance, the cost
savings on average of over 30 percent.
I could go on with these examples, but let me shift to the
industrial base part of it. To meet the 21st century national
security environment, the industrial base clearly has to be
flexible, adaptable, agile, responsive, innovative, and it must
provide high-quality goods and services at affordable prices,
and, most important, in the quantities required.
Now, to achieve this I think it requires the government to
change the way it does its business. As Mr. Augustine said, in
a monopsony environment it's the government's responsibility to
do that. It has to reform its laws, its regulations, its
policies, its acquisition procurement practices, and in general
it has to remove the barriers that have been created through
what I would categorize as overregulation and detailed input
specifications, and shift much more to an emphasis on creating
incentives for industry and focused on output results rather
than input specifications.
Let me briefly just note the four findings of that Defense
Science Board Task Force that I mentioned, whose objective was
achieving a 21st century industrial base. The first finding
was: ``Current trends and policies will not result in an
effective industrial base.'' Second: ``That the DOD must drive
the industrial base transformation in order to support the 21st
century military.'' Third: ``The government must change in
order to facilitate rapid and affordable acquisition of needed
weapons, systems, and services.'' Fourth: ``A weakened DOD
acquisition workforce impedes the acquisition of military
capability and government oversight.''
This all involves changing the way the government does its
business, which basically is a cultural change. For successful
implementation of culture change, the literature is clear: it
requires leadership with a vision, a strategy, a set of
actions, a set of metrics to continuously monitor it.
So in order to stay within the time, let me simply tick off
the ten recommendations that I have in my prepared statement
and just briefly note them. The first one is, in order to do
this the DOD has to articulate a national security industrial
vision and adopt policies that match this vision and secure
incentives for industry to achieve that vision, and then of
course monitor it in order to see the realization of it.
I think perhaps the most important part of that vision is
incorporating the competitive commercial marketplace into it.
We have barriers significantly to that. In fact, let me just
quote from a National Defense Industry Association report that
just came out: ``Removal of the many barriers--legislative,
regulatory, et cetera, that prevent new suppliers, commercial
particularly, from entering the aerospace and defense
industries and previous suppliers from returning. These
barriers include specialized cost accounting, export controls,
intellectual property rights, government-unique flowdown
requirements to the lower tiers,'' and so forth.
Second, the weapons requirements process has to shift to be
focused on the netcentric system of systems in order to gain
the force multiplier effect of the lower-cost, multiple
distributed sensors and shooters, rather than the historic
focus on self-contained complex, expensive platforms.
Third, we have to achieve lower costs and faster-to-field
capabilities, while still getting better performance. The
computer industry shows us we can get higher and higher
performance at lower and lower costs. We have to use that
model. That requires the DOD to change its requirements process
in order to include cost and schedule and then use a block
upgrade model where block 1 uses existing technology and
continues to do R&D as future blocks evolve.
Fourth, we have to train as we fight, which means
recognizing the very big role of contractors on the
battlefield. Today in Iraq and Afghanistan we have about
270,000 contractors, more than we have in uniform, and yet they
are performing non-inherently governmental functions, but they
come with pretraining and lower cost, and the government has
the responsibility for managing them and part of that means
that they have to include the planning, training, exercise,
education in order to prepare for this mixed force.
Fifth, we have to focus on staying ahead, and that means by
adequately resourcing the engines of innovation. Now,
historically the first things that get cut when the budget goes
are research and then training and travel. Well, we cannot
afford to allow research to go away, especially for the small
businesses, the SBIR program which was mentioned earlier, basic
research at universities and government labs, the clear IR&D of
the companies, the IR&D effort, if you will, and the important
manufacturing technology areas. All of those have to be
continued to be supported or we'll simply fall behind.
Sixth, we have to understand and realize the benefits of
globalization while of course mitigating its risks. Today it's
very clear that technology and industry are globalized and for
the United States to take advantage of this from both economic
and military perspectives we have to change our export and
import laws. It's time for recognition of the globalization in
this area.
Seventh, we have to achieve far greater use of best value
competitions and foster long-term competitive dynamics. These
incentives coming from this continuous competition are obvious
in terms of competitive dual sourcing. The data are clear, but
we're in many cases doing it in speeches, not in reality.
Eight, we have to transform the DOD logistics system into a
world-class datacentric logistics system. It is the most
expensive of all our acquisition phases, costing over $270
billion last year, and carrying an inventory of $90 billion,
and not doing a world-class job by any measure in terms of
responsiveness, reliability, asset visibility, cost, you pick
one. It's absolutely critical that we revise that and that's an
area for big cost savings as well as greatly enhanced
performance.
Ninth, we have to recognize that over half of the DOD
acquisition costs--in fact, in fiscal year 2009 it was 57
percent--are for services, and yet all of our regulations,
policies, practices, education, et cetera, are based upon
buying goods. That has to change. We have to recognize that an
important part of our industrial base are the Services, not
just the people building ships, planes, and tanks, and our
policies therefore have to change.
Last, tenth, DOD, with Congress' help, has to move
aggressively to strengthen the future high-quality, high-skill
government acquisition workforce. I recently chaired a
commission on Army acquisition and program management in
expeditionary operations and the whole commission was shocked
to find how much the DOD acquisition workforce, particularly at
the senior levels, has been undervalued, not just in numbers,
but in senior positions.
For example, in 1990 the Army had five general officers
with contracting experience. In 2007 they had none. I give you
lots of other examples. Without smart, well-trained,
experienced acquisition buyers and managers, we will not get
there in my opinion. It's simply not achievable to get the 21st
century structure that we need.
In my prepared remarks I also discuss the other workforce
concern, which is S&T workforce, which Norm Augustine just
highlighted, and clearly that's an area that has to be
addressed, both for security and economic competitiveness.
So, in summary, it's absolutely critical that the
government changes the way it does its business and as a result
that the national security industrial base is transformed into
a flexible, adaptable, agile, responsive, innovative structure
that provides high-quality goods and services for 21st century
military needs, but at affordable prices and in the quantities
required. I think the men and women of our armed services
deserve nothing less.
Thank you.
[The prepared statement of Dr. Gansler follows:]
Prepared Statement by Hon. Jacques S. Gansler, Ph.D.\1\
---------------------------------------------------------------------------
\1\ Dr. Gansler is a professor and holds the Roger C. Lipitz Chair
in Public Policy and Private Enterprise at the University of Maryland's
School of Public Policy; where he also directs the Center for Public
Policy and Private Enterprise. He is a former Under Secretary of
Defense, responsible for Acquisitions, Technology and Logistics (1997-
2001); and is the author of the forthcoming: ``Democracy's Arsenal:
Creating a 21st Century Defense Industry'' (MIT Press; June, 2011). He
recently has served as the Chairman, ``Commission on Army Acquisition
and Program Management in Expeditionary Operations;'' and as the
Chairman, ``Defense Science Board Task Force on Improvements to
Services Contracting.''
---------------------------------------------------------------------------
The National Security environment of the 21st century has totally
changed from that of the 20th Century--as shown by the many areas
listed in Table 1. However, the major supply-base change has simply
been consolidation (from around 50 major suppliers to a half dozen). As
a 2008 Defense Science Board (DSB) Task Force (which I chaired)
concluded, ``the Nation currently has a consolidated 20th century
defense industry, not the required and transformed 21st century
National Security Industrial Base it needs for the future.'' (reference
1)
Unfortunately, in the 3 years since that report, there has not been
a noticeable improvement. In fact, in many areas the trends are adverse
to the need--with rising costs for equipment and services; stretched
out schedules; and undesirable shifts in acquisition and procurement
practices (as discussed below).
To meet the 21st century National Security environment, the
industrial base must be flexible, adaptable, agile, responsive, and
innovative; and it must provide high-quality goods and services at
affordable prices, in the quantities required. To achieve this,
requires the government to change the way it does its business, i.e.
reform its laws, regulations, policies and acquisition/procurement
practices. It must remove the current barriers--created through
overregulation and detailed ``input'' specifications--and shift to an
emphasis on creating incentives for industry to achieve the desired
output results.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Let me cite a few of the recent acquisition/procurement adverse
trends:
A significant shift from contracts awarded on the
basis of ``best value'' (i.e. a combination of risk [based on
prior performance and technology status], proposed performance,
schedule, and costs) to awards based on ``Low Bid, Technically
Acceptable''--which is an invitation to ``buy in;'' wait for
directed contract changes (to be quoted high, in a sole-source
environment); and not focus on quality, cost or schedule
control, or ``past performance'' evaluation.
A ``requirement' to recompete all service contracts
every 3 years (independent of performance and costs achieved)--
which is a disincentive; compared to the incentive-based
requirement to recompete every 3 years unless the supplier is
getting higher and higher performance at lower and lower costs
(in which case they deserve to receive the follow-on award).
Not recognizing that ``competition for an award'' is
dramatically different than ``competition during execution''--
where the former results in a monopoly supplier and large cost
growth (from the many changes that came along--from technology
changes, mission changes, interface changes, etc.); and the
latter results in competitive efforts to continuously improve
performance and reliability, and continuously lower costs (in
order to get a larger share of each ``best value'' award). A
current example would be the second engine for the F-35
fighter. Here, there never was a competition for the engine
(only for the prime contract); and the history (from the
``Great Engine War,'' for the engines for the F-15 and F-16) is
clear--the Air Force ran a continuous competition between Pratt
and Whitney's engine and GE's; and they got higher and higher
performance and increased reliability, at lower and lower
costs, from both engines (saving over $4 billion--net). Since
the F-35 is the largest program in history (with 11 nations
participating) and since engine maintenance is the highest cost
element of the Department of Defense (DOD) support; and since
the same two companies have both developed engines for this
aircraft; instead of just giving speeches about
``competition,'' why not do it? Simultaneously, maintain the
only two U.S. suppliers, and their lower-tier suppliers, for
the future, competitive industrial base of military jet
engines.
Another barrier to competition--this time put in place
by Congress--is the passing of laws inhibiting public/private
competitions (via OMB Circular A-76 rules) for work currently
being done by government workers, but which is not inherently-
governmental work. The hundreds of cases in the past have shown
savings of over 30 percent--no matter whether the winner is the
public or private sector!
Similarly, the current administration push for
''insourcing'' of work--without specifying that it is intended
only for inherently-governmental work--is actually raising
costs. (For example, the Air Force said they would save 40
percent by bringing equipment maintenance in-house; but the
Congressional Budget Office (in October 2005) had stated ``over
a 20 year period, using military units would cost roughly 90
percent more than using contractors''--and ``wrench-turning''
is certainly not inherently-governmental (only the management
and contracting for it is inherently governmental).
Finally, some of the greatest, and most innovative,
ideas in the past came from unsolicited proposals from industry
(which then received an award for a ``demonstration'').
However, these unsolicited proposals are now being greatly
discouraged, because they are getting a response that says,
``Thank you for the idea, we will now put it out for
competition--or otherwise it will hurt our competition
scorecard.''
I could go on with the examples; but, instead, let me briefly note
the four critical ``findings'' of the above-noted DSB Task Force (on
achieving a 21st century industrial base):
1. Current trends/policies will not result in an effective
industrial base.
2. DOD must drive transformation to support a 21st century
military.
3. Government must change to facilitate the rapid and affordable
acquisition of needed weapons, systems, and services.
4. A weakened DOD acquisition workforce impedes the acquisition of
military capability and government oversight.
Since ``changing the way the government does its business'' and,
correspondingly, ``transforming the National Security industrial base
for 21st century needs,'' is basically a ``cultural change,'' the
literature is clear--for successful implementation of a cultural change
it requires leadership (with a vision, a strategy, a set of actions,
and a set of metrics).
Let me draw on (and add to) the ``recommendations'' of the DSB Task
Force, in order to address the above-noted four findings:
1. Articulate a National Security Industrial Vision; adopt
government policies to implement the Vision; structure incentives for
industry to achieve the Vision; and monitor ongoing industrial dynamics
to ensure its realization.
Critically important is that this vision includes the incorporation
of the high-tech, high-quality goods and services available in the
competitive commercial market. A recent report from the National
Defense Industrial Association (NDIA, February 2011; reference 2)
stated ``there are many capable U.S. manufacturers that simply choose
not to work in the aerospace and defense industries.'' They went on to
observe the many barriers (legislative, regulatory, etc.) that
``prevent new suppliers from entering the aerospace and defense
industries, and previous suppliers from returning (these ``barriers''
include: specialize cost accounting rules; export controls;
intellectual property rights; government-unique ``flow down''
requirements to lower-tier suppliers; etc.). Finally, this group of
defense industry executives concluded that ``the existing suppliers
base may not be the most conducive to helping the industry meet
expanding requirements for improved security, higher levels of
innovation and greater responsiveness.''
As I, and others, have written (in numerous articles and books), it
makes economic and strategic sense (in terms of low cost, high quality,
rapid response, surge capability, reduced overheads, etc.) to combine
commercial and military engineering, production, and support in the
same industrial operations. But to do so requires the removal of the
above-noted barriers. It should be observed that other countries
clearly recognize these benefits (of ``dual-use'' operations); and, in
fact, the recently-released ``Chinese defense industrial policy''
explicitly advocates the use of ``dual-use'' (civil and military)
industrial operations.
2. In the weapons' ``requirements process,'' focus on
interoperable, Net-Centric Systems-of-Systems (with independent
``architects,'' and enhanced government management and systems
engineering, capability).
Here, it is particularly important, in order to gain the force-
multiplier effect of distributed sensors and shooters, in a ``net-
centric'' model (vs. the prior, ``platform centric'' model), that we
pay close attention to cyber security--in our design, development and
testing.
3. Achieve lower costs and faster-to-field capabilities, while
still achieving better performance.
As the computer world has demonstrated--with higher and higher
performance, at lower and lower costs, with each new generation of
systems; and with new systems coming out on 18 month cycles--it is
clearly possible, using product and process technology evolution, to
simultaneously realize the dual objectives, of lower cost and higher
performance. However, this requires changing the DOD ``requirements''
process, to include cost and schedule; and to fully-utilize a ``Block
upgrade'' process--beginning with proven technology (for ``Block I''),
in order to get it out into the field rapidly. Then, continue with R&D,
to prove out the technology for future ``Blocks''. (This is a common
commercial practice, known as ``spiral development.'') It also requires
a change in the DOD ``requirements process'' itself (as General
Cartwright, Vice Chairman of the Joint Chief's, has recently advocated)
in order for the system to respond faster to the changing ``urgent
needs'' of the combatant commanders; and to be able to make faster
decisions, while trading off performance, schedule and cost, in early
``blocks'' of the equipment, as it evolves (see reference 3).
4. Train as we fight: Recognize the role of ``contractors on the
battlefield.''
Today's military operations involve a ``mixed force'' of military,
government civilians, and many contractors (e.g. in Iraq and
Afghanistan, around 270,000 contractors--even more than the military).
They are performing non-inherently governmental functions (with pre-
training, and at low cost) but they must be government-managed; and
there has been inadequate staffing, as well as inadequate planning,
training, educating, and exercises in preparation for this ``mixed
force.''
5. Focus on ``staying ahead'' by adequately resourcing ``Engines
of Innovation.''
Historically, whenever there are shrinking budgets, the first
things to be cut are research, training, and travel. With the need to
``stay ahead'' (i.e. to maintain technological superiority-- which has
been the U.S. security strategy for the past half century), we must
make sure we don't ``eat our seed corn.'' We must not allow our
industry and university research budgets to shrink--especially in these
areas: (1) for small businesses (e.g. via the ``Small Business
Innovative Research Program''); (2) in the Industry's ``Independent
Research and Development'' (which must remain ``independent''--and
which recently has been drifting toward efforts to support near-term
``bid and proposal'' efforts); and (3) in the important ``manufacturing
technology'' effort (which must be geared to a focus on lower cost, but
high quality, manufacturing processes--even when producing an item in
relatively small quantities).
Finally, there are times when an R&D award (at the prime contractor
level, or in a critical subsystem or part) may be the only way to
maintain a competitive, potential second source in a key industrial-
base area (and this award also serves to keep pressure on the current
source, to continue to innovate--in order to remain competitive). Thus,
there is a need for a strong link between the R&D organizations and
those doing industrial base analyses.
6. Understand and realize the benefits of globalization while
mitigating risk.
As I wrote in ``Foreign Policy'' (March 2009, reference 4), ``The
United States must face the fact that it no longer has a monopoly on
the world's best military technology. America's path toward future
security involves cooperating with allies and taking advantage of the
best they have to offer, not cutting itself off and watching as its
military superiority slips away.''
Given that one purpose of military procurements is to ensure
competitive advantage over the other countries' technological arsenals,
the idea of depending on foreign sources for military equipment might
seem ill-advised, even dangerous. But, in fact, virtually every weapons
system used by the U.S. military today contains components that were
manufactured or designed somewhere else--and their selection was based
on higher performance; not on lower costs. Take, for example, the
Army's new mine-resistant, ambush-protected (MRAP) vehicles. Designed
to protect soldiers in Afghanistan and Iraq, they have a V-shaped hull
that was originally developed and refined in South Africa, along with
armor that was designed in Israel, robust axles from Europe, and
electronics from Asia.
