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HEARING ON DEPARTMENT OF DEFENSE’S

CONTRACT BUNDLING POLICY

THURSDAY, NOVEMBER 4, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC.

The Committee met, pursuant to call, at 10:00 a.m., in Room

2360, Rayburn House Office Building, Hon. Jim Talent [chair of the

Committee] Presiding.

Chairman TALENT. Good morning. Today the Committee focuses

its attention once again on the issue of contract bundling. This is

the second hearing we have held on this issue this year and it is

part of a series of hearings the Committee intends to hold on the

issue in the near future.

The Small Business Administration recently promulgated an interim rule pursuant to the Reauthorization Act of 1997. I am sure

the Committee will want to look at those in some detail. In addition, I am working with members of the Committee from both sides

of the aisle and with the gentleman from Hawaii, Mr. Abercrombie,

a member of the House Armed Services Committee, on procurement reform legislation over which the Committee will have jurisdiction.

So there is no shortage of work to be done with respect to contract bundling. Contract bundling is one of the most important

issues facing small business today. In fiscal year 1998, the Federal

Government spent approximately $181 billion on procurement contracts.

Small business received just $33 billion or 18.3 percent of that

total in prime contracts, substantially short of the overall prime

participation goal of 22 percent. By far the single largest contractor

within the Federal Government is the Department of Defense,

which in fiscal 1998 accounted for $109 billion or 60 percent of the

$181 billion total.

Clearly, the Defense Department’s contract bundling policies

have a direct and substantial impact on small business. Given the

importance of the Department’s contract bundling efforts, I am particularly concerned with what I see as an accelerating trend towards what can only be called ‘‘mega-bundles’’ within the defense

procurement community.

We will hear testimony later today concerning contract bundles

within the Defense Department that are so enormous in scope and

size that they raise serious questions as to whether even a company the size of General Motors could successfully compete, let

alone a small business.

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Here to try to disabuse me of them is the Honorable David R.

Oliver, Principal Deputy Under Secretary of Defense for Acquisition and Technology. We invited Mr. Oliver to join us, because in

addition to Under Secretary Jacques Gansler, he is responsible for

developing the Pentagon’s contract bundling position and he is in

a position to address the rationale and justifications behind those

policies. We are particularly grateful to Mr. Oliver for being here.

We have asked Mr. Oliver to focus his remarks on the following

areas. First, what is the guiding principle behind the Department’s

contract bundling policy? Specifically, we asked him to address

whether monetary policies or benefits associated with procurement

efficiencies have a greater impact on the Department’s decisions to

bundle contract requirements.

We have also asked Mr. Oliver to address the long-term effects

of contract bundling on competition and the ability of small businesses to win prime contracts. I am particularly concerned that by

shutting small businesses out of prime contracting opportunities,

the Department may be irreparably harming our Nation’s small

business defense industrial base. If that is the case, the policy is

surely, at best, penny wise and pound foolish. I am not so sure how

penny wise it is either.

Finally, we asked Secretary Oliver to address how the Department plans to meet its small business goals and its small and disadvantaged business utilization goals in light of several mega-bundles such as the Flexible Acquisition and the Sustainment Tool

bundle within the Air Logistics Command and the DTS–CE bundle

within the Defense Information Technology Contracting Office.

The Committee is also going to hear from several small business

owners who will address the impact Defense Department contract

bundling has on their businesses. We invited Ms. Vanessa

Morganti, the owner and president of Future Solutions, Inc., a

woman-owned 8(a) firm from Broomfield, Colorado, to be with us

but because of other commitments she was unable to make it. I

would ask unanimous consent that her written statement be included for the record.

[The information may be found in the appendix.]

Chairman TALENT. Our first witness on the second panel is Mr.

Paul Murphy, President of Eagle Eye Publishers in Fairfax, Virginia, who will discuss the results of his study on contract bundling

which he recently completed under contract with the SBA’s Office

of Advocacy.