Of course, critics argue that these arrangements are incredibly
dangerous. After all, couldn't the U.S. weapons supply be cut off
during wartime if the country were too reliant on foreign parts? Most
of these foreign sources, however, are from NATO nations or other
countries with which the United States has had enduring military and
commercial relationships. For example, despite very public opposition
in some of these countries to U.S. actions in Afghanistan or Iraq, at
no time did foreign suppliers (including 20 German and 2 French
suppliers) restrict the provision or sale of components.
Skeptics also worry about ``Trojan horses'' built into foreign-
supplied systems, particularly in the case of software. But this
potential threat can be addressed through extensive and rigorous
testing and reverse engineering; just as required in the financial and
medical communities. Still others raise serious and legitimate concerns
about military technology leaking into the hands of rogue regimes or
terrorists, or being sold to third parties without U.S. knowledge.
These are certainly excellent arguments for international arms-control
treaties. But there's no reason why such treaties need preclude legal
arms trade among allies, along with mutually-agreed-to verification
techniques.
More commonly, opponents emphasize the potential loss of jobs that
might occur as a result of buying equipment from offshore firms. This
was the argument critics in the U.S. Congress fell back on in March
2008 when the U.S. Air Force awarded a contract to build an airborne
refueling tanker to Northrop Grumman, over rival Boeing. What made
Northrop's bid controversial was that it planned to convert commercial
aircraft built by the European conglomerate EADS (using Airbus
aircraft) for military use. Some parts would be built in Europe and
then shipped to the United States for assembly in Alabama. The response
from Congress was as predictable, as it was wrongheaded. Members from
both parties swiftly denounced the decision to reward the lucrative
contract to a ``foreign firm'' (even though it was to be built in
Alabama).
The Defense Department should not become a social welfare
organization; and its sole responsibility should be to supply U.S.
warfighters with the best equipment at the best price. Luckily, though,
these two goals aren't mutually exclusive: in fact, the Air Force found
that the presence of the Northrop/Airbus bid resulted in a dramatic
reduction in the Boeing bid (as the eventual winner).
The United States is still the world's largest military customer
(in fact, larger than all the others combined), and it's in the
interest of international weapons manufacturers to do business where
the buyers are. In the past decade, a number of major international
firms have set up shop in the United States (bringing money and jobs to
the United States, along with their technology; and even increasing
U.S. trade exports). Alone, the Northrop deal would have created tens
of thousands of U.S. jobs.
It is also inconceivable that the United States would be involved
in any future military operation without being in some form of
international coalition. This is primarily for geopolitical reasons
(rather than simply military ones), but its importance cannot be
underestimated. When operating in a coalition environment, the United
States must be able to fully operate in an integrated fashion with its
allies; and they all must have the best possible equipment.
Despite the benefits that military globalization has already
brought, Congress continues to pass laws blocking its expansion. These
laws can sometimes be directly detrimental to military operations. In
1998, export controls held up the production of a U.S. fighter plane
for 7 months while a U.S. company waited for an export license to
supply technical data to a Dutch company that was building parts for
it. These U.S. export controls even prompted one major German defense
contractor to instruct its employees to ``avoid U.S. defense goods at
all costs.''
In addition, the export control laws also create a significant
barrier to commercial firms doing defense business. For example, when a
commercial electronic part was used in a ``Maverick'' missile (and,
therefore, under export control), it also was being used in a Boeing
737 aircraft, being sold (commercially) offshore. This resulted in an
export violation; and caused Boeing a $15 million fine. (See reference
8) Clearly, the commercial world market for electronic parts is far
larger than the DOD's, so such restrictions greatly discourage
commercial firms from offering their high-performance, low-cost parts
to the DOD. Obviously, this leads to specialized DOD parts (at low
volume and high cost); and to reduced exports of any parts or equipment
(including commercial) that are used in DOD systems. Neither of which
results is desirable.
On the import side, the 1993 ``Buy American Act'' requires that 51
percent of all purchases by the Pentagon be produced in the United
States. This often results in foreign-designed weapons systems being
transferred to the United States for production at a significant
increase in cost to the American taxpayer. Congress has occasionally
flirted with expanding the act to cover all military purchases. (In
fact, in 2004, the House of Representatives passed a law stating that
all parts of all weapon systems must be made in the United States; on
U.S. machine tools.) This requirement would have had disastrous
consequences for military procurements (i.e. lower performance and
higher costs); and in some cases would have required the government to
create entirely new (subsidized) industries. (Fortunately, the Senate
did not concur; so it did not become law.)
It is clear that, today, technology and industry are globalized;
and for the United States to gain the advantages of this (for economic
and military benefits) it is time to revise the Nation's export and
import control laws! The President currently has a Task Force
addressing this issue.
7. Achieve far greater use of ``best value'' competitions, and
foster long-term competitive dynamics.
I have written and testified frequently about the benefits (in cost
and performance) of competition. But, there are (as described above)
right and wrong ways to perform a competitive acquisition (see
reference 5). Weapon systems are not interchangeable commodities (so
you can not just ``open the envelope'' and pick the low bidder) the
decision must be based on a combination of risk (based on ``past
performance'' of the firm and current status of the proposed
technology) and the proposed performance, cost, and delivery (i.e.
``best value''); as well as the probability of maintaining these
``promises'' in the presence of the large number of future changes
(that are unavoidable in this rapidly-changing world).
So, incentives are required (to achieve high performance at low
cost); and the best one (over the long run) is the presence of, or a
credible option for, continuous competition among two sources (known as
``competitive dual-sourcing'').
The usual counterargument is that ``we can't afford the second-
source start-up costs;'' and ``this time will be different''--``We will
manage the sole-source contractor, and allow no government-imposed
changes.'' But this just doesn't have any credibility!
8. Transform the DOD logistics system into a world-class, data-
centric logistics system.
The DOD Logistics system is, by far, the most expensive of its
overall acquisition phases (in fiscal year 2009 it cost over $270
billion, and the DOD also carried an inventory of over $90 billion);
and yet, it is not world class (by any measure--responsiveness;
reliability; asset visibility; cost; etc.). However, for warfighting,
it is absolutely critical that ``the right part gets to the right
place, in the required time.'' A comparison with the logistics systems
of Walmart, UPS, Fed Ex, Caterpillar, etc. shows that it can be done;
and that the DOD has no choice but to modernize its logistics systems--
both for higher performance and for significant cost savings!
The only way to achieve this is to spend some R&D money on
modernizing the existing DOD's, 20th century, logistics systems (of
which there are over a thousand relevant I.T. systems alone), and to
continue its recent emphasis on ``Performance Based (i.e. results-
based) Logistics.''
9. Recognize that, while over half of DOD's acquisitions are for
services, all of the current regulations, policies, practices,
education, etc. are based on acquiring goods; and this must change.
I recently chaired a congressionally-mandated DSB Task Force on
``Improvements to Services Contracting'' (reference 6, May 2011), and
found that, in fiscal year 2009, 57 percent of all DOD acquisition
dollars went to buying services. Of course, the boundary between
hardware and services is increasingly blurred (i.e. buying
transportation services as opposed to buying trucks). While specifying
the requirements for the services, and effectively managing them,
(often without clear metrics for performance) is extremely difficult,
and requires extensive training and experience, this is not recognized
or appreciated in current DOD policies, practices, training, education,
and (particularly) in hiring and promotions. When it is realized that
essentially all of the contractors in Iraq and Afghanistan are
performing ``services'' (of an extremely wide variety), the importance
of this area (to the military mission) should become clear.
Additionally, when one thinks of ``the defense industrial base'' they
tend to think of the firms building ``ships, planes, and tanks;'' and
yet, they also need to consider those firms providing services (and
receiving over half of the acquisition dollars)--and often providing
these services ``in harm's way'' (in fact, the dead and wounded from
industry have recently been exceeding those in uniform).
It is time for policies, organizations, personnel activities, etc.
to recognize that (like the U.S. economy) services are, and will
continue to be, a big part of doing business in the National Security
arena. This change must take place!
10. Move aggressively to strengthen the future, high-quality,
high-skill, Government Acquisition Workforce.
When I chaired an independent Commission for the DOD on ``Army
Acquisition and Program Management in Expeditionary Operations''
(reference 7; October 31, 2007), we were shocked to find how much the
DOD acquisition workforce (particularly at the senior levels) had been
undervalued. This is shown clearly by the data in Figure 1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Since the mid-1990s, as the dollars and actions for DOD
acquisitions were rising dramatically, the acquisition workforce was
being cut. (25 percent of this was by congressional mandate.) Even more
critical than the numbers being cut, were the senior positions. For
example, in 1990 the Army had five general officers with contracting
experience; in 2007 they had none. In this same time period, the
Defense Contract Management Agency went from 4 general officers to none
(while their workforce went from 25,000 to 10,000). The Air Force had
cut both their acquisition general officers and their SES acquisition
personnel in half.
Without smart, well-trained, experienced acquisition buyers and
managers, making the required changes in DOD buying practices, and
achieving the required transformation of the industrial base (for 21st
century National Security) will simply be unachievable. Fortunately,
Congress has recognized this need with some important acquisition
workforce legislation. Also, the Army has established the ``Army
Contracting Command;'' while Senator Collins and Representative
Connelly have recently introduced a very positive set of bills to
address acquisition workforce education and training. But progress is
moving slowly--and (as described above) there have been many actions
(by both Congress and the administration) that are more focused on
``rule compliance'' than on ``results achieved.''
One final personnel issue which must be addressed is the science
and technology (S&T) workforce (in government and industry). It has
been increasingly difficult to get U.S. students (in general) to go
into S&T; and those that do, prefer to work in Hollywood animation,
Wall Street computer modeling, or biotech; to working in aerospace and
defense (the greater money, more work freedom, and greater job
stability appear to be better). One of the unique government
requirements (that is requested to be ``flowed down''--even to
university researchers and lower-tier defense workers) is that the
workers must be U.S. citizens. (This is in spite of the fact that we
allow 3 percent of the U.S. military to not be U.S. citizens.)
Importantly, in 2006 the National Science Foundation reported that ``35
percent of those obtaining graduate degrees in science and engineering,
in U.S. universities, held Temporary Visas''--and they were even
required to sign an agreement that they would leave the United States
when their studies were completed. Given America's history as an
``immigrant nation,'' and the number and quality of these foreign S&T
graduate students, I would think that, after an appropriate security
check, we should ``staple a green card to their graduate degree;'' and
encourage them, along with their U.S. counterparts, to seek work in
fields related to National Security. (Realizing that Enrico Fermi was
not a U.S. citizen when he worked on the Manhattan Project for us; and
that many of the founders of Silicon Valley were not U.S. citizens; it
only makes sense to consider them.)
In summary, it is critical that the government changes the way is
does its business (i.e. implement real acquisition reform); and, as a
result, that the National Security Industrial base is transformed into
a flexible, adaptable, agile, responsive, innovative, structure that
provides high-quality goods and services (for 21st century military
needs) at affordable prices and in the quantities required.
The men and women of our armed services deserve nothing less!
Thank you.
references
1. ``Defense Science Board Task Force on Creating an Effective
National Security Industrial Base;'' July 2008
2. ``Recovering the Domestic Aerospace and Defense Industrial
Base;'' S. Malnyk, K. Sullivan, C. Peters; National Defense Industrial
Association; February 2011
3. DSB Task Force on ``Fulfillment of Urgent Operational Needs;''
July 2009
4. ``Trade War;'' Jacques Gansler; ``Foreign Policy;'' March 2009
5. ``National Security Acquisition Challenges;'' J. Gansler, W
Lucyshyn; Strategic Studies Quarterly; Winter 2010 (pages 13-31)
6. Defense Science Task Board on ``Improvements to Services
Contacting;'' May 2011
7. ``Urgent Reform Required: Army Expeditionary Contracting;''
report of the ``Commission on Army Acquisition and Program Management
in Expeditionary Operations;'' October 31, 2007
8. ``Boeing Pays $15 Million Fine;'' Dominic Gates; The Seattle
Times; April 8, 2006
Senator Hagan. Thank you.
Mr. Odeen.
STATEMENT OF PHILIP A. ODEEN, MEMBER, DEFENSE BUSINESS BOARD,
TASK GROUP CHAIR, ASSESSING THE DEFENSE INDUSTRIAL BASE
Mr. Odeen. Thank you very much, Chairman Hagan. First of
all, let me say thank you for holding this hearing. This is a
very important issue but it seldom gets attention before
Congress, so this is a great step forward. It struck me as an
excellent example of what President Eisenhower called
``absolutely critical, but not urgent, issue.'' People know how
important it is, but they never quite get around to addressing
it. So thank you for doing this.
I'm going to take a bit of a different tack in my comments.
My prepared statement agrees with many of the things Jack and
Norm have said, so let me just look at this issue in a
different light. First, the health of the defense industry
today. The traditional aerospace-defense companies are in very
good condition right now. They have strong earnings, cash flow
is excellent, their debt levels are low, and they have very
solid investment grade credit ratings.
It may seem surprising but over the past decade they've
been able to attract very capable technical people, both new
college graduates and some experienced people. The economic
situation in particular is a factor, although September 11
might have had an impact as well.
At the other end, because of the recession, experienced
people are not leaving as early as they often did, so the
companies have experienced a short-term step up in the
capability of their workforce. Longer term, it's a different
issue and there still is a ``bathtub'' in their experience
base. They hired nobody in the 1990s, essentially, so they lack
people who would have 10, 15, 20 years of experience that are
simply not in that workforce. So you have a real gap there,
made up temporarily by these more experienced people that are
staying on.
The current situation is in stark contrast to the picture a
decade ago. Following a decade of defense budget cuts, the
industry consolidation that's been discussed, revenue and cash
flow were declining, debt levels were high, and most of the
companies had subinvestment grade credit ratings. Moreover the
stock prices had done very badly throughout the 1990s. The
company also had an aging workforce and great difficulty in
recruiting capable technical talent, either new graduates or
experienced people.
All is not well, even though the overall picture looks
pretty good right now. There are some significant challenges
that DOD and its industrial partners face. You have a web of
third- and fourth-tier subcontractors that support larger firms
in very important ways and they are in real disarray. Many of
them are primarily commercial in their orientation and the 2008
recession, with its dramatic impact on the industrial base,
hurt them badly. This has had a flow-through effect on DOD.
Because of the lower expected defense spending, stock
prices are not doing well, despite very good earnings and very
strong dividend increases. Stock prices today of all the major
companies are well below the level in 2009 after the recovery
from the 2008 stock crash. By contrast, the rest of the stock
market has improved dramatically. Weak stock prices make it
harder to attract capital, but also to reward people with
stock-type compensation.
Perhaps the most difficult issue facing DOD today has been
touched on already and that is the ability to access commercial
technology, which is critical to most important defense
capabilities. Let me talk about this briefly because it's one
of my special concerns. Many critical defense capabilities rely
heavily on the commercial sector, which leads, in fact often
dominates, cutting edge technologies in computers, software,
communications, and other areas of electronics.
The policy and regulatory changes made in the 1990s, which
Jacques will recall, helped facilitate DOD's access to the
commercial world. Unfortunately these have been seriously
eroded over the past decade. There are other barriers as well:
the slow, complicated acquisition process and the multiple,
complex regulations Jacques mentioned; a convoluted, opaque
requirements process which makes it hard for companies to know
what defense needs and where they should be directing their
investment; buy-America laws and export controls, which you've
discussed already.
Let me mention one of the nuances in export controls. If
you're a high-technology American company with really
interesting technology and opportunities to sell worldwide, you
don't want to get involved with DOD. Before you know it, your
item will be ITAR-controlled and your ability to export will be
diminished dramatically. Many companies with good technology
simply refuse to deal with DOD because of that risk.
There are a lot of future challenges for DOD, assuming
reduced defense spending and the end of the wars in Iraq and
Afghanistan. Some of these challenges have already become
evident: tough decisions on the cancellation of existing
weapons programs; very tough choices between buying more of
today's traditional systems and next generation capabilities;
pressure on investment spending from the growth in military
personnel-related programs, in particular health care and
retirement; and finally, the greater difficulty to maintain
competition as we enter a period of lower investment spending.
You're seeing these issues emerge already and they will grow in
importance in the years ahead.
How will the defense industry react to this? As I said,
they're doing well today, but as defense spending comes down
they're going to have to respond. Small niche-type acquisitions
can provide special new capabilities, and some additional
incremental revenue, and you're already seeing this. They're
going to diversify or attempt to diversify into those
government markets that they see as stable or perhaps growing--
intelligence, cyber, homeland security, areas like that. You
may see some effort to move into the commercial sector,
although, as Norm Augustine knows well, that has not been
successful in the past. Also, you will see increased efforts to
sell products internationally, especially to the Middle East
and Asian markets, where there's a lot of procurement going on.
Export controls are a complication here. The recent issue on
the sale of fighter aircraft to India is an interesting case
study of the problems that export controls create.
Mega mergers are not likely, as far as I can see. However,
if the spending cuts are deep like they were in the 1990s,
you're likely to see a different situation. It may force DOD to
rethink its policy on mega mergers or at least support limited
mergers of some sectors of the defense industry, for example
shipbuilding. If there isn't enough money to support adequate
multiple suppliers, they're likely to have to permit more major
mergers.
How does DOD respond to this? First of all, there's no
silver bullet, no one-size-fits-all policy, given the complex,
multifaceted nature of the industrial base supporting DOD. In
my view, DOD must make every reasonable effort to maintain some
competition on those platforms that will be of continued
importance in the future, not all major platforms, but those
that will clearly be important for a long period into the
future.
Even more critical strong competition, the next level down,
major subsystems, such things as radar, aircraft electronics,
fire control systems for ships, aircraft engines, and so forth.
You must have competition in these areas if at all possible.
It will also be important for DOD despite lower budgets to
invest in areas that are going to be central to the future
effectiveness of the military--C\4\ISR is the obvious example--
as well as promising new capabilities, such as unmanned systems
that can really change the game. Investment to preserve options
for the future, such as funding prototypes, can also be
important. They give us choices as we go forward.
I've talked primarily about the hardware suppliers in my
comments today, as have my colleagues. The important services
sector, which is roughly half of DOD contract spending, will
also face challenges that DOD will need to respond to. They're
somewhat protected for a variety of reasons, such as the nature
of their funding, their ability to be flexibly cut back and
maintain profits and cash flow. They'll face big problems as
well that I can cover in more detail during the discussion if
you wish.
In closing, just let me again compliment the committee for
addressing these issues. I know DOD is addressing them and your
interest and support will encourage the Department to cope with
the industrial base challenges that lie ahead.
Thank you very much and I look forward to your questions.
[The prepared statement of Mr. Odeen follows:]
Prepared Statement by Hon. Philip Odeen
Good afternoon, I appreciate the opportunity to appear before you
today. The Defense Industrial Base is a vitally important issue, but
one that seldom gets attention from Congress. It is a perfect example
of issues that President Eisenhower described as 'critical but not
urgent.'
the industrial base today
The large Defense industrial companies are in sound condition
today; strong revenue and cash flow, growing profits, and impressive
balance sheets with limited debt and investment grade credit ratings.
This is in stark contrast to the Industrial Base a dozen years ago,
following a decade of sharp reductions in Defense spending and the
massive consolidation of the traditional industry players following the
so-called ``last supper,'' hosted by Secretary Perry. Revenues had
declined along with profits, cash flow was weak (in part due to the
Department of Defense (DOD) policies), and the surviving companies had
heavy debt loads and non-investment grade credit ratings. They also had
an aging workforce and found it difficult to attract well-qualified
technical and engineering talent.
Today's Defense Industrial Base is healthy in areas beyond its
financial condition. Human capital has been rebuilt after a decade of
attracting quality college graduates and experienced technical and
engineering talent. This is due largely to the weak industrial economy
and the good wages and benefits Defense industry offers. But I believe
the attitude of our people post-September 11 contributes as well.
While the large primes and most major subcontractors are in good
condition, the lower tier suppliers are a different story. The recent
recession impacted many of them severely. Most of these firms primarily
sell to larger commercial manufacturers, and commercial demand dropped
sharply in 2008. A number of small companies providing items such as
forgings and specialized components went bankrupt or had to close
selected operations. Defense industry was able to work through these
issues, but problems still remain. In many ways, these 3rd and 4th tier
suppliers are the weakest link in the Defense industry supply chain.
Hopefully the current recovery of the broader manufacturing sector will
reduce the risks going forward.
DOD, however, relies on a much larger web of suppliers beyond the
well-known aerospace and defense primes. In many areas such as
electronics, information technology, and communications, most of the
new technologies reside in the commercial world--frequently in firms
based outside our boarders. Here DOD's outlook is far less positive.
The policy changes made in the 1990s to facilitate DOD's access to the
commercial world have largely been eroded. As a result, DOD is again
forced to rely heavily on its traditional suppliers and sources of
technology.
access to technology
Looking beyond DOD's limited access to commercial technology is
DOD's own investment in the science and technology so critical to its
future needs. During much of the second half of the 20th century, the
United States was the leader in defense technologies. DOD had a robust
research and development program and with its industrial partners,
accounted for a significant share of the key new technologies that
supported our military capabilities. That is far less true today--again
due to a variety of factors.
The growing importance to DOD of new areas of
technology (communications, IT, etc.)--all areas led, and in
many cases, dominated by the commercial world.
Pressure within DOD budgets on S&T spending and
similar pressures on Independent Research and Development
spending by the aerospace and defense companies.
The explosion of technology developments and products
outside the United States, especially in regions such as Asia.
As a result, technologies that are important to military
capabilities are often available to anyone with ``deep
pockets.''
DOD and its traditional suppliers, have difficulty accessing these
robust external sources of advanced technology for various reasons.
Some are self-imposed, such as:
Slow, complicated acquisition processes and complex
and onerous rules and requirements, which deter commercial
companies.
A lengthy, convoluted and opaque requirements process
that make it difficult for industry to understand future
defense needs.
`Buy America' regulations and other barriers that
often exclude foreign suppliers.
Export Controls (both here and abroad) designed to
limit the spread of defense-critical technology that can limit
access to the United States as well as foreign technology.
Other impediments are more traditional, ranging from
inadequate knowledge of what is available in the wider
industrial base (here and abroad) and the ``not invented here''
syndrome.
DOD is concerned by these issues and is addressing them. But
support from Congress for the needed funding and legislative action
will also be important.
Future Challenges to the Defense Industrial Base
Looking to the decade ahead and beyond, it is clear that DOD and
its industrial partners will face escalating challenges, in part due
the likely downward trajectory of DOD spending. This has implications
for both DOD's access to needed industrial capabilities and the makeup
of its traditional supplier base. It will also make it more difficult
to maintain effective competition as consolidation continues and some
firms narrow their focus to businesses where they have comparative
advantages.
DOD's challenges are already obvious:
Tough decisions to cancel existing weapons programs
that may not be affordable in the future.
Difficult investment choices between traditional
platforms and next generation weapons and capabilities.
Finding adequate funding for investments given the
growing spending on military personnel (pay and benefits,
retirement programs, and in particular, the rapid rise of
healthcare spending).
Trying to maintain competition when there are only a
few (maybe two) providers.
The traditional Defense contractors will also face challenging
times exacerbated by reduced defense budgets. Given the concentration
of the Industrial Base today, we are unlikely to see the mega mergers
and acquisitions we saw in the 1990s. Rather, companies will likely
respond in other ways:
Smaller--often niche--acquisitions to provide new
capabilities, contract vehicles and incremental revenue.
Diversification efforts, which are already in evidence
as companies try to penetrate Government markets that are seen
as growing or at least stable (e.g. intelligence, CYBER, and
Homeland Security). Some limited efforts to expand into
commercial markets can also be expected.
Increased emphasis on international sales, despite the
constraints of export controls (e.g. the recent failed effort
to sell combat aircraft to India).
Selling or spinning out declining or less profitable
business areas, leaving a more focused and stable base
business.
If the investment budget cuts are deep (as in the 1990s), more
draconian actions will be needed, that could include mergers of large
primes, or sectors of two companies (e.g. shipbuilders). This may prove
unavoidable, but will further reduce competition. The smaller players
will have other challenges. Do they sell, refocus on commercial
markets, or leave the defense sector entirely? This is already underway
as numerous small firms have been acquired by larger companies or, in
some cases, gone private with the help of private equity firms.
All segments of the Defense Industrial Base will find it harder to
attract and retain a capable workforce in a period of decline and
contraction. I will leave this discussion to the expert, Norm
Augustine.
the services sector
My remarks above have largely focused on the aerospace and defense
hardware sector. The Services Sector--roughly half of Defense contract
dollars--will also face a range of challenges, some different from
those facing manufacturing companies. Services cover a broad range of
offerings from complex software and Command, Control, Communications,
Computers, Intelligence, Surveillance and Reconnaissance (C\4\ISR)
technology to routine actions to maintain bases and facilities. It is
highly competitive with 70 percent of the dollar value delivered via
task order contracts (indefinite delivery/indefinite quantity,
Government-wide Acquisition contract).
The Services Sector may be impacted less, given that much of their
funding is from Operation and Management accounts. They also have
capabilities that have readier applications in the commercial world
(e.g. CYBER or IT). Also, they can quickly cut costs to maintain
profits and cash flow, since they are not burdened by extensive
facilities and infrastructures. But, they will be undoubtedly impacted
despite these advantages. I can expand on the Services Sector in the
discussion period if you have questions.
how should dod respond to these challenges?
Determining how to best respond to these challenges will not be
easy as the industrial base is large, complex, and multi-faceted. A
variety of selected policies and programs will be needed. The
appropriate proper actions for the hardware programs will depend on:
The industry segment
The competitive landscape
The access needed to technology and products
The actions that will be required include:
Preserving competition for key platforms whenever
possible, even though it will be costly in the short term. At a
minimum, preserving competition among the major system
providers is important (engines, fire control systems, radars,
etc.)
Focused investments to encourage competition in new
areas critical to combat effectiveness such as C\4\ISR or
innovative capabilities with great potential, such as unmanned
vehicles of all types.
Use of tools such as Broad Area Announcements and
prototyping to provide future options and maintain critical
skills in the Industrial Base.
A major strength of the Services Sector is its robust competitive
nature, its agility and the continued emergence of new, creative
companies. This competitive landscape needs to be maintained. Properly
administered task order contract vehicles, careful application of OCI
(conflict) rules, and actions to enable nontraditional suppliers to
compete will all help.
Conversely, DOD must avoid letting excessive competition damage
quality of the services, which can result from an undue focus on low
price. Best value must be the key mantra in most cases, especially
those involving technology and specialized expertise.
Finally, the health of the Defense Industrial Base must be
regularly monitored. This includes its financial condition, access to
technology and the state of its human capital. We must not recreate the
Defense industrial landscape of the 1990s.
concluding comments
I compliment the committee for addressing these issues. I know DOD
is addressing them as well and your interest and support will help the
Department cope with the industrial base challenges that lie ahead.
I look forward to responding to your questions and comments.
Senator Hagan. Let me just say thank you to all of you for
agreeing to come and share your information and background and
testimony with this committee. I think it's extremely helpful.
I will go ahead and start with some questions. In last
year's QDR it called for a consistent, realistic, and long-term
strategy for shaping the structure and capabilities of the
defense technology and industrial base. Given all of your prior
DOD experience, do you feel that DOD has a long-term strategy
that's executable and will it be able to account for the rapid
evolution of commercial technology and the unique requirements
of ongoing conflicts?
Do you want to start, Mr. Augustine?
Mr. Augustine. I'd be happy to. I think the first thing I
would note is that the defense industry to a large degree is
really a microcosm of U.S. industry as a whole, and U.S.
industry as a whole, I believe, is greatly threatened by
international competition today. We simply aren't very
competitive and we're becoming less so. DOD has the added
complication I've already mentioned of needing security
clearances for its industrial base in many instances.
Does DOD have a long-term strategy for dealing with this? I
would have to say I don't believe it does today. On the other
hand, I have to give DOD credit that there's probably more
attention being given to the defense industrial base today than
there has been in a long time, and I think that's important.
There are many things that could be done in terms of a
strategy. I would just cite one thing that stands out in my
mind. Perhaps the most valuable asset that the industrial firms
have are their advanced design teams. Our factories are
valuable and so on, but the really irreplaceable thing is
experienced advanced design teams. How do you maintain those,
for example, when you develop one new airplane every 3 decades?
In my judgment the only way you can do that is to adopt an
approach promoted by Dave Packard, my former boss, when I was
in the Pentagon. That is to prototype systems.
So to me the keystone of a strategy, at least one of the
keystones, should be to adopt--to reinvigorate the prototyping
program, the intention would not be to deploy the systems, but
simply to maintain the state-of-the-art, advance the state-of-
the-art, maintain the knowledge base, and the people base. It
doesn't cost that much to do that. The payoff is enormous.
Senator Hagan. Dr. Gansler.
Dr. Gansler. Let me just pick up on Norm's last point,
because I think it's really important to do the prototyping,
but I think it's even more important to do it competitively, so
multiple sourcing. I think that was as well what Dave Packard
was really pushing.
I would argue that right now your question about rapid
acquisition--I did a Defense Science Board study recently on
rapid response to combatant commander's needs. We don't have a
rapid responding system at all. Beginning with the requirements
process and then the procurement process and all the gates that
you have to go through and the inflexibility of that system for
rapid response--we do need to have a change in that process in
terms of everything, including the budget process, so there
would have to be some dollars available to rapidly respond as
well. But then you need an ability to do the process much more
rapidly.
We can do it. We've done it sometimes on some programs, but
it's always a special case. In fact, in that hearing when we
did the Defense Science Board we were kind of surprised to see
every time someone would come up and talk about something that
they had done rapidly, they started off by saying: We had to go
around the system. You shouldn't have to do that. Fortunately,
they had supplemental funding, and without supplemental funding
they would not have been able to do that.
An area that I am very worried about, as I said in my
remarks earlier, is research. If we start trying to save money,
we put off the future for the present, and that's not going to
be the smart move to make. It's eating our seed corn, if you
will. We can't afford to do that.
Then lastly, I think, relative to the vision, having a
vision statement that you don't implement is not effective.
They give lots of speeches about trying to have competitive
sources, at least two sources, in the United States and then,
as Senator Portman mentioned, for example on the second engine
for the JSF, where we have a strong history with the great
engine war for the F-15 and F-16, that both engine suppliers
got higher performance, higher reliability, lower cost. The Air
Force in that smaller program said they saved over $4 billion.
This is a much larger program. Why aren't we doing it?
Well, because this year we don't have the money and this
program we know how to manage better than we have all the other
ones in the past, we won't have any changes, and all these
things that I think are not credible.
So we have to implement this vision, not just talk about it
in speeches.
Mr. Odeen. Let me just add one other point related to that.
The S&T spending, SBIR programs, are all important, but the
most critical thing for DOD is to be able to reach out to that
very large commercial technology sector, both in the United
States and even overseas. I believe that has to be a key
element of any strategy.
We're simply not going to be able to spend enough on S&T
within the companies. There are IR&D programs that the Pentagon
is spending on its labs. You have to reach out to the broader
technology base of the country, which is huge in comparison to
the amount of money spent on technology within DOD or by its
suppliers.
So I think that this must be a key element of the strategy,
reaching out to industry, finding ways to simplify the
acquisition process, get rid of these barriers that keep
companies from wanting to play. I think this is important and
should be a key part of the strategy.
Dr. Gansler. If you needed some examples of what he was
just saying, Boeing just recently had to pay $15 million for a
commercial transport that had a part that happened to also be
in a missile. It was a commercial part and therefore they had
to follow export controls for that little electronic part that
was inside of its avionics in a commercial aircraft. That's
kind of silly, isn't it?
In other cases where we were ahead commercially.
Senator Hagan. How was that determined, investigated? How
did that come up?
Dr. Gansler. The ITAR list of parts. If a system is in a
defense product, as a commercial item, if it's on that list of
controlled items it automatically has to then get permission
for export control.
Senator Hagan. So they had--they paid the penalty, but
continued?
Dr. Gansler. No. Then they had to start getting export
control permission for that electronic part.
Mr. Odeen. They probably self-reported it.
Dr. Gansler. Yes, they self-reported, in terms of how they
found out about it. But it's just an absurd example, it seems
to me, of overdoing the controls.
Another example that I've heard of would be the infrared
area, where we used to own the night and we were way ahead. But
our companies couldn't export infrared and so now the French
are taking over the world market. They can export around the
world. We have to be sensible about the fact that the world is
now globalized. Technology is globalized, industry is
globalized, labor is globalized, but we're trying to protect,
and that's hurting us.
Senator Hagan. Do you know the last time we updated these
laws?
Dr. Gansler. Yes. We update them all the time. We add more
things to them. The problem is we haven't removed things from
them.
Senator Hagan. Dr. Gansler, in your written testimony, and
you also mentioned it, you talked about low-bid, technically
acceptable. Can you tell me a little bit of background? I guess
I'm surprised, depending on what it is we're talking about.
Dr. Gansler. We're talking about either services or
products. I mean, I certainly know you wouldn't get your heart
surgeon on the basis of lowest hourly rate and someone with a
degree.
Senator Hagan. Well, I think about all the high-tech
instruments that we have to have to conduct the mission we just
saw.
Dr. Gansler. Exactly.
Senator Hagan. I don't think I'd want somebody with just a
technically acceptable item.
Dr. Gansler. No. That's, the problem is that people say,
well, gee, you could save money by taking the low bid, even
if--I mean, how would you buy an engineer at the lowest hourly
rate? If they happen to have a degree from the back of a
matchbox and their temperature's 98.6, they're qualified as an
engineer. That's not the way you should be buying services, nor
is it the way you should be buying products.
Increasingly there's been a shift towards that throughout
the DOD and the intelligence community, by the way. So I think
we have to get back to recognizing that you pay a little more
and you get a lot more, it's worth it.
Senator Hagan. Last year's Defense Business Board study on
the defense industrial base addressed the specific issue of the
need for the defense industrial base to continue to have access
to crucial technology, expertise, and capabilities, what we're
talking about. Mr. Odeen, as the leader of that study, how well
do you think DOD is taking--is doing in taking the steps that
were recommended to ensure its access to technology in a
globalized world?