We will also hear from Mr. Maurice Allain, President of Phoenix

Scientific Corporation, a small defense electronics manufacturing

firm in Warner Robins, Georgia, who will address the proposed

mega-bundle known as the Flexible Acquisition and Sustainment

Tool, FAST, bundle.

We will also hear from Mr. Craig Brooks, President and CEO of

Electra International Telecommunications, a small telecommunications company located in Bethesda, Maryland. Mr. Brooks will

discuss the effects of large-scale bundle of telecommunications service within the Defense Information Technology Contracting Office.

Finally we will hear from Ms. Josephine Ursini of Virginia

Beach, Virginia. She is the outside counsel for the Society for Travel Agents in Government and will discuss how the Defense DepartVerDate 11-MAY-2000 09:19 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\65422P2.XXX pfrm08 PsN: 65422P2
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ment is shutting out smaller travel agencies from government travel management contracts.

I would encourage members of the Committee to read the statements of these witnesses, if they haven’t done so yet, to see the impact on bundling on small business and also to really begin thinking about whether bundling accomplishes what the government

says it accomplishes.

At this time I want to recognize the gentlelady from New York,

Ms. Vela ́zquez, for any remarks she may have.

[Mr. Talent’s statement may be found in the appendix.]

Ms. VELA ́ZQUEZ. Thank you, Mr. Chairman.

Mr. Chairman, we are here today because we continue to be concerned with the state of Federal Government contracting. We are

here because we continue to see that our Nation’s small businesses

are being cut out of the loop. After 6 years of discussions, this situation is unacceptable. So I begin with a message to government

agencies that should be evident from the fact of this hearing. But

that bears saying: We are still paying attention. We are still here

and we will not go away until the situation for small business improves.

Now, the questions we face today might all be different if we

knew there was a concrete benefit to bundling. For example, if we

knew bundling saved the government money, we could discuss how

to balance the needs of small businesses against taxpayers’ dollars.

But that just is it, we do not know if bundling saves money. We

hear unsubstantiated claims but they were just that, and they have

little more weight than other claims that bundling actually costs

money.

The fact is that we do not know, and we shouldn’t pretend otherwise. Benjamin Franklin said, ‘‘Being ignorant is not so much a

shame as being unwillingly to learn.’’ we need to ask why certain

departments, like the Department of Defense, seem unwillingly to

learn.

One of the things I am most eager to get out of today’s hearing

is the chance to shine some daylight on the murky recesses of bundling practices. There is the question of the Warner Robbins Air

Force Base contract, where we cannot even get a straight answer

about what is or isn’t in the contract. And what about bundling

that already exists? Are we supposed to believe that small businesses cannot provide janitorial or messenger services? And we

know for a fact that small businesses can fulfill government telecommunications and travel agency contracts.

There have been some attempts to stop the blatant use of contract bundling, including the interim rule recently released by the

SBA. While these changes will put teeth into requiring measurably

substantial benefits, the rule also includes a loophole allowing bundling if it is critical to the agency’s mission. It doesn’t take a military genius to realize that is a loophole you can drive a tank

through.

We should not fool ourselves that this is merely about adjusting

a rule or a definition. This is about keeping small businesses in

business and in business with our government. We have already

held a hearing looking at the proposed rule. Now, we need to find

the courage to ask the hard questions. If DOD is saving so much

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time and money, why are there no numbers to support it? If DOD’s

aim is to keep small businesses contracting with their agency, why

are they being put out of business? Small businesses are facing a

crisis in Federal contracting, and we need significant, meaningful

action if we are to move forward.

I thank the panelists who took the time to be here today, especially those members of the small business community who will

share their horror stories about government contracting. I look forward to hearing what you have to say, and I thank the Chairman

for having this hearing today.

Thank you.

Chairman TALENT. I thank the gentlelady for her comments and

fully endorse them.

Chairman TALENT. All right. Our first panel consists of the Honorable David R. Oliver, the Principal Deputy Under Secretary of

Defense for Acquisition and Technology.