Mr. Odeen. It's a little hard for me to say. They were
receptive to the report. We briefed many of the senior people
on it. We had very good exchanges. They understand the need to
do that. But I'm not sure exactly how far they've gone on that.
Perhaps someone from DOD could answer that. It's only been a
year and a half, which seems like a long time, but that's not a
long time for DOD to respond in terms of changing policies and
regulations.
But they certainly ``got it'' based on my conversations,
and hopefully they will move down that path in the months and
years ahead.
Senator Hagan. Thank you for your participation in that,
too.
Dr. Gansler. There are still problems in that area. For
example, Ronald Reagan, not an ultra-liberal, said that
fundamental research should be globalized; it should be
independent of what countries the researchers come from or we
can share cooperatively, we can publish freely. But a lot of
the policies in recent years have said United States only
people and, as Norm pointed out, most of the Ph.D.s today
coming out of our universities are not United States and
therefore can't take part in this research.
I'm sure you know that most of the people founding Silicon
Valley were not U.S. citizens. Enrico Fermi was not a U.S.
citizen; he worked on the Manhattan Project. We can take
advantage of these foreign students and scholars.
Senator Hagan. I agree. We were talking about that earlier.
Actually, my next question has to do with that, the fact that
we heard in the first panel some of DOD's initiatives and
programs to attract and retain a new generation of scientists
and engineers, but not only in DOD, but also for the broader
defense industrial base.
Dr. Gansler, particularly in your statement you raised the
concept that we talked about of stapling the green card to a
degree of a graduating student in S&T who has had an
appropriate security check. In your wide-ranging interactions
with others on this topic, what do you see as the way ahead as
far as implementing this proposal and what are some of the
impediments or concerns that would have to be addressed for
successful implementation?
Dr. Gansler. Right now, by law I believe they're required
to sign that they'll go home. That seems to me a silly law. I
would not do that. We're a nation of immigrants. Why would you
force them to sign that they'll go home when they're finished?
Because they're here on a temporary visa and the concept behind
the temporary visa is that they will agree to go back.
Well, when they get their Ph.D. maybe you do staple a green
card with it, and many of those could easily be encouraged to
go into the defense sector. We actually have 3 percent of the
military as non-U.S. citizens. We let them get shot at and
killed. Why won't we let them go into our defense industry or
why won't we let them go into the government? There's some
conflict there.
Mr. Odeen. It's more than just defense industry. They can
populate the broader industrial base. This is good for the
United States and has various feedbacks to DOD. If there are
issues, they don't all have to go to work for a company like
Lockheed Martin. They can go work for other companies that will
be providing technology and products that will help the country
more broadly, but can respond to defense needs as well. We
should clearly encourage them to stay.
Dr. Gansler. But at the lower tiers we now have again a law
that says that the prime contractor must pass on all the
requirements that they have to the lower tiers. So the point
that Phil is talking about about the lower tiers, if they hire
non-U.S. citizens they're again not following the directives
that came from the prime down through law to the lower tiers.
We should perhaps not require that to be passed on that it must
be a U.S. citizen working on the widgets.
Mr. Augustine. I'd like to touch on that myself. There's a
real dilemma here. The percentage of bachelor's degrees that
are awarded in the STEM fields are about 4.4 percent of the
total degrees awarded. So about 95 percent of our people are
not studying in the STEM fields in college. That's one of the
lowest ratios in any industrialized country, or any developing
country at this point.
You go from there to the fact that when I graduated from
college, and maybe my colleagues on the panel, if you wanted to
work at the leading edge of the state-of-the-art, the place to
work was either in the defense industry or the space program.
Today that's not the case. There are a lot of exciting things
in biotechnology and nanotechnology and information systems and
so on.
There are certainly exciting things in the defense
industry, as well, but the point is that there are options.
There are a lot more options. When the students look at the
bureaucracy of the defense sector, it's very tempting to them
to go elsewhere, and I'm afraid that's been happening.
One of the recommendations that was made in ``The Gathering
Storm'' study was that when a student graduates with a Ph.D. in
one of the sciences or engineering, hard sciences or
engineering, that they be given 1 year to gain a ``permanent''
job, and when they do gain that job that they then be given a
green card and an expedited process to become a citizen should
they want to do so. I don't think that's been acted on, but I
believe it would be a useful thing to do.
Mr. Odeen. Could I add one more comment about the STEM
issue?
Senator Hagan. Certainly.
Mr. Odeen. The defense industry is very concerned about
this longer term. I was on the Northrop Grumman board for a
number of years, and they now give 90 percent of their
charitable contributions, which are substantial, to STEM-type
programs. The charity golf outings are gone, the symphony
orchestras and operas are getting hit, because they're putting
their money against STEM programs, 90 percent of it, because
they're so concerned about the long-term implications it has
for their business.
Dr. Gansler. If I could add to Norm's point about
citizenship, I can give you a specific example of that, too. A
leading nanotechnology expert in the United States came to me
and said: I applied three times for citizenship, I had my
fingerprints taken, and because it mentions in nanotechnology
something about the word ``nuclear'' and he was an Iranian
citizen, so they kept rejecting it.
I just got so fed up with it, I took his resume to
Secretary Gates and said: ``Bob, you have to get him
approval,'' and he did. But you can't normally do that. So we
have to make it a lot easier for people to get citizenship who
want to be citizens.
He said to me: I'm going to have to go to Canada; I just
can't get citizenship here. That's inexcusable.
Senator Hagan. Let me move to the manufacturing
technologies. In the written statement, the DOD mentioned the
need to continue efforts to strengthen the focus on
manufacturing process development. Mr. Augustine, in your
statement you also mentioned the need to invest in
manufacturing process technology. Do you feel that DOD is
investing at an adequate level and in the right areas, and if
not how can they improve?
Mr. Augustine. I really don't believe that DOD is investing
adequately. They do invest in product technology, as
distinguished from process technology. The areas they tend to
invest in, though, are probably not the ones that we're going
to need in the future. I think we're going to need highly
flexible, low-rate manufacturing technology and that really is
getting very little attention anywhere in this country.
Senator Hagan. I'm sorry? Say that one more time? Highly
successful low-rate?
Mr. Augustine. Low-rate, highly flexible manufacturing
technology. We have a situation where the bulk of the
manufacturing technology used to come out of the private
sector, non-DOD. Today that technology is moving abroad and DOD
is therefore going to have to pick up a bigger load for this
low-rate, highly flexible effort of the type used for defense.
Senator Hagan. Dr. Gansler, you led a Defense Science Board
study on DOD's manufacturing technology program in 2006. Do you
feel that DOD is following the recommendations of that study,
and if not what do you think are some of the impediments to
pursuing those recommendations?
Dr. Gansler. I would strongly support the points that Norm
just made, because in terms of the focus on manufacturing
technology, manufacturing processes, the focus needs to really
be on low-cost, small quantity, low rate. It's not just being
able to produce at a low rate, but it's efficiently producing
at a low rate. Usually people say, well, gee, if you just let
me build another million of them I can lower the cost. But we
don't have the money to do that, and on the other hand we ought
to be able to build at lower rates more efficiently with modern
flexible manufacturing technologies. The focus in that area it
seems to me is where I would place the emphasis.
I think there isn't a full recognition, even though there's
lots of speeches being made about the importance of low cost. I
think we have to incorporate into those speeches the importance
of low-cost manufacturing processes, and a focus on research in
that area I think is critical.
Senator Hagan. DOD is taking efforts to revitalize
industry's IR&D activities and resurrect a more meaningful
interaction with industry on communicating future R&D needs.
What do you feel that DOD's efforts in this area--are they
being effective, and if not what other actions would you
recommend?
Mr. Odeen. Well, let me just make one comment. IR&D is
obviously an expense. It is reimbursed by the government, but
it goes into your overhead rate and therefore it competes with
other things. In particular, bid and proposal money and IR&D
used to be in the same category. I think they're now separating
them again. But in a highly competitive kind of situation, the
mere fact that you'll get reimbursed for it doesn't help if it
drives up the overall cost of your product.
So there's a tough dilemma in the intensely competitive
world we're in right now. We need to find ways to permit
companies to spend reasonable amounts of money on that. DOD
also needs to reach out, and I think they're beginning to do
that, reach out more to take advantage of company technology.
It often is not actively accessed by the Services to see how
they can use it. So the companies invest in on technology the
next big weapons competition, as opposed to trying to do more
basic, fundamental technology research that could broadly
benefit DOD.
Dr. Gansler. We found that there were two shifts taking
place in this IR&D. One was forgetting that the ``I'' stands
for ``independent,'' and the government was trying to suggest
to the companies where they should spend their money; then
second, that the companies were shifting a lot of what had been
IR&D into the bid and proposal activities because they had been
combined. So separating them out is really important.
Mr. Odeen. I was going to say what Jacques just did, that
the ``I'' stands for independent. You have a double-edged sword
when the government says, we're going to get involved and help
you. The government, well-meaning, believes that if they tell
industry what it is they're interested in that industry will
spend its money more effectively than if it doesn't know what
the DOD wants.
The problem is that when you implement that, the government
becomes very invasive and starts telling you what it is you
should be working on, which is contrary to the whole idea of
IR&D.
Senator Hagan. Let me ask a question about the DOD
laboratories. Across the Services, the DOD has an impressive
laboratory enterprise with scores of facilities across the
country that employ or fund a range of people, from the most
junior postdoctoral student to Nobel Prize winners. Dr.
Gansler, given that you were previous Under Secretary for AT&L
and had oversight of DOD's laboratories, how well is DOD
currently managing and utilizing its laboratory enterprise and
how successful are the interactions between the DOD labs and
industry and what are some ways to improve these interactions?
Dr. Gansler. I think one of the main things is trying to
recognize the directions of changes. One of the tendencies of
any laboratory, including the DOD labs, is to do incremental
change to old technology, try to make it a little bit better,
but not to shift to totally new areas. One of the things that
made Bell Labs so exciting was that they shifted in some cases
into totally new semiconductors and things of that sort.
If you can--so-called disruptive technologies, if they
could be encouraged in the laboratories, that would be great.
One of the problems that comes up is that the military have an
institutional inertia also, so they tell the labs, I want to
continue to build airplanes with men in them and I want them to
go faster and higher and so forth, but not encouraging them to,
say, start doing unmanned systems, for example. That would be
kind of a disruptive technology, is what I meant by the
example.
To the extent that we can get some of the laboratories
working into these areas that are disruptive, I think we can
make a bigger impact in the long term.
Senator Hagan. Should they not be doing that on their own?
I mean, when you say we should get them----
Dr. Gansler. Well, the problem is they are funded by DOD.
That's what we were talking about, the importance of
independent research from the industry because they're not
constrained to doing just the incremental stuff. They can do
the disruptive stuff that gets into a new field, and that's
what we should be encouraging some of the labs to be doing as
well.
Senator Hagan. Do any of the others want to comment on this
question?
Mr. Odeen. One comment on the labs. I think the fact that
they're now being able to attract some better people, that was
talked about I think by Brett Lambert or one of the speakers
earlier, is good, because they have had a real problem of an
aging workforce and great difficulty attracting good people. A
role they could play is to some degree reaching out to the
commercial technology industry to look for solutions to the
issues that they understand their Service faces. They can be an
interface between the Service and the commercial world because
they have an understanding of both the Service and its needs
and also technology. So that might be a role that they do some
of already, I think, but they could perhaps do more.
Dr. Gansler. One other area that the labs have had some
success with and that is cooperative ventures with university
research. To the extent that that brings in some of these new
ideas, I think that should be encouraged as well.
Senator Hagan. We're very interested in technology transfer
between our universities and corporate and, obviously, defense.
In your view about this, how well is DOD engaging in technology
transfer and transition to industry?
Dr. Gansler. Well, the valley of death, getting over that
is a really important part of the SBIR program, for example. To
the extent that we continue to sponsor and help it, that's
really an important way of doing it. Half of the total
government's SBIR program, of the $2 billion, about $1 billion
of that is DOD efforts, and that has been a major support for
the small business and for new ideas coming in and for more
rapid transition of ideas to application, to commercialization
of these ideas, is what's behind the SBIR selections. That's an
important one that I hope Congress can support.
Mr. Augustine. I would like to observe what a complex issue
this really is: the company I used to work for operated several
research labs. They happened to be Department of Energy labs as
opposed to DOD labs, but the situation I think is similar. We
were strongly encouraged to try to transfer technology outside
the labs. But any technology that transferred into our company
was viewed as our taking undue advantage of our situation of
operating the lab. So we built high walls so that no knowledge
could get out of the lab and into our company. It would be like
Boeing getting fined $15 million.
In fact, we had a program where we got a share of the
profit in startup companies that we helped create. The first
couple years, we started about 15 companies--I say ``we'' did;
the people who ran them started them--with the technology that
the labs we were able to provide. These were independent little
companies. About ten of them failed and a couple of them did
so-so and one or two of them hit a home run and we made some
money on them.
We got such criticism for taking advantage of our position
with the government that I remember our chief of advertising
came in and said: Look, you're killing us; why don't you get
out of these places? So we said, don't give us a share of these
businesses any more, we don't want anything to do with the
profits.
So here's a case of a really well-meaning rule, but as it
was applied I think it hurt everybody. I also have a belief
that the government should do only those things that cannot be
done well in the private sector. I've traveled 109 countries
and I have yet to see any system that's better than our free
enterprise system. I see us moving away from it across the
board.
Senator Hagan. So tell me what you want us to--what we
should be doing?
Mr. Augustine. I will be very candid here.
Senator Hagan. Please.
Mr. Augustine. I think our Congress and our administration
views a job in the government as more important than in the
private sector. I've experienced this for many years. This
isn't a new phenomenon.
Senator Hagan. Some of us will take issue.
Mr. Augustine. I'm sorry?
Senator Hagan. Some of us will take issue with that.
Mr. Augustine. Yes, I would hope so.
But I have testified many times where that seemed to be the
case. I'm not an anarchist, I might add. I spent 10 years with
the government. When I was with the government and in the
position I held I could cancel a contract in industry and
10,000 people would lose their jobs and I'd probably get two
letters. I can recall trying to close Frankfort Arsenal that at
the time I don't think had contributed anything since 1776, and
it took us 4 years and many people even say it may have cost
the President his job in a close reelection.
I think the government has to play an important role--and
that role is to do high-risk, high-payoff, long-term research
and engineering. When it begins doing other things, I think it
hurts industry, particularly in a time of declining budgets.
Senator Hagan. Let me ask about small business. All of you
have mentioned the importance of small business and the lower
tier suppliers within the defense industrial base. In your
view, how can the roles that small businesses play in the
defense industrial base be strengthened? I know that from our
small businesses, they create so many jobs throughout our
country.
Mr. Augustine. Small businesses do create a lot of jobs.
They create most of the really new leading edge ideas that are
so important. About half of the money that is put into the
prime contractors goes back out to subcontractors, many of
which are small businesses. They're the ones who know how to
build the optical coatings or a particular kind of laser or a
certain kind of chip or a package. That's a technology that's
only known to those companies in many cases.
But small businesses don't have deep pockets. Just as when
the government has a budget problem, it pushes it down onto the
prime contractors, the prime contractors do exactly the same
thing to the small companies. The small companies are the ones
who suffer the most. I think one of the things that has to be
done is to watch out for those companies that have very key
technologies, and to create an environment so that new
companies can start in a way that they can afford to do
business with the Defense Department.
Dr. Gansler. One specific thing that you can do is to start
counting those lower-tier contracts to the small businesses.
The goal for small business contracts is purely the government
direct contract, and there are not many small businesses that
build a fighter plane or a ship or things like that. Yet a
large share of it and most of the small business participation
is in the technology area and down at the lower tiers. Perhaps
maybe even if you raise the percent of the work total that has
to go to small businesses, but count the lower tiers and
directly related.
Now, the other impact on the small businesses are the
overburdening regulations and legislation that get passed on to
them downstream from the primes. Again, that's a legislative
requirement that everything be passed on, and perhaps a way of
relieving that would be helpful to the small businesses as
well, so that you could have some flexibility on what you pass
down to them so that they have more flexibility and rapid
response capability, the innovation that they could wring out,
without being burdened by having to have the 12-foot-long
bookshelf of the Federal Acquisition Regulations and things
like that, hiring their own lawyers and writing contracts. It
would be much helpful to them if they could do business in a
commercial-like fashion at the lower tiers.
Mr. Augustine. If you would permit me to share a real-world
story that applies to Jack's comment, some years ago I was
running our company's astronautics group and one day a box
showed up in the mail. When I opened it, it had a bunch of
seals in it that we used on Titan launch vehicles. In it was a
letter from the president of the company who manufactures the
seals. He said: We really want to help America. We believe in
America and want to do everything we can. Here's a 5-year
supply of seals; will you please go away and leave us alone?
That carried the message to me of how oppressive we were.
Senator Hagan. Interesting story. Wow.
I was hoping we'd have a few others come in, but obviously
with the vote and some of the other meetings that are going
on--I think we've had a very good discussion on your
perspectives, on the challenges and your views of the
effectiveness of the various strategies, plans, and programs
that DOD is pursuing to address the challenges facing the
defense industrial base.
I want to ask you one closing question, and that is, in
your view, if you can, what are the top three things that
Congress can do to help address these challenges we discussed?
I know that the exports area was certainly one of them, but if
you have any details on the top three I would be very anxious
to hear.
Mr. Augustine. Since my name starts with ``A,'' I'll start
out. It's hard to narrow the list to three, but one thing would
be to fund----
Senator Hagan. We'll certainly take extras, extra written
testimony.
Mr. Augustine.--would be to fund a series of competitive
prototypes. A second thing would be to fix the export laws. The
way to do that is to build high fences around really important
things, rather than what we do today, which is to build low
fences around everything. If you go down the export list,
you'll be amazed at what's on there: handcuffs, shotguns.
There's something on there called ``horses at sea.'' Seriously.
I've never figured out why ``horses at sea'' are on the export
list, but they're there. So that would be a second action.
It's hard to narrow down to a third one, but I guess it
would have to do with people. That would be to find a way to
encourage U.S. students to study science and engineering and
encourage foreign students to come here and to stay here.
Senator Hagan. Dr. Gansler?
Dr. Gansler. My top three I think would be starting with
the workforce as being I think essential, and this is--across
the board, this is in terms of some senior people in the
government with experience and training and so forth, on the
military and civilian side, all the way down, because if you
don't have smart buyers you're in trouble. Even if you had a
good industry, they can't recognize them. So I'd go all the way
down to the industry side as well.
Someone asked a question earlier about how you can get some
people into the government. I know when Norm and I went in it
was under something called Public Law 313. That doesn't exist
any more, but it allowed us to come from senior positions in
industry into the government for 3, 5 years, and then not have
to get through that whole civil service system. They could hire
people.
You now have provisions under highly qualified experts to
be able to do that. We should take full advantage of that.
Senator Hagan. But you're saying we used to have that and
then we stopped it, and now----
Dr. Gansler. We had Public Law 313. That was abolished, but
now you have allowed, for example, 20 people at DARPA for
highly-qualified experts. I think that could be greatly
expanded in allowing people coming with industry experience
into the government. Seeing both sides of the street is really
important.
Senator Hagan. I'm glad you brought that up, because I was
going to ask that.
Dr. Gansler. Workforce I think is my first one. I think
globalization is my second one. How does the Nation gain the
benefits of globalization instead of creating the barriers to
globalization, which we have been doing? We talked a lot about
that already.
My third one is commercialization, being able to bring in
the technologies, the goods, the services, particularly the
services. Almost every one of the services, 57 percent of what
we buy, are in the Yellow Pages. We ought to be able to take
full advantage of commercial practices, commercial goods,
commercial services, commercial firms, as part of the broadened
industrial base, and globalized. It was no question in the
tanker case that we gained an enormous benefit by allowing a
foreign competitor to bid against Boeing. Boeing won, but at
much lower prices than they would have if it wasn't for the
presence of competition. So opening up the market. It's imports
as well as exports that have to be addressed in globalization.
Senator Hagan. How would you defend that against jobs in
America?
Dr. Gansler. Just the opposite. Actually, the presence
today of the foreign firms investing in the United States have
actually, increased as a result of their money coming in here,
have increased our exports, our jobs, and our capital
investments in the United States. When you put in--you know, a
Finmeccanica comes here, EADS comes here, Thales comes here,
AIA comes down here--go down the list of all the foreign
companies that are now investing in the United States and
helping our exports, bringing technology, creating jobs, and
bringing high tech technology of their country so that we can
take full advantage of it. I think it's helping our economic
and job situation.
These people who we were talking about earlier with their
Ph.D.s from schools, they're not replacing the unemployed today
in America.
Mr. Odeen. It's hard to add any after those three, but let
me comment the latter one, the job issue. If you look at the
Northrop Grumman-EADS tanker bid and the recent EADS bid as
well, they were going to put a very large presence in the
southeastern part of the United States and create a lot of
jobs. I suspect they would have created as many jobs as Boeing
will with its tanker. So it wasn't really a jobs issue, where
the jobs were located.
If you're going to be a major supplier to the U.S.
marketplace as a foreign company, you're going to build your
presence here, like BAE Systems has and others have. So you're
going to bring jobs here and perhaps export from here as well.
So I don't think it's a jobs issue.
Second, the workforce issue. Letting there be a free
exchange or maybe a managed exchange between industry and
government, going both ways, has great benefits for both
industry and for the government, and this has been mentioned
earlier. In about 2001 I took a look at the senior leadership
of the defense industry, in particular the top 10 or 12
companies. I think all but one of them were led by a person who
had had a real experience in DOD at some point in time, like a
Norm Augustine or Boeing's Frank Shrontz. They all had a time
in the government to learn how the government operates. You're
a better supplier if you understand the government, how the
government works. You also bring a lot of knowledge to the
government. So those exchanges I think are critical.
Unfortunately it doesn't happen today.
Back again to the prototyping idea, I think that's a lot of
benefit from it. Other ways to encourage fresh ideas? There are
so-called broad area announcements (BAA) that ask for people to
come in with creative ideas to solve military capability needs.
That's another way to draw in ideas, then have bakeoffs or a
competition. Low level, not costly, but this really brings new
and fresh technologies to the defense marketplace.
Senator Hagan. I really do appreciate your time here, the
fact that you had to wait for the vote. I really do appreciate
it. But first of all, I appreciate the service that you've
given and your testimony today. I do want to say that we will
keep the hearing record open for 3 days to allow other members
to submit statements and-or questions for the record.
Thank you, we will certainly take note of all of your great
ideas and hopefully take action on them.
This subcommittee is adjourned.
[Questions for the record with answers supplied follow:]
Questions Submitted by Senator Kay Hagan
long-term defense industrial base strategy
1. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, the most recent Quadrennial Defense Review (QDR), released
early last year, addressed the need for strengthening the Defense
Industrial Base (DIB). Specifically, it said, ``America's security and
prosperity are increasingly linked with the health of our technology
and industrial bases. In order to maintain our strategic advantage well
into the future, the Department of Defense (DOD) requires a consistent,
realistic, and long-term strategy for shaping the structure and
capabilities of the defense technology and industrial bases--a strategy
that better accounts for the rapid evolution of commercial technology,
as well as the unique requirements of ongoing conflicts.'' Is DOD
developing an industrial base strategy that will be published?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The Department
recognizes the DIB is more global, commercial, and financially complex
than ever before, however in general the Department believes that
market forces should shape the industrial base.
The Department regularly addresses specific industrial base
concerns within programs and services to determine if intervention in
the market is warranted. The expectation is that there may be rare
cases when the Department would intervene to preserve competition or to
ensure that sources for key products are maintained, but these
interventions would be on a case by case basis. The Department has also
embarked on a more comprehensive sector-by-sector, tier-by-tier (S2T2)
analysis of the industrial base, which will help inform future
programmatic decisions and allow for the continued monitoring of the
health of the industrial base. A summary of the S2T2 analysis will be
included in the annual industrial capabilities report submitted to
Congress pursuant to 10 U.S.C. 2504.
2. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, what budget items, if any, in the fiscal year 2012 President's
budget request are directly related to the development of this
strategy?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. A number of defense
accounts are focused on supporting innovation and improvements in
industrial capabilities. The Defense-wide Manufacturing Science &
Technology line is currently funded at $18.9 million in fiscal year
2011 and at $17.9 million for fiscal year 2012. Additional Service and
Agency Manufacturing Technology programs are funded at a total of
$189.4 million in fiscal year 2011 and $193.7 million in fiscal year
2012. This brings total funding for Manufacturing Technology programs
to $208.3 million for fiscal year 2011 and $211.6 million for fiscal
year 2012. Furthermore, the Defense Advanced Research Projects Agency
(DARPA) has a focus on disruptive manufacturing. DARPA is budgeted to
invest $54.4 million in fiscal year 2011 and $91.5 million in fiscal
year 2012 for manufacturing initiatives. Combined with the
Manufacturing Technology budgets, these research and development
investments total $243.8 million in fiscal year 2011 and $303.1 million
in fiscal year 2012.
Defense Production Act (DPA) Title III activities are funded
through the ``DPA Fund.'' Under Executive Order 12919, the Secretary of
Defense is designated the DPA Fund manager. The Title III Program,
working with other Federal departments and agencies, has initiated a
number of large-scale actions to create or expand domestic production
capabilities for essential materials and technologies, including
radiation-hardened electronics; lithium ion batteries; Vacuum Induction
Melted/Vacuum Arc Remelted specialty steel; beryllium production;
renewable energy sources; satellite communications transceivers for
warfighter communications; and advanced electronic materials, including
silicon carbide and gallium nitride for next generation radars and
electronic warfare capabilities, to name a few.
Additionally, to enhance the efficiency and effectiveness of long-
term DIB strategy, the Department has funded a S2T2 assessment of the
industrial base as a component of the Department's study budget. This
project is a multi-pronged effort to collect industrial base data to
inform acquisition strategy and industrial base policy decisions.
recruiting and retention efforts
3. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, how is DOD measuring the effectiveness of its Science,
Technology, Engineering, and Mathematics (STEM) education, recruiting,
and retention efforts?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The DOD has a vision of
inspiring, developing, and attracting diverse and world-class STEM
talent to meet national defense needs. The DOD-wide STEM Education and
Outreach Strategic Plan builds on and coordinates existing evaluation
and assessment efforts for the Department.
At the post-secondary level, for each of these major programs, we
measure DOD effectiveness using a mixture of qualitative and
quantitative tools. The Department has several major thrusts, such as
Science, Mathematics, and Research for Transformation (SMART), the
National Defense Science and Engineering Graduate (NDSEG) Fellowship
Program, and the Information Assurance Scholarship Program (IASP).
Metrics and approaches include tracking scholarship and fellowship
recipients who transition into the DOD STEM workforce, the number of
current employees who participate in certain STEM degree completion
programs, the geographic reach of efforts as represented by the
diversity of applicants, and post-intervention feedback received from
participants. To date, nearly 500 undergraduate to doctoral graduates
from the SMART program and 240 from the IASP have transitioned into the
DOD workforce.
At the K-12 level, individual STEM education efforts occur
throughout the United States and are managed both locally and centrally
by the DOD components. However, metrics for the effectiveness are
imprecise.
4. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, could the current Military Accessions Vital to the National
Interest (MAVNI) program that targets non-U.S. citizens with critical
foreign language and medical skills be applied to STEM-related fields
and for DOD civilians?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. Section 504b, title 10,
U.S.C., allows the Secretary of a Military Department to enlist other
than U.S. citizens or legal permanent residents when such enlistment is
vital to the National interest. The MAVNI Pilot Program used this
authority to provide a unique opportunity to fill some of our most
critical readiness needs, specifically with health care professionals
and those who possess particularly important foreign language and
cultural skills. MAVNI is statutorily limited to enlistment into the
military and has no counterpart for civilian hiring. We are not aware
of any STEM-related critical shortages in the military force structure,
particularly or entry-level requirements.
Although the current MAVNI Program is not directly applicable for
DOD civilians, it could be used as a starting point for analysis into
the possibility of designing a similar program for civilian foreign
students pursuing degrees in STEM-related fields at colleges and
universities in the United States. The analysis would need to address
Appropriations Act constraints, Immigration Law, personnel security
requirements, and Office of Personnel Management non-citizen hiring
regulations.
5. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, what would be specifically necessary, as some have suggested,
to staple a green card or certificate of citizenship to the doctoral
diploma of a graduating non-U.S. citizen who has studied in a field
that is of importance from a national security perspective, has been
appropriately cleared, and is willing to commit to a certain period of
employment in the defense industrial sector or the DOD?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. Providing a Green Card
or Naturalization certificate to such a doctoral degree recipient, as
posited in your question, would require changes to the Immigration and
Naturalization Act of 1952, P.L. No. 82-414, and Title 8 of the U.S.
Code. Naturalization would immediately qualify the recipient for
employment with DOD.
However, under Executive Order 11935, only United States citizens
and nationals (i.e., certain Pacific Islanders) may compete for
competitive service positions. Federal agencies (not just DOD) are
permitted to hire Green Card-holding non-citizens only when there are
no qualified citizens available. A non-citizen may only be given an
excepted appointment and may not be promoted or reassigned to another
position in the competitive service, except in situations where a
qualified citizen is not available. The non-citizen may be hired into
the competitive service only if permitted by the appropriations act and
immigration law, as well as any relevant Executive Orders or other
regulations.
industrial base analysis
6. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, when will the initial S2T2 industrial base analysis be
completed to a sufficient level to be shared with Congress?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The S2T2 effort is a
process to expand the scope of the Department's industrial base
assessments beyond traditional programmatic boundaries and to create a
database on industry for use as inputs to many decisionmaking processes
across the Department. S2T2 is not a ``study'' in the traditional
sense. It draws from existing and ongoing work across the Department,
the results of which the Services and program offices already share
with Congress in various formats. S2T2 matches those ongoing efforts
with a holistic Office of the Secretary of Defense-level look at the
industrial base that will gather new data. Much of the data in the S2T2
effort will be company proprietary--data that will be very helpful for
informing some of the Department's internal decisions--and must be
carefully protected. We will need to determine the extent to which the
final S2T2 analysis can be shared when we complete each analysis and
ascertain the extent to which the included data is releasable.
The initial S2T2 effort will not be comprehensive but is based on a
sample of companies and datasets. The Department will continue to
refine and extend the data over time. From the initial phase, we expect
actionable implications, and the Department will include such results,
as appropriate, in the President's budget proposals in future years.
Results from S2T2 work will also be included in the annual industrial
capabilities report submitted to Congress pursuant to 10 U.S.C. 2504.
manufacturing technology program
7. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, in 2006, a Defense Science Board (DSB) panel published a
report titled: ``The Manufacturing Technology Program--a Key to
Affordably Equipping the Future Force''. This report recommended that
DOD's manufacturing technology program grow its investment level to 1
percent of the overall Research, Development, Test and Evaluation
(RDT&E) budget. The fiscal year 2012 budget requested about $200
million for manufacturing technology--which is only about a third of a
percent of the RDT&E budget. Should the 1 percent level be a funding
target?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The Department responded
to the 2006 DSB report, which was a seminal study of the Manufacturing
Technology program, by creating and funding a Defense-wide
Manufacturing Science & Technology line in 2008. The line is currently
funded at $18.916 million in fiscal year 2011 and at $17.888 million
for fiscal year 2012.
The additional Service and Agency Manufacturing Technology programs
are funded at a total of $189.4 million in fiscal year 2011 and $193.7
million in fiscal year 2012. This brings total funding for
Manufacturing Technology programs to $208.3 million for fiscal year
2011 and $211.6 million for fiscal year 2012.
The report also recommended DARPA have a focus on disruptive
manufacturing. DARPA is budgeted to invest $54.4 million in fiscal year
2011 and $91.5 million in fiscal year 2012 for manufacturing
initiatives. These include three programs known as META, the Fast
Adaptable Next-Generation Ground Combat Vehicle, and Open
Manufacturing. Combined with the Manufacturing Technology budgets,
these research and development (R&D) investments total $243.8 million
in fiscal year 2011 and $303.1 million in fiscal year 2012. Such
increases demonstrate the Department's commitment to these priorities,
particularly in the current constrained fiscal environment. The
recommendation made in 2006 that 1 percent of the RDT&E budget go to
manufacturing and technology arose in a much different fiscal
environment than exists today.
Additionally, the S2T2 analysis referenced previously includes
assessment of industrial and technological capabilities resident in
manufacturing sectors. The output of this activity will provide some
insights for the development of future-year defense budgets, including
manufacturing-related programs. The Department does not believe that an
arbitrary spending target for manufacturing technology is needed or
appropriate.
independent research and development
8. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, Under Secretary of Defense, Ashton B. Carter, has stated that
he wants DOD to reinvigorate industry's Independent Research and
Development (IR&D) efforts and increase the interactions and insights
between DOD and industry. What is DOD specifically doing to revitalize
industrial IR&D?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. DOD reimburses IR&D
expenses as allowable indirect costs for approximately 1,200 firms in
the DIB. The DOD IR&D program is one of the Department's key sources
for technology innovation. In the mid-1990s, the law governing IR&D
oversight was changed to provide contractors more autonomy in their
choice of IR&D projects, which effectively eliminated DOD oversight of
a contractor's IR&D projects and investment objectives. As a result of
this change, the Department's science and technology and defense
acquisition program managers lost insight into IR&D projects planned
and underway and thus lost opportunities to leverage the DIB's IR&D
efforts in DOD programs. The change also resulted in a loss of
information relevant to the DIB's overall IR&D investment trends and
technology thrusts. The net effect is the Department does not have
access to the information it needs to enact policies relevant to the
IR&D program that will maximize the benefit the Department and the DIB
can derive from the DIB's IR&D efforts.
The Department is launching two initiatives to open up new channels
of communication with industry. The Department believes the
initiatives, when combined, will provide opportunities to better
leverage the innovation in the DIB's IR&D efforts for DOD programs.
The two initiatives are:
1. Collect IR&D project data; store it in a centrally located and
protected data base accessible to government science and technology and
acquisition staff.