Mr. Oliver, we appreciate you being here and please give us your

statement.

STATEMENT OF HON. DAVID R. OLIVER, PRINCIPAL DEPUTY

UNDER SECRETARY OF DEFENSE FOR ACQUISITION AND

TECHNOLOGY

Mr. OLIVER. Yes, sir, Mr. Chairman. I appreciate the opportunity. I have submitted a written statement, let me give a more

general summary.

Chairman TALENT. Fine.

Mr. OLIVER. There are, in my opinion, three reasons that are

captured rather well in a Rand study for bundling. One of them

has to do with scale economics, and what it says—and this is sort

of a technology-driven problem. It says that with the changes in information technology, it is important to recognize that one can get

data and exchange it between parts, and that better communications mean that it is—that sometimes there may be a change in

scope that is important.

And when we get through at the end, I will talk about the DTS–

CE contract because it sort of follows on that. So you essentially

have scale economics, and I would maintain that that is driven by

technology. And what we should consider is with technology changing so rapidly—and I would particularly in two areas, in information technology and also in transportation, which applies to some

other things that this Committee has looked at, you have to consider whether or not you need to change the way you are contracting. So that is one.

The second is in scope economies. In scope economies, what I am

talking about is the ability to use cross-training and also to get efficiencies of people. Let us say we are talking about security on a

particular installation. If I have security units on an installation

and they are all broken up, then I have to maintain a certain number of reserves in order to respond to a problem. I have to worry

about numbers of people who are going to report in sick at any particular time, take leave, et cetera.

If I should bundle those together, choose to bundle them together, there are obvious savings because I can smooth out the

rough edges in those things. And I only have to maintain many

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fewer response forces. So there is an opportunity for a scope economics in some areas.

Chairman TALENT. Just to clarify, you are not talking about the

Department’s own personnel in managing the contract; is that correct?

Mr. OLIVER. I am going to get to that. I am actually talking

about, for example, security forces that you hire; where you go out

and you would hire security forces to provide for this part of a base,

this part of the base, this part of the base. In that case, you are

obviously better if you hire one contractor to handle the whole

thing.

Chairman TALENT. The whole base. Now you are talking about

the contractor’s resources?

Mr. OLIVER. Right.

Chairman TALENT. I am sorry.

Mr. OLIVER. Which results in less costs and more efficient organization to the government.

Chairman TALENT. Okay.

Mr. OLIVER. The third has to do with the delegation responsibility.

Chairman TALENT. I will say to the Committee, I just wanted to

clarify—we will have plenty time for questions. I just wanted to

clarify his statement. Believe me, the gentleman will have time. Go

ahead.

Mr. OLIVER. The third has to do with the delegation of responsibility. The purpose of business—the business’s core capabilities,

particularly in some businesses, is management, the business management; and the purpose of the core capability of the Defense Department is war fighting. In those cases where we are requiring—

using people in uniform to manage these various contracts and to

shift assets between them and make lots of contracts, et cetera, we

are not asking these people to do what the Nation expects is their

core competency. And so the question is, do you want to transfer

that core competency to those people who have a core competency

in management of these people and these small businesses?

And I think that those three general areas, in other words, scale

economics, scope economics and delegation responsibility cover the

primary reasons that one might choose bundling. At the same time,

of course, just as you are, we are concerned with the balance that

is necessary between these efficiencies or cost savings, or better

government issues and needs and the interests of small business.

And in the small business requirements, there are two critical

factors that I think are important, one of which is that we are required to use as a source selection factor—if you do a bundling, you

are required to use as a factor what the plan is for whoever wins

that contract to utilize small business. I mean that is terribly key,

because it becomes an important factor in an evaluation of the

award.

The problem that one, a cynic, would say is what happens if the

person makes a great plan but then doesn’t do it? And the other

SBA rule that I think is important, there is another factor you specifically have to use, is you have to use what the past performance

of that contractor is in using small business.