2. Request annual IR&D strategic plans that describe a firm's
overall IR&D strategic investment objectives, trends, and technical
thrusts.
9. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, are there any legislative actions that might need to be taken
to assist these efforts?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. DOD recommends no
additional legislation.
access to foreign technology
10. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, last year, the Defense Business Board's Task Group on
Assessing the Defense Industrial Base issued a report that, among a
number of recommendations, stressed the importance of DOD retaining
access to critical technologies in the DIB. What is the impact of a
budget reduction in fiscal year 2012 of about one third to the Foreign
Comparative Testing (FCT) program and our ability to search and analyze
technologies available globally?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. FCT is only one of
several programs in our portfolio that facilitates access to
technologies from traditional and non-traditional industrial base
suppliers. Although FCT is one of the few programs focused specifically
on accessing and evaluating technology from our foreign partners, it is
not the only one. All of our technology investment programs, and many
of our acquisition programs, can reach out across the global market,
and have done so.
For instance, under The Technology Cooperation Program, we
established an action group comprising the United States, Canada,
United Kindgom and Australia to coordinate on Technology Watch/Horizon
Scan programs--those programs that look for emerging technologies.
Though not specifically focused on global reach, we do have mechanisms
within the international agreements process that leverage these
technologies. FCT is one of several value-added programs we had to
reduce funds in our fiscal year 2012 budget request in order to support
the Secretary's Defense Efficiency-Baseline Review initiative. The
Secretary's reform agenda required a zero-based review of all programs,
aligning the fiscal year 2012 resources with the most critical
priorities and eliminating or reducing funds for lower-priority
functions. We do plan to revisit the decision in future-year
deliberations, and adjust funding thresholds among our various
technology programs, as needed, to support ongoing operations.
technology transfer and transition
11. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, in the National Defense Authorization Act (NDAA) for Fiscal
Year 2009, Congress asked DOD for a report on its broad technology
transfer and transition activities. Two years later, this report has
not yet been delivered. When is DOD planning on completing and
delivering this report to Congress?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. The Department is aware
of the reporting requirement and is updating the report to reflect
current activities for technology transfer and transition. The revised
report is in coordination within the Department and we anticipate
sending it to Congress shortly.
12. Senator Hagan. Secretary Kendall, Secretary Lemnios, and Mr.
Lambert, it appears that Secretary Lemnios, the assistant Secretary of
Defense for Research and Engineering ASD(R&E), is increasing quick
reaction special projects at the expense of technology transfer and
transition programs (e.g. the Defense Acquisition Challenge (DAC)
program and the Technology Transfer Initiative (TTI)). What is the
rationale?
Mr. Kendall, Mr. Lemnios, and Mr. Lambert. It is true that the
budget request for the Quick Reaction Special Project (QRSP) program
has increased from a budget request of $78 million in fiscal year 2011
to $92 million in fiscal year 2012. We did not, however, increase the
QRSP at the expense of DAC and TTI. As part of our annual program
review, we assess the relative effectiveness of all our programs. We
assessed that the work sponsored under DAC and TTI was just as
effectively conducted by the Military Departments. We determined that
an additional Office of the Secretary of Defense (OSD)-level investment
was no longer needed.
laboratories and the defense industrial base
13. Senator Hagan. Secretary Lemnios, from your perspective, what
are the roles of DOD labs?
Mr. Lemnios. The Department's laboratories are an important part of
the science and technology enterprise. The Department's laboratories
serve as its technical base, and fulfill several key roles, including,
but not limited to:
rapid technical responses to warfighter operational
needs,
technically competent, unbiased assessments of
commercial and defense industrial solution technologies,
key sources of breakthrough technologies for future
acquisition programs, and
a unique conduit to transition the knowledge gained
from basic research investments into warfighting capabilities.
14. Senator Hagan. Secretary Lemnios, what are their core
competencies?
Mr. Lemnios. The DOD Laboratories have many Core Competencies
closely aligned with national defense objectives. I consider a core
competency to be the people (scientists and engineers), technical
skills, and physical infrastructure (labs/equipment) to develop and
deliver new technology products; and provide support to new and
deployed warfighting systems. For example, DOD Labs maintain core
competencies in topics such as energetic materials, submarine
hydroacoustics, and radar electronics to support advances in future
acquisition programs. In an effort to scope and categorize DOD Lab core
competencies more systematically, I have initiated a three-phase
process:
Phase 1 is currently assessing the laboratories'
competencies in the seven S&T priorities (data to decisions,
cyber technology, autonomy, electronic warfare & protection,
human systems, countering WMD, and engineered resilient
systems) established by the Secretary of Defense in his 19
April 2011 memorandum.
Phase 2 will assess abilities to support technical
requirements in cross-cutting technology areas that were
identified in the 2010 QDR and recent DPPG.
Phase 3 will examine the laboratories' support to
unique Service requirements, e.g., oceanography, armor, and
space technology.
After completion of these phases, I believe we will be able to
better access core and critical technologies.
15. Senator Hagan. Secretary Lemnios, Congress has provided a broad
range of personnel authorities, such as the Laboratory Personnel
Demonstration program and direct hiring authority to allow DOD
laboratories to recruit and retain the best and brightest scientists
and engineers. What is your assessment of how well the Services are
using these authorities?
Mr. Lemnios. The Services are effectively utilizing the Demo Lab
authorities within the established limits of Title 5 statutes. My
assessment is that these authorities provide the necessary flexibility
to develop and preserve our technical workforce within the labs. The
pay for performance system is a significant contributor to retaining
our talented technical personnel and the direct hire authority ensures
our labs can rapidly target and hire talented graduates as they enter
the job market. Within the Department, the Under Secretary of Defense
for Personnel and Readiness governs personnel policy, instructions, and
directives and maintains an ongoing dialogue with the Services,
specifically the labs, to ensure authorities are implemented and
exercised to their potential.
I have personally visited several DOD laboratories and spoken with
many of our scientists and engineers, a growing percentage of whom are
in the early stages of their careers. I have found a bright, energetic
and talented workforce that is dedicated to supporting our military
through the development of new technologies and weapon systems. I have
not seen, nor am I aware of any impediments to exercising the demo lab
or direct hire authorities.
16. Senator Hagan. Secretary Lemnios, what challenges are the labs
facing on the personnel issues that are not under your direct control?
Mr. Lemnios. Lab personnel policies are the responsibility of the
Under Secretary of Defense for Personnel and Readiness (USD(P&R)). P&R
maintains a high level of communication with the labs and supports
rapid implementation of all the Demonstration Lab authorities that have
been granted by Congress over the past several years. As an example of
a lab personnel challenge, I am concerned about the significant
fraction of lab staff that is eligible for immediate retirement, and
what the subsequent effect on lab capabilities would be if large scale
retirements occurred.
I am also concerned about the rapidity by which our labs can hire
new talent. I am familiar with the practices we used at Lincoln Lab to
hire top quality talent. We could have people in the roles and working
in a matter of weeks. This is not the case in DOD labs.
______
Questions Submitted by Senator Jeanne Shaheen
national defense education program
17. Senator Shaheen. Secretary Lemnios, the National Defense
Education Program (NDEP) has been reduced in this year's budget request
so that there will be approximately 50 fewer graduating students in the
SMART program per year that will be available for employment at DOD
laboratories. Given the need for more scientists and engineers in DOD,
what was the rationale for this budget reduction?
Mr. Lemnios. The National Defense Education Program (NDEP) provides
support ranging from K-12 students through world-class researchers, and
ensures a steady stream of new technical talent into the Defense
workforce. In view of increasing budgetary pressures, the SMART program
is being re-aligned towards a steady state of about 800 students vice
the original projection of 1,000 when SMART began in 2006.
small businesses
18. Senator Shaheen. Secretary Lemnios, DOD's fiscal year 2012
budget proposes the elimination or reduction of many programs critical
for transition of R&D production, including DAC, TTI, FCT, and
Manufacturing Science and Technology (S&T). What are you doing to
better assist small- and medium-sized firms in the transition of R&D
projects to the defense and commercial marketplace?
Mr. Lemnios. DOD has an active technology transfer program that
assists small- and medium-sized firms to develop products that have
defense and commercial applications. Companies are offered access to
government developed technology and encouraged to recognize
opportunities to apply technologies developed for commercial
applications against DOD needs. We also work with these firms to
jointly develop technologies for both military and commercial
applications. We use Cooperative Research and Development Agreements
(CRADAs) to allow both the private sector and DOD activities to provide
technical expertise to mature the technology. On a non-interference-
with-mission basis, we also allow these firms to use DOD laboratory
equipment and facilities when it is in the best interest of the
government. We provide technical assistance to companies working
through advanced defense technology clusters funded by the Small
Business Administration and plan to provide this same assistance to the
``innovation clusters'' which will be formed and funded via the
administration's Jobs Accelerator and Innovation Challenge, announced
on May 20, 2011.
The Small Business Innovation Research (SBIR) Commercialization
Pilot Programs within the Military Departments are also used to bridge
gaps in moving technologies into acquisition. The program allows DOD
components to spend 1 percent of their SBIR budget on commercialization
activities that accelerate the transition of SBIR-funded technologies
to Phase III and focus on systems being developed, acquired and
maintained for the warfighter. Plans for the recently authorized Rapid
Innovation Fund Program include projects which assist small- and
medium-sized firms in the transition of R&D projects to the defense and
commercial marketplace.
19. Senator Shaheen. Secretary Kendall, the NDAA for Fiscal Year
2011 authorized the Rapid Innovation Program, which was funded at $439
million for fiscal year 2011. Could you elaborate on implementation
plans for this program?
Mr. Kendall. The Department issued guidance on August 12 providing
an implementation plan for the Rapid Innovation Program Fund. The
guidance is attached.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
20. Senator Shaheen. Secretary Kendall, with the moratorium on
congressionally-directed spending, how do we ensure that ideas in the
seed stage of development continue to be funded?
Mr. Kendall. The Department has a robust science and technology
investment portfolio that provides competitive funding opportunities
for technology developers with ideas in the seed stage of development.
In most cases, ``seed stage'' ideas would be appropriate for basic or
applied research funding.
Small businesses can compete for DOD funding through the Small
Business Innovation Research (SBIR) program. In particular, 15 U.S.C.
638 authorizes 2.5 percent of the DOD extramural R&D budget set aside
for the SBIR program. Small businesses can compete for DOD funding
through SBIR, currently funded at $1.2 billion per year.
21. Senator Shaheen. Secretary Kendall, SBIR is one answer, but by
itself, insufficient. How is DOD addressing start-up funding vital to
getting many of our small contractors off the ground?
Mr. Kendall. Small businesses are a critical part of the DOD supply
chain. To maintain our technological edge on the battlefield, we
recognize that small businesses are critical to providing innovative
solutions to DOD needs. The Department is committed to maximizing the
contributions of small business in DOD acquisition and is working to
create a business environment that understands, appreciates and
leverages their value. Each DOD component is expected to seek
improvements in leveraging small businesses, and to establish
aggressive Small Business Targets based on its unique product needs. In
addition to the $1.2 billion of SBIR funding awarded to small
businesses, the Department awarded 21 percent of all eligible contracts
to small businesses in fiscal year 2010.
We also participate in Administration efforts to encourage and
provide assistance to start-up entrepreneurial businesses. For example,
we are participating with other Federal departments via the President's
Start Up America initiative and the Jobs Accelerator and Innovation
Challenge. Furthermore, the Department is implementing the Rapid
Innovation Fund (RIF) which Congress authorized in the NDAA for Fiscal
Year 2011. One key goal of the RIF is to give small businesses
opportunities to provide innovative technologies that resolve
operational challenges or other critical national needs. Implementation
will start with a pilot effort in fall 2011.
title iii
22. Senator Shaheen. Mr. Lambert, the Defense Production Act (DPA)
Title III Program (Title III) serves a critical role to ensure domestic
production capacity for items essential for national defense. However,
DOD's fiscal year 2012 request for the program is only $19 million and
it will shrink to $12 million in fiscal year 2013. Could you explain
DOD's decision to reduce funding in this critical area, particularly
given that programs funded under this area are proven, needed, and
provide immediate benefit to the economy?
Mr. Lambert. DPA Title III activities are funded through the ``DPA
Fund.'' Under Executive Order 12919, the Secretary of Defense is
designated the DPA Fund manager. The amount included in the DOD budgets
request each year for Title III is only a portion of the amount of
funding available for this important program. Other Federal agencies
are appropriated funds for their agency-specific projects; those funds
are transferred to DOD as the Fund Manager for execution. The current
DOD Title III budget reflects priorities set during the regular
budgeting process to maintain previous ongoing initiatives. DPA Title
III provides powerful tools to support our Nation's manufacturing
capabilities, but the Department remains constrained in its ability to
prioritize this program in the current fiscal climate.
Additionally, the President has convened a Defense Production Act
Committee (DPAC), consistent with the 2009 DPA Reauthorization (Public
Law 111-67). The role of the DPAC, which is comprised of the heads of
various Federal Departments and agencies, is to advise the President on
the effective use of the DPA for mobilizing industry for important
national needs. The DPAC is currently developing a strategic focus for
future Title III activities, conducting comprehensive assessments of
industrial capabilities, and determining appropriate mitigation
strategies, including use of Title III, in areas critical to multiple
DPAC members.
23. Senator Shaheen. Mr. Lambert, for the Senate Armed Services
Committee to better understand the expanded uses of Title III and the
proper funding levels, it is critical that Congress receives detailed
information on the specific industrial bases or technologies that
shortfalls have been identified that Title III could address. Please
provide this information.
Mr. Lambert. The Title III Program, working with other Federal
departments and agencies has initiated a number of large-scale actions
to create or expand domestic production capabilities for essential
materials and technologies including radiation-hardened electronics,
lithium ion batteries, Vacuum Induction Melted/Vacuum Arc Remelted
specialty steel, beryllium production, renewable energy sources,
Satellite Communications transceivers for warfighter communications and
advanced electronic materials including silicon carbide and gallium
nitride for next generation radars and electronic warfare capabilities,
to name a few.
Additionally, the President directed the Secretary of Defense to
lead a cabinet level inter-agency body known as the DPAC to advise him
on the effective use of these powerful authorities. Such advice will be
informed by the DPAC's ongoing efforts to identify cross-cutting
manufacturing shortfalls. This analysis includes an examination of
cross-program interdependencies, early indicators of risk, areas of
limited competition, impact of reliance on foreign sources, and areas
of limited needed industrial capacity.
shipbuilding industrial base
24. Senator Shaheen. Mr. Lambert, in an April 21 article in
Bloomberg, the Chief of Naval Operations, Admiral Gary Roughead, USN,
commented that: ``The industrial base is really a strategic asset . . .
the industrial base today, particularly as it applies to shipbuilding,
is probably as fragile as it has ever been.'' Can you elaborate on the
current state of the U.S. shipbuilding industrial base, and DOD's
efforts to ensure that our current capabilities are maintained?
Mr. Lambert. Our shipbuilding industrial base has emerged in the
past three generations as a national strategic asset. Today's Surface
Navy is at its smallest size since the early 1900s. As we work through
the implications of managing the defense enterprise during a slowdown
in spending, it is crucial that we preserve the capabilities resident
in our shipbuilding industrial base in order to build and maintain a
Fleet for the demands of providing global presence and readiness
wherever our Nation's interests are challenged.
Within our shipbuilding industrial base, thousands of firms and
suppliers--some big, others small--help build, maintain and equip our
Fleet. These firms, their suppliers, and their suppliers' suppliers,
are each links in a chain that, if broken, can have unforeseen
consequences on our military capabilities. To ensure the Nation has the
shipbuilding industrial capacity it needs, we must better understand
the different supplier tiers, their interdependence to one another, and
the programs they serve across the Department.
The Department and industry must manage resources in ways that do
not hollow out the capabilities of our Nation's Fleet or recklessly
jeopardize our shipbuilding industrial base.
______
Questions Submitted by Senator Claire McCaskill
critical information technologies
25. Senator McCaskill. Mr. Lambert, as I understand it, most
cybersecurity-related projects by DOD have focused on cost and schedule
enhancement enabled by sourcing production globally. While cost and
schedule are always critical considerations, I am also concerned that
there has not been enough consideration about risk management and
system security implications, particularly as they relate to
outsourcing the manufacturing and/or production of high-value, mission
critical DOD Information Technology (IT) systems to other countries. I
know that Senator Levin's staff is doing an important investigation on
the issue of the security of the IT supply chain--and I support that--
in part because there are concerns that malware, or other malicious
computer code, could be inserted into the global IT supply chain for
computers and software destined for U.S. Government use. What are your
thoughts regarding the threat posed by malware or malicious software on
critical DOD information technologies?
Mr. Lambert. Globalization continues to impact today's information
and communications technology (ICT) sector. While globally sourced
technology provides innumerable benefits to the Department, it also
provides our adversaries with increased opportunities to compromise our
supply chain by inserting malware into ICT to access or alter data, and
intercept or deny communications. Even though the risk of such a supply
chain attack may be tolerable for many consumers of commercial ICT, the
DOD cannot ignore these risks to its national security missions.
Managing DOD's risk will require a greater awareness of the threats,
vulnerabilities, and consequences associated with acquisition
decisions; the development and employment of tools and resources to
technically and operationally mitigate risk across the lifecycle of
products (from design through retirement); the development of new
acquisition policies and practices that reflect the complex global
marketplace; and partnership with industry to develop and adopt supply
chain and risk management standards and best practices.
DOD represents a small portion of the commercial ICT market;
therefore, it is unlikely that our assurance requirements can drive the
development of commercial off-the-shelf products. However, the DOD is
taking a proactive risk management approach to address this issue,
enhancing the acquisition process in light of the changing global
market to ensure processes are strong and risks are mitigated.
DOD is in the process of institutionalizing the Trusted Defense
Systems/Supply Chain Risk Management strategies described in the
Trusted Defense Systems response to the NDAA, section 254, delivered to
Congress in January 2010. The Department's strategy for achieving
trustworthy defense information and weapons systems in light of supply
chain risk contains the following core elements:
1. Prioritize scarce resources based on mission dependence.
2. Plan for comprehensive program protection.
3. Detect and respond to vulnerabilities in programmable logic
elements.
4. Partner with industry.
The forgoing strategy is being implemented to protect DOD systems
from supply chain risks, but this plan does not directly address
commercially-owned and operated telecommunications infrastructures
which may be facing similar risks. DOD and DHS are co-leading an
Interagency Task Force that will in partnership with industry develop a
more complete understanding of the relevant technical risks to the U.S.
telecommunications infrastructure and will assess the dependency of
vital governmental and economic operations upon that infrastructure. It
will then evaluate a range of potential technical risk mitigation
strategies.
26. Senator McCaskill. Mr. Lambert, what is DOD doing in the
public-private sector in support of U.S. Comprehensive National Cyber
Security Initiative (CNCI) and Supply Chain Risk Management (SCRM)?
Mr. Lambert. A foundational piece of DOD's CNCI work in the public-
private sector is the Enduring Security Framework (ESF). The ESF is a
public-private partnership that includes the chief executive officers
and chief technology officers of major information technology and
defense companies. The ESF now meets regularly with top officials from
the Department of Homeland Security, the Office of the Director of
National Intelligence, and DOD.
CNCI #4 coordinates and redirects research and development efforts,
and CNCI #9 defines and develops enduring ``leap-ahead'' technology,
strategies, and programs: DOD is spending over $500 million in cyber-
related R&D in both classified and unclassified domains. The majority
of these projects are competitively sourced from the private sector.
One of the largest projects is the National Cyber Range (NCR) that
includes the Johns Hopkins Applied Physics Lab and Lockheed Martin. The
NCR will provide an environment for realistic, qualitative and
quantitative assessments of potentially revolutionary cyber research
and development technologies. The range must be capable of testing a
variety of technological thrusts. The goal of the NCR is to enable
large scale experimentation and testing of new cyber technologies.
CNCI #5 connects current cyber ops centers to enhance situational
awareness: DOD is conducting a voluntary Cyber Security/Information
Assurance (CS/IA) pilot program with the DIB. The DIB CS/IA Pilot
program leverages DOD Cyber Crime Center intrusion forensic
capabilities to analyze threat data and share threat information among
the DIB companies. This unique threat sharing among DIB companies,
which did not exist prior to the program, is believed to be responsible
for preventing compromise of DOD information in the recently publicized
hacking attempts on DIB companies.
CNCI #8 expands cyber education: DOD has a full-time director of
Science, Technology, Engineering and Mathematics (STEM) education. At
military installations and DOD laboratories, our scientists and
engineers-military and civilian-support science fairs and competitions,
mentor our scholarship and fellowship recipients, and partner with
science and math teachers in the classroom. An objective of the program
is to inspire students, parents, teachers, and the public to engage in
STEM discovery and innovation.
CNCI #11 SCRM develops a multi-pronged approach for global supply
chain risk management. Globalization of the technology marketplace
provides increased opportunities for adversaries intent on harming the
United States by penetrating the supply chain to gain unauthorized
access to data, alter data, or interrupt communications. DOD and the
private sector must manage risks stemming from both the domestic and
globalized supply chain in a strategic and comprehensive way over the
entire lifecycle of products, systems and services. This requires a
greater awareness of the threats, vulnerabilities, and consequences of
decisions. It also involves the development and employment of tools and
resources to technically and operationally mitigate risk across the
lifecycle of products (from design through retirement), and the
development of new acquisition policies and practices that reflect the
complex global marketplace. DOD will collaborate with industry to
develop and adopt supply-chain and risk-management standards and best
practices. This initiative will enhance Federal Government skills,
policies, and processes to provide departments and agencies with a
robust toolset to better manage and mitigate supply-chain risk at
levels commensurate with the criticality of, and risks to, their
systems and networks.
CNCI #12 extends cybersecurity into critical infrastructure
domains: DOD has been in discussions with DIB companies about
voluntarily extending the Einstein ``shield'' to their private cyber
infrastructures. Einstein 3 will draw on commercial technology and
specialized government technology to conduct real-time full packet
inspection and threat-based decisionmaking on network traffic entering
or leaving Executive branch networks. The goal of Einstein 3 is to
identify and characterize malicious network traffic to enhance
cybersecurity analysis, situational awareness and security response. It
will have the ability to automatically detect and respond appropriately
to cyber threats before harm is done, providing an intrusion prevention
system supporting dynamic defense.
______
Questions Submitted by Senator Rob Portman
national security strategy
27. Senator Portman. Mr. Lambert, in the 2010 National Security
Strategy (NSS), the administration proposed that by 2020, the United
States would restore leadership in higher education by seeking to lead
the world in proportion of college graduates. The NSS also calls for
heavier investment in STEM areas, and expanding the educational
opportunities to underrepresented groups, including women. This is a
noble, albeit, vague goal. What is DOD doing to assist in this effort?
Mr. Lambert. DOD is a long-term, continuous sponsor of science and
engineering education, and places specific emphasis on U.S. college
students pursuing STEM degrees.
DOD supports the NSS goal with the Department's STEM Education and
Outreach Strategic Plan. DOD's National Defense Education Program has
sent 1,750 DOD scientists and engineers into K-12 schools in 26 States
supporting 8,000 teachers and inspiring 180,000 students. Since 2006,
the SMART Scholarship for Service Program has supported hundreds of
U.S. undergraduate and graduate STEM degrees with nearly 300 becoming
employees in the DOD S&T/laboratory community. Continuing its historic
engineering graduate student support, DOD awarded 200 new 3-year
graduate fellowships through the NDSEG Fellowship Program while an
additional 400 are receiving their second and third year of support for
a total of 600 in the program. At the faculty level, DOD supported 29
distinguished faculty members' basic research with some of the largest,
longest-term educational grants in the Nation. These National Security
Science and Engineering Faculty Fellowships simultaneously engage and
financially support more than 150 of the best graduate and post
doctorates in DOD-relevant research areas. DOD provides substantial
annual support to the Historically Black Colleges and Universities and
Minority Institutions program. Throughout DOD there are more than 130
subsidiary education, training and outreach programs that inspire and
develop students in STEM--from K-12 enrichment initiatives such as
STARBASE, the Science and Engineering Apprenticeship Program, and
JROTC, to college preparation (Great Minds in STEM), financial support
(SMART, NDSEG, and the Information Assurance Scholarship Program),
internships (Naval Research Enterprise Internship Program),
undergraduate, graduate, postdoctoral and faculty education.
DOD continuously funds STEM education as a matter of tomorrow's
national security.
28. Senator Portman. Mr. Lambert, how do you see this goal being
achieved?
Mr. Lambert. The National Security Strategy STEM goal was stated in
the paragraph ``Improve Education at All Levels'' and is a total
government commitment to restore U.S. leadership in higher education by
seeking the goal of leading the world in the proportion of college
graduates by 2020. DOD has a vital, continuing, national security
interest in attaining this goal and has over the long-term, spent its
appropriated funds to do so. DOD will continue to do more than its
share to achieve this NSS goal. However, the total goal can only be
achieved by coordinated efforts from all sectors of government,
industry, the educational community, and society working together. In
this regard, DOD is an active participant in the Office of Science and
Technology Policy's Committee on STEM Education which seeks, among
other things, to coordinate STEM education in the Federal Government.
29. Senator Portman. Mr. Lambert, the 2010 NSS states, ``We have
launched a number of science envoys around the globe and are promoting
stronger relationships between American scientists, universities, and
researchers and their counterparts abroad. We will reestablish a
commitment to science and technology in our foreign assistance efforts
and develop a strategy for international science and national
security.'' What short-term benefits have been seen through this effort
thus far?
Mr. Lambert. DOD supports the Office of Science Technology and
Policy science envoy initiative while managing complementary efforts
for global scientific exchange through the international science
offices of the Army, Air Force and Navy. These international offices--
located in London, Santiago, Tokyo, and elsewhere--are intended to
contribute awareness of scientific strengths internationally and to
fund talented international performers that fill gaps in existing
portfolios. Short-term benefits provided by these efforts include
facilitated scientific relationships between U.S. researchers and other
global leaders, broad scientific situational awareness to inform
technological strategic planning, and the ``transition'' of research
breakthroughs throughout the world into technology development to
support the U.S. national security requirements.
30. Senator Portman. Mr. Lambert, is this exchange of ideas
cultivating a renewed commitment to S&T in our own country?
Mr. Lambert. Our Nation's commitment to science and technology
(S&T) is spurred on not only by a sense of urgency to remain
technologically dominant in areas of high priority to national
security, but also through mutually beneficial partnerships with
innovative international partners, such as those facilitated formally
through the international research offices of the military services. It
is in the United States' interest to support expanded international
science partnerships, and it is our policy to continue them.
Today's S&T is more global and distributed than ever before. While
the United States remains among the world leaders in fast moving areas
such as information technology, engineered materials, digital and
quantum communications, and nanotechnology, among others, it is also
the case that we are not the dominant leader in all S&T that we once
were. Consequently, it is important to remain engaged in S&T throughout
the world, to be aware of the advances and collaborate at the leading
edge of science and technology.
education and outreach strategic plan
31. Senator Portman. Secretary Lemnios, in 2009 the first STEM
Education and Outreach Strategic Plan for 2010-2014 was produced and
signed-off on by you. Since that time, what successes has the STEM
Development Office seen?
Mr. Lemnios. There have been numerous successes throughout the
Department since the Strategic Plan was submitted to Congress in May
2010. Broadly, it generated interest and awareness in the Department's
role in fostering innovation and growing STEM workforce and
capabilities.
The SMART Program, in particular, is demonstrating positive results
in attracting high quality students to the DOD workforce. As a
scholarship-for-service program, SMART scholarships range from 1 to 5
years for bachelor's, master's and doctoral students majoring in a STEM
discipline or field. In 2011, applications rose from 2,600 to over
2,800 and SMART graduates transitioning into the DOD workforce
increased from 130 to more than 230. In 2012, we estimate that
approximately 270 will become DOD employees. Building capacity in STEM
critical areas such as systems engineering is also important. The
Systems Engineering Capstone project funded teams of undergraduate and
graduate students from both military and civilian institutions for the
purpose of working on authentic DOD challenges. In addition, students
received important mentoring from military and DOD civilian systems
engineers as well as industry professionals.
Across the Department, greater attention has been paid by
Components to align STEM education, training and outreach to their
technical workforce needs. The Army Education and Outreach Program
(AEOP) implemented a management approach for a more cohesive strategy
for its $17.2 million K-12 STEM investments. In 2011, AEOP awarded a
cooperative agreement to execute a Virginia Tech led consortium of
academic and nonprofit institutions to stimulate STEM education and
outreach and highlight Defense career paths. The Navy committed to
doubling STEM investments, including initiatives that reach under-
represented students in Los Angeles, St. Louis, and the Bronx. In March
2011, the Air Force issued a STEM Workforce Strategic Roadmap, entitled
``Bright Horizons'' that explains how they will manage their STEM
workforce. Among other activities, the Air Force oversees the NDSEG
Fellowship Program that supported nearly 800 graduate students enrolled
at 79 graduate institutions.
32. Senator Portman. Secretary Lemnios, what amendments/additions
have you made to the plan since it was first published?
Mr. Lemnios. The Education and Outreach Strategic Plan was
developed as an overarching document that sets a foundation to achieve
the vision of inspiring, developing and attracting a diverse, world-
class STEM workforce to meet the national defense needs. Following the
congressional plan submitted in May 2010, the STEM Development Office
has been working closely with the Military Departments as they develop
their STEM strategic direction and service specific initiatives. As
examples, the Air Force recently issued its STEM workforce strategic
roadmap, ``Bright Horizons;'' the Navy's STEM2 Stern effort is
providing guidance and planning for STEM investments, and the Army
Education and Outreach Program is focusing on their K-12 investments.
Currently underway is a strategic implementation framework that will
provide a focused approach to the Department's current and future STEM
investments and aligned to the NSTC Committee on STEM Education efforts
and the DIB needs. This focused and integrated approach includes
collaborative roles and responsibilities of the DOD components.
Optimizing our STEM investment is more critical than ever and we are
building a strong partnership across DOD to do so.
33. Senator Portman. Secretary Lemnios, what kind of budget/
resources are required to run the office and implement the plan?
Mr. Lemnios. The STEM Development Office (SDO) employs 3 to 4 DOD
employees to run and implement the plan. In turn, each of the DOD
Components must have staff and resources that SDO can draw on to
implement their portions of the Plan.
34. Senator Portman. Secretary Lemnios, what measures are being
used to assess the effectiveness of your efforts?
Mr. Lemnios. The measure of effectiveness for STEM activities is
challenging, and a problem we continue to work at. To this end, I have
reconstituted a STEM Board of Directors at a more senior level, with
representatives from the military departments, as well as USD(P&R) and
USD(I). We have invited the Department of Education and NSF as
observers. Among the tasks the board will take on includes the
understanding requirements, our gaps, and the efficiency of current
programs to address them.
At the end of the day, the measures of success must focus on
whether the DOD can find the right mix and numbers of employees to
deliver national defense capabilities. So, for example, the SMART
program is assessed as to what fields of study the students pursue, and
how many stay in DOD lab jobs after their required service period is
over. Similarly, for the Systems Engineering Capstone project,
effectiveness is assessed based on how many students participate in the
DOD-inspired course projects, which is an indicator of students who are
more inclined to pursue DOD S&T careers.
recruitment and retention
35. Senator Portman. Secretary Lemnios, I understand that the
military Services are having trouble recruiting, retaining, testing,
and evaluating personnel at some test ranges because of, among other
things, the remoteness of those test ranges; differences in pay; the
length of time to hire new employees; the loss of the Federal Career
Intern Program; and Base Realignment and Closure (BRAC). Do you agree
with that assessment? If so, how do you intend to ameliorate how each
of these factors negatively impact recruitment and retention?
Mr. Lemnios. As part of the Developmental Test and Evaluation
Fiscal Year 2010 Annual Report, components reported on recruitment and
retention of qualified T&E personnel. There were no specific issues
noted with their ability to recruit talented personnel at the Test
Ranges. The components discussed many efforts in place for recruitment
and retention including:
Expedited Hiring Authority
Section 853 Funding
Targeted Recruitment
Competitive Salaries
Monetary Awards
Intern Programs
Career Fairs
Tuition Assistance
Funding to Offset Student Loans
Career Development/Developmental Assignments
There was minimal impact of BRAC on T&E Specific positions. Only
the Army specifically noted a BRAC impact for the Army Test and
Evaluation Command. The Army reported that ``efforts are underway to
fill these positions using competitive and noncompetitive procedures,
targeting diverse applicant pools (Federal and private sector
employees, departing military, college graduates, etc.), and at entry,
developmental, full-performance and senior levels.''
36. Senator Portman. Secretary Lemnios, the Systems Engineering
workforce directly supporting the Director for Systems Engineering is
now at 117 and is projected to meet the goal of 172 by fiscal year
2012. By contrast, the 59 people supporting the Director for
Developmental Testing are expected to decrease to 52 next fiscal year
and not expected to meet the goal of 70. Given the importance of
developmental testing to ensuring the timely fielding of new, needed
combat capability, what are you doing to reverse the trend in
developmental testing hires?
Mr. Lemnios. In general, the supply of qualified personnel for
Developmental Test & Evaluation is not the issue. The current plan to
reach a goal of 70 personnel has been impeded by overall restrictions
on new government hires. This has affected 9 government billets,
including the Principal Deputy SES position for DT&E. We have attempted
to compensate for these gaps in government personnel through detailees
and rotational assignments. While the number of oversight positions in
OSD is important, so is rebuilding the Developmental Test and
Evaluation competencies of the components. The overall test and
evaluation workforce has grown from 7,420 personnel in fiscal year 2008
to 8,591 in second quarter of fiscal year 2011. This represents a
growth of 16 percent.
37. Senator Portman. Mr. Kendall, last August, Secretary of Defense
Gates said that his greatest fear is that in economic tough times
people will see the defense budget as the place to solve the Nation's
deficit problems, and that those cuts would be disastrous in the world
environment we see today. With the current budget cuts that the
President has proposed to DOD, how do you see it affecting our
competitive advantage in S&T?