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And many of the people that I have been talking to, the question

is, then, do you do it, do you evaluate that each year, do you evaluate that when the contract comes due? In other words—but the

teeth are there to make sure that the people are using small business.

Now, there are two good studies on this, one by Rand and one

by—actually, there are several. There are a couple of studies from

Rand and also from the Center for Naval Analysis on this, but I

don’t think there is a good study that addresses all of the Committee’s questions.

And I am going to commission that study. They have written a

Statement of Work for it, and I am going to go—what I want to

do is, I want to focus in fact on the Committee’s questions. And I

am also interested in making sure that the savings, whether they

were fiscal savings or management savings or scope savings, I

want to see how they were from predicted to what they were when

the contract was initiated. So I am going to do that. I think that

is going to take about 6 months to get that, because I want to make

sure I get some good data. But I will sign that in the next 10 days,

it has got to be done in a couple of months.

So the Committee is correct. I am not sure there is a plethora

of data out there that proves it one way or the other.

The part that I think that is interesting when I looked at this

more carefully in the last couple of weeks is that this has been

going on for 5 or 6 years, and there is no decrement in the Department of Defense’s use of small businesses. In other words, I am not

sure that I—I don’t have the data right now to say a particular

contract resulted in what the people thought it was going to result

in.

But I am sure that when I look at the figures, that there hasn’t

been a decrement in small business in the Department of Defense.

And, in fact, if you look, it has been remarkably steady and over

time, over the last 10 years, the numbers have actually gone up.

And if you particularly look at it and see whether it is statistically

significant, I will assure you it is not. In other words, the changes

either way are not statistically significant.

So when I look at the big picture, I see it as the same; in other

words, the same percentages going to small businesses to, et cetera,

except we are slowly increasing that, and I attribute a great deal

of that, to be honest with you, to Bob Neal who is sitting behind

me, who is my deputy for that. So that is the big picture.

If we want to talk about—let me establish right off, let us talk

about DTS–CE and also let us talk about Warner Robins, and I

will get that out in the open. The DST–CE thing I don’t think it

is a good example, and I will tell you why. When you look at the

DST–CE bundling, they did essentially for the fiberoptics contracts

across the United States—what you see is that is driven by military requirements; in other words, as you worry about information

security and you worry about the ability of people to get into your

system, then you decide on several things, one of which is a physical separation of the circuits, and the other is protection of those

switching centers by which people could get in or could disrupt.

I talked to the people from DST–CE this week, this week or last

week. And I think that those were reasonable military decisions

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that they wanted to protect the security of those switching circuits,

switching centers and also the physical security, the separation of

those, and that really happens at the switching centers. When they

decided to enforce—when they decided to make a specification for

security, that tends to go to a larger company because you need a

nationwide thing.

If we are going to worry about the United States defense in this

world, it is a national—in other words, it is a national exchange

of communications, information, et cetera, and I think they made

a good choice. I think that number, it ends up being about 2 to 3

percent of DST–CE’s total budget. I looked at their evaluation, I

thought it was valid—I don’t think that is good impression—we ran

right up against military requirements, and that is a tough thing

to debate. And I will have to say that I think those military requirements are good.

If we get into it, we are going to find that small businesses who

have tried to compete, I am not sure that they were—that is a

tough one.

With respect to Warner Robbins, and the FAST contract, I am

not sure it is timely. I think it is good the Committee is interested

in it, because it forces me to be interested in it, and it forces the

Department of Defense to look at this carefully, but they are not

ready to talk. For example, when I talked to them yesterday, I

guess, they are not ready to say to me precisely what safeguards

they have in place. In other words, they have decided, for example,

that what—now, this is technology-driven, and the question of technology-driven is the Air Force doesn’t have the technology, some of

the advanced technology to do the repairs, and they end up having

different small businesses in many cases who are doing various

technical things, such as the repair and maintenance of communications equipment aboard a particular aircraft.

To manage those individuals is much better done in a matrix organization. It is much better done by someone, to be honest with

you, outside the military, because as I have talked about before

that is not the core capability of the military, that is the core capability of business.

They are thinking about right now awarding three contracts to

whoever wins it as prime and one that is specifically reserved for

small businesses. And each of the primes, of course, would have to,

as I said to you, one, demonstrate what the small business plan is

for incorporating small businesses; and, two, what their past performance is doing. And they would have to periodically prove that.

The reason I say that is not right, is they were unable to explain

to me yesterday what their plan was, when they were going to review it, when they were going to check as to what the guy’s performance was, et cetera. So I think the Committee is absolutely

right to be interested in that and ought to watch us carefully. But

it is a difficult one to evaluate on because it is not firm enough at

the moment to be criticized either way. They are going to get back

with my staff, by the way, before they firm up my acquisition strategy, because we had some questions.

That is the end of my statement, sir, I am ready to answer any

questions.

[Mr. Oliver’s statement may be found in the appendix.]

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Chairman TALENT. Well, I appreciate very much the informality

and candor of your statement. And what I want you to understand

up front, and Mr. Gansler also, is that this is an aspect of what

the Department does; that this Committee has not only a longstanding interest but an interest as mandated by what we have

been told to do under the House rules. We are interested in the effects of procurement on small business.

Beyond that, however, I want to repeat a point that Ms.

Vela ́zquez made. It is one thing if we can have some reasonable

confidence that bundling contracts saves money to the taxpayers or

increases quality provided to the taxpayers, then we have a classic

kind of conflict between the desire we all feel to promote small

business as an avenue of opportunity for individual entrepreneurs,

and maybe the interests of the taxpayer in inefficiency in a particular contract.

Where, however, we are not saving money for the taxpayers for

a bundle, where quality is going down, and then you have something that everybody agrees is a bad thing to do. And I will just

tell you, and I am working with this and Mr. Abercrombie on the

Armed Services Committee has also worked on this, others have

here as well. We have been presented with a number of instances

of bundles where, when you get into it, you have a serious question

whether it is not costing the government more and whether the

quality isn’t going down; the reason being that when you reduce

competition for a particular—and this is classic economic thinking—you reduce competition for a particular bid, the price tends to

go up. And the bigger an enterprise is that gets a bid, the bigger

the bundle, the fewer the competitors, the less pressure on the

eventual winner to maintain high-quality services, particularly if it

is a bundle for a longer term.

You get a contract for 2 years, 3 years, 4 years, well, now—

maybe you have tried to discount the price to get it. There is tremendous pressure on you in order to make money by reducing the

costs of that bundle. You mentioned a couple of things that mitigate in favor of bundling.

Let me flip on the other side of that. You mentioned economies

of scale. There is such a thing as diseconomies of scale, too, where

the bigger the enterprise is the more overhead it has to have to

manage all of its parts.

Mr. OLIVER. Right.

Chairman TALENT. You look at the rest of the American economy, the trend is towards smaller enterprises, and the bigger enterprise is trying to act like smaller enterprises. So I would argue

that, yes, it is true there can be economies of scale, and particularly that is why WalMart is successful. But WalMart is not only

purchasing from huge contractors, WalMart does an awful lot of

business with small businesses who beat out big businesses.

I ought to give you a specific instance, and Mr. Brooks is going

to testify about this: long distance service for particular bases. And

the point of his testimony is that when this was bundled, it used

to be individual marketers of long distance servicers could bid with

particular bases for services to handle the long distance services

and network services for those particular bases. And then it was

changed so that it was bundled, and only the three big—AT&T,

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Sprint, WorldCom—which is going to become two, by the way, because they are going to merge—was allowed to bid.

He makes a point in his testimony that in almost every case

where we have documented, the government ends up paying more

for circuits from one particular base to another. Here is what he

says: ‘‘a particular circuit analysis is contract number,’’ and then

he gives the number, which was for a T–1 point-to-point circuit between Robbins Air Force Base in Macon, Georgia and a DOD Computer Megacenter in Slidell, Louisiana. Under the new bundling

system, AT&T charged DOD $215,000 for the life of that contract,

while the then-current market rate for an identical circuit procured

through the old system was about $125,000, $90,000 or 67 percent

delta. Thousands of such circuits were procured under the bundled

volume-discounted new contracting system.