Mr. Kendall. The Department is still formulating the budget for
fiscal year 2013. Until we integrate all competing needs and
requirements, it is not possible or prudent to speculate on how
possible reductions will affect our competitive advantage in S&T. It
remains clear that the Administration continues to value S&T.
Recognizing the potential advantage it brings, the Department will
balance this advantage with competing priorities in the fall budget
development.
the future of the defense industrial base
38. Senator Portman. Mr. Kendall, in Dr. Jacques Gansler's 2007
report, ``Achieving a 21st Century Defense Industrial Base,'' he states
that, `` . . . the Defense Industrial Structure, the controlling
policies, practices, laws, and the Services' budgets and requirements
priorities have not been transformed to match the needs of [the post-
September 11] world.'' Would you agree with Dr. Gansler's assessment?
Mr. Kendall. Dr. Gansler's 2007 report is informative and
insightful in many respects. As we adjust to the needs of the post-
September 11 world, the Department's industrial policies must also be
adjusted. However, the Department relies primarily on market forces to
create, shape, and sustain the industrial, manufacturing, and
technological capabilities in the industrial base. As the wars in Iraq
and Afghanistan continue to evolve, and our Nation continues to recover
from the worst economic recession since the Great Depression, the
Department faces significantly greater constraints on resources. This
evolution will have a significant impact on the DIB. The Department
must work closely with our partners in the defense industry to ensure
we are better stewards of the taxpayer's money in these fiscally
austere times.
39. Senator Portman. Mr. Kendall, how is DOD attempting to adapt
the defense structure to more technological and unconventional warfare?
Mr. Kendall. DOD relies on a responsive market driven industrial
base and in general does not direct the internal structures of
privately-owned corporations that constitute the DIB. Rather, these
companies adapt to meet the requirements of the Department as expressed
through its planned expenditures on research and acquisition programs
and on its requirements as expressed to industry in any number of ways.
As DOD requirements for materiel and service solutions to conduct more
technological and unconventional warfare increase, the DIB is adapting
to provide these solutions.
The Department also periodically conducts analyses/assessments to
identify and evaluate those industrial and technological capabilities
needed to meet current and future defense requirements. We use the
results of these analyses/assessments to make informed budget,
technology investment, acquisition, and logistics decisions. DOD
industrial assessments evaluate and address changes in key systems,
subsystems, components, and/or material providers that supply many
programs and affect competition, innovation, and product availability.
DOD components also conduct their own assessments when: (1) there is an
indication that industrial or technological capabilities associated
with an industrial sector, subsector, or commodity important to a
single DOD component could be lost; or (2) it is necessary to provide
industrial capabilities information to help make specific programmatic
decisions. These assessments generally are conducted, reviewed and
acted upon internally within the DOD components.
acquisition workforce
40. Senator Portman. Secretary Lemnios, the recently enacted Weapon
Systems Acquisition Reform Act (WSARA) identified the deterioration in
the DOD's core competency in systems engineering and developmental
testing as an important cause of why the cost of acquiring major weapon
systems have skyrocketed over the last decade or so. As such, the WSARA
called on DOD to develop the relevant workforce to reacquire that
competency. Where is DOD in building up its systems engineering and
developmental testing workforce?
Mr. Lemnios. The Department's systems engineering workforce
(defined as those acquisition personnel designated as part of the
SPRDE-SE/PSE Defense Acquisition Workforce Improvement Act (DAWIA)
career field) grew by 4,972 personnel between fiscal year 2008 and
second quarter fiscal year 2011. This growth is a 14 percent increase
over the fiscal year 2008 baseline of 34,527 personnel. The Department
is currently exceeding the system engineering workforce growth target
established in 2008.
The Department's test and evaluation workforce (defined as those
acquisition personnel designated as part of the T&E DAWIA career field)
grew by 1,171 personnel between fiscal year 2008 and second quarter
fiscal year 2011. This growth is a 16 percent increase over the fiscal
year 2008 baseline of 7,420 personnel and is a combination of in-
sourcing, re-coding, and new hires. The Department is currently
exceeding test and evaluation workforce growth target established in
2008. DASD (Developmental Test and Evaluation) (DASD(DT&E)) is
currently working to ensure that all appropriate Government positions
are DAWIA Test and Evaluation (T&E) coded and at the required level of
certification.
A USD(AT&L) memorandum dated August 25, 2010 identified eight Key
Leadership Positions (KLP) that must be staffed with qualified,
certified acquisition personnel in each Major Defense Acquisition
Program (MDAP) and Major Automated Information System (MAIS) program
office. Among the eight KLPs identified are Program Lead Systems
Engineer and Program Lead for Test and Evaluation. The DASD(SE) and
DASD(DT&E) are assisting in the development of qualification and
training requirements for these positions.
41. Senator Portman. Secretary Lemnios, to the extent that DOD has
not performed to plan, what are the most substantial challenges to its
ability to build up this important part of the acquisition workforce?
Mr. Lemnios. DOD is currently performing to plan in staffing its
systems engineering and test and evaluation acquisition workforce.
The fundamental workforce challenges facing the DOD are the same as
those facing industry: Attracting the best and the brightest technical
talent in a competitive environment. The increasing complexity of
systems and necessity for testing and evaluation rigor require
recruitment of a technically-skilled workforce.
There has been some concern that current hiring policy will impact
the growth of the systems engineering and test and evaluation
workforces. On March 16, 2011, USD(AT&L) and USD(Comptroller) co-signed
a memorandum, entitled ``Continuation of Defense Acquisition Workforce
Improvement Initiative'', noting that Defense Acquisition Workforce
Development Fund (DAWDF) hiring continues and clarifying that the
military departments may request in-sourcing exemptions within current
budget levels for critical acquisition positions. This memorandum has
clarified the process by which the Military Departments may continue to
grow critical acquisition workforce areas, which include the systems
engineering and the test and evaluation workforce.
42. Senator Portman. Secretary Lemnios, how does DOD intend to
overcome those challenges?
Mr. Lemnios. We are working directly to grow the pool of talent
available to support our systems engineering and test and evaluation
workforces.
As an example, in direct support of our Science, Technology,
Engineering, and Mathematics (STEM) Strategic Plan, the DASD(SE) has
implemented a Systems Engineering (SE) Capstone project with 10
universities affiliated with our Systems Engineering Research Center
(SERC) and with the four Service academies. The purpose of this effort
was to explore techniques to improve SE knowledge and career interest
among undergraduate and graduate engineering students and to increase
the available pool of candidates for SE positions in the DOD. This
effort provided students with substantive practical experience with SE
concepts and skills, and with opportunities to apply these skills in
the context of product development. The first year of this program has
been very successful and we have recently implemented a second year as
a follow up. We believe that this project will continue to increase the
pool and capabilities of systems engineering talent for future DOD
workforce needs.
The DASD(DT&E) is working with the DOD components to identify and
appropriately code all Government positions that conduct acquisition
related Test and Evaluation (T&E) to insure that they are captured as
part of the appropriate DAWIA workforce and that they are supported in
achieving requisite acquisition certification.
The DASD(DT&E) and DASD(SE) are working with the DOD components to
identify their future needs for their respective technical workforce so
that appropriate attention can be focused on recruiting, training and
retaining skilled, talented, and certified personnel.
43. Senator Portman. Secretary Lemnios, I understand that the
Services are proposing to change their original acquisition workforce
goals. In particular, the Services want to hire about 1,400 fewer
professionals in the Systems Planning, Research Development, and
Engineering and Systems Engineering/Program Systems Engineering (SPRDE-
SE/PSE) career field. Given how vital these functional capabilities are
to helping senior acquisition managers make fully-informed investment
decisions on major weapon systems (especially about technological and
integration risk), why should Congress be comfortable with this change
in goal?
Mr. Lemnios. The Department has not formally changed the
acquisition workforce goals established in 2008.
SPDRE workforce growth to date has been consistent with the 2008
plan and Secretary Gates' initiatives to restore and rebalance the
acquisition workforce. DAWDF funding continues to be used effectively
to recruit, train, and retain engineering personnel for the DOD
acquisition workforce.
The DOD fiscal year 2012 budget overview stated: ``DOD intends to
hold the civilian workforce at fiscal year 2010 budget levels. This
action does not apply to our ongoing acquisition workforce improvement
strategy to hire about 10,000 new DOD acquisition civilians by 2015, as
measured from fiscal year 2008 levels. The action may impact our
continuing conversion of contractor filled positions to new DOD
civilians (includes 3,000 acquisition positions so far). However, DOD
will continue to ensure that inherently governmental functions are
performed by career Federal employees.'' On March 16, 2011, Dr. Carter
and Mr. Hale co-signed a memorandum entitled ``Continuation of Defense
Acquisition Workforce Improvement Initiative'' clarifying the Military
Departments' ability to request exemptions for additional in-sourcing
authority for critical acquisition positions. It is our expectation
that the military departments will exercise these authorities in
rebalancing their workforce growth to meet the 2008 acquisition
workforce growth plan.
44. Senator Portman. Dr. Gansler, a recent article from Business
Week stated that of the Indian and Chinese students who received a
degree from an American college and returned home, 72 percent of Indian
returnees and 81 percent of Chinese returnees said the opportunities to
start their own businesses were better in their home countries.
Furthermore, the speed of professional growth was also better back home
for 54 percent of Indians and 68 percent of Chinese. How do you see the
United States being able to compete with international businesses when
entrepreneurs make it a point to not startup in the United States?
Dr. Gansler. Unfortunately, today it is U.S. policy to make these
top scientists and engineers (e.g. from India and China) sign an
agreement (when they get their temporary student visas) that they will
return to home when they get their degrees. This should change!
In the past, Silicon Valley was largely founded by non-U.S.
citizens; and Enrico Fermi was not a U.S. citizen when he worked on the
Manhattan Project.
It is U.S. policy to not restrict basic research on government
contracts to U.S. citizens, but many agencies (e.g. DOD, DHA,
Department of Energy) have been doing it anyway. This discourages
graduate students in science and engineering (e.g. from India and
China) from developing an interest in starting up a company in the
United States based on their funded graduate research work; or from
starting a U.S. company after their degree with a government-funded
SBIR project.
We need to create incentives for these people (after appropriate
security checks) to want to remain in the United States (after getting
their degrees) and to start up companies. Instead, we have created
barriers to their doing so.
small businesses
45. Senator Portman. Dr. Gansler, would you agree that current
policies in the United States are discouraging talented individuals
from starting a small business, particularly one that could contribute
to the national defense?
Dr. Gansler. Besides the barriers to non-U.S. citizens (discussed
above), there are growing concerns by U.S. citizens about starting new
businesses in the national security area. Specifically, these concerns
are driven by the projections of shrinking national security budgets,
as well as the requirement to deal with the excessive, complex, and
costly procurement rules imposed by Congress and the executive branch
(e.g. specialized cost accounting; intellectual properly demands;
export control barriers; et cetera). Additionally, they see how hard it
has been to extend SBIR legislation, and the tendency of many in
security agencies to view SBIR as a ``tax'' on their program dollars
(rather than a benefit). Finally, they know that whenever budgets have
shrunk, in the past, the first area cut is usually R&D; which startup
firms (of course) require.
46. Senator Portman. Dr. Gansler, what would you say needs to be
done to encourage more businesses to contribute to the national
defense?
Dr. Gansler. Firms (small and large) would be interested in doing
national security work if they were rewarded with sales and profits for
doing better and better work at lower and lower costs (i.e. providing
greater and greater ``value''). Instead, recently there have been many
examples of a national security shift (driven by budget concerns and
recent acquisition policy initiatives) to awarding contracts on the
basis of ``low bid, technically acceptable;'' and providing award fees
based on ``input'' rule compliance, instead of ``output'' results/
performance achieved.
I am a strong advocate of the benefits of effective competition;
and even the credible threat of introducing it. But when a firm does a
great job, at an affordable cost, they deserve to receive a sole-source
follow-on as a reward. But the current ``score card'' would list this
as a ``noncompetitive'' contract; so it would count against the agency,
and be discouraged; thus removing the incentive for the firm to achieve
such beneficial (to the government) results.
industrial base consolidations
47. Senator Portman. Mr. Augustine, in your June 26, 2006,
editorial to Defense News, titled: ``The Last Supper, Revisited,'' you
said that it was ``inevitable that much of this restructuring would
occur sooner or later.'' Knowing what you now know about the fallout
from the defense budget cuts of the 1990s, do you foresee any large-
scale consolidations among our domestic contractors? If so, why?
Mr. Augustine. Without knowing the depth of actual budget cuts in
the future it is of course impossible to state the extent of future
consolidations that might be appropriate. If the cuts are extensive, it
may be that further downsizing among the major defense domestic prime
contractors would be appropriate. However, I think it is unlikely this
will occur since in part because the administration has made clear that
it does not intend to permit further consolidation under any
circumstances. Combinations with foreign firms appear to be
permissible; however, I believe they are unlikely at the prime
contractor level.
I do believe that consolidation among subcontractors and third-tier
suppliers is both appropriate as well and as needed. That particular
tier was not affected to the extent the prime contractors were affected
following the ``Last Supper'' meeting and there do appear to be
opportunities where cost savings could be made without significantly
damaging the DIB. There is always the danger that we as a nation tend
to focus on the health of the prime contractors whereas per se but fail
to recognize that they would be unable to carry out their
responsibilities without the support of the subcontractor and supplier
base.
48. Senator Portman. Mr. Augustine, what effects would
consolidation have on products produced by the DIB and would these
items be of value to the American taxpayer?
Mr. Augustine. The impact of consolidation depends greatly on the
size of the defense budget since one of the requirements for the
industry is, within reason, to match its capacity to whatever the
defense budget might prove to be. Previous consolidation of the defense
budget tended to produce greater efficiency under circumstances where
companies were over-sized compared to their market. On the other hand,
consolidation can reduce competition and that tends to increase costs,
thereby offsetting some of or more than, the potential savings. In
general, one should try not to have fewer than three sources for any
given item of equipment--and most certainly not less than two. Given
the latter, and a reasonable-sized defense budget, I believe the DIB
will be able to produce items of value to American taxpayers and to our
Armed Forces. It should, however, be noted that this would require a
far larger DIB than the DOD has in the past indicated was affordable.
competing internationally
49. Senator Portman. Mr. Augustine, with an increasingly globalized
economy, do you see the American DIB being able to compete with foreign
companies?
Mr. Augustine. It is my belief that if we remain on the path we are
now pursuing as a nation, America will continue to erode its ability to
compete with foreign companies, just as has been occurring for the last
several decades. Since the DIB must draw upon many of the same
suppliers as the commercial market; rely largely upon technology
created for the commercial market; and utilize financial sources
identical to those of the commercial market, it is my belief that the
DIB will continue to deteriorate along with the overall U.S. base. If
we are to change this glide path, we will need to repair our K-12
education system, reverse the ongoing deterioration of our higher
education system, significantly increase our investment in research,
and create a regulatory and policy environment that is conducive to
strengthening American competitors.
50. Senator Portman. Mr. Augustine, if the American DIB cannot
currently compete, what should be done so that they can be competitive
or to keep a competitive edge?
Mr. Augustine. Although the answer to this question was previously
summarized, to those interested in America's future competitiveness I
would commend the ``Gathering Storm'' reports prepared by the National
Academies of Science, Engineering, and Medicine in 2005 and 2011.
communicating with industry
51. Senator Portman. Mr. Odeen, a report recently published by your
group, the Defense Business Board, recommended that DOD open a dialogue
with defense industry companies to improve understanding between what
DOD wants, and how industry can provide a timely, cost efficient, and
quality product. This is a view shared by the top acquisition official,
Under Secretary of Defense, Ashton B. Carter. In your view, has DOD
adopted this recommendation?
Mr. Odeen. You asked two questions related to a 2008 Defense
Business Board report on improving the dialogue between DOD and Defense
industry. I chaired the report and discussed it with senior OSD
officials at that time. They were responsive to the issues raised and
our recommendations, and the Deputy Secretary issued a letter in the
fall of 2008 directing that communications with industry get higher
priority, and directed that specific steps be taken to improve the
dialogue.
During the transition after the 2008 election. I briefed the senior
OSD Acquisition nominees on the report and they indicated they fully
understood the importance of robust communications with the Industrial
Base. Since that time I have been told a number of times by industry
executives that senior DOD Acquisition officials have been open to
meetings and listened to their questions and concerns.
With regard to your specific question about enhancing the dialogue
regarding DOD's equipment requirements to ensure industry delivered
more responsive, timely and cost effective weapons and equipment. I am
not able to provide a specific answer. As a result of ours and other
critiques of the capabilities requirements process, the Vice Chairman
of the Joint Chiefs of Staff has undertaken a major review and
revamping of the process. He feels the process is broken and requires
fundamental change. This effort is ongoing and I am not privy to the
status of the review or the changes under consideration. This would be
an appropriate question to the Vice Chairman when he appears before the
committee.
52. Senator Portman. Mr. Odeen, have they done so successfully and
what still needs to be done?
Mr. Odeen. See response to question #51.
[Whereupon, at 5:16 p.m., the subcommittee adjourned.]
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