He says an agency report filed by the DOD with the GAO described AT&T’s bundled contract as high priced, cumbersome, unwieldy, burdensome, sluggish, inadequate, unresponsive, inflexible,

nightmare.

And then they did more research and said it was not alone in

comparing the bundled pricing to that of the old system. A DISA

study in March of 1995 compared new bundled prices for comparable transmission services from three sources. The old system—

the agency found the old system, the competitor system, invariably

lower than the bundled system, normally by a wide margin.

I will tell you personally I have encountered this over and over

again.

I am going to finish in a second, and you can tell me why I am

crazy, because intuitively if you got more contractors bidding on

the contracts, the pressure to hold the price down is going to be

lower.

That is just, it seems, intuitively correct. Now, tell me why it

isn’t.

Mr. OLIVER. No, I absolutely agree with you. I mean, Jack and

I spend a great deal of time worrying about how do we increase

competition, to be honest with you. This happens to be probably 40

percent of our time is worrying about increased competition because we know that the marketplace works, and that if we can increase competition, it will protect us from making a lot of mistakes.

I mean, that is the crux of what was good.

But I don’t—I wasn’t clear. My problem is I don’t think it is a

good example. I think there may be some other better examples.

And what I would like to do, if I can talk to your counsel, is get

some examples of the ones that you have heard where the results

were not the same. I would like to make this specifically part of

my study. I am absolutely—I want to put of some of this to bed

and get some data, and there will be people who come in and talk

to you where the people who lost the bids and people—if I go out

and talk to the people who won the bids, they will tell me it is terrific, right? Because the people who win the bids don’t come in and

talk to you. And the same thing for me; we both hear from the

same kind of constituents. So I will do that.

Chairman TALENT. Sure.

Mr. OLIVER. But let me talk about that one. The reason that is

not—this is my opinion—the reason it is not a good example is beVerDate 11-MAY-2000 09:19 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HEARINGS\65422P2.XXX pfrm08 PsN: 65422P2
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cause what you had was—it has been a great concern the last several years about hacking and about the ability of people to get into

our network and destroy our network in times of war. And so what

DST–CE did was decide to make a network specifically invulnerable. And to do that, what they did was they decided they would

essentially separate the switching networks from the normal

switching networks and they would also insist on security controls

of each of the places that you could enter, and they would also insist that you could track what that switching network was doing.

Now, you don’t do that in a normal business. In other words, I

would not deny to you that I think that is a much more expensive

way than the way they were doing it before, which was bidding out

to all the companies that could work it. But what I am saying is

the problem that you run afoul here is I think that is a valid national security decision. And it is just like the fact that you tend

not to do fighter work with 707s. It turns out that you would rather do that with fighters that it is specifically paid for. We pay a

cost differential when we make those kind of decisions.

Jack believes, as do I, it is better to keep as much in the commercial world as possible, and we are really trying to do that. And

I know you are supporting us on that. But that example, when I

looked at it, and I spent some time looking at it, I am not sure it

is the best example. I am sure this Committee can find a lot better

examples for which I would have much more trouble explaining,

but that one is tough.

Chairman Talent. Let me stick with that one for a minute, because Mr. Brooks also brings up the security issue. And, of course,

from his point of view of small business, they are used to the fact

that when they can prove to the Department that it actually costs

more money to bundle, then the Department will come back and

say, well, yes, but there is some special requirement that only the

larger contractors can perform.

So security was the reason given for this. He goes on to say this:

Contracts for over 5,000 telecommunications service were awarded

in using the old system. Less than 1 percent of those services had

security network management and/or delivery requirements that

disqualified any one of as many 50 of the small business competitors.

So before the bundling occurred, there was no security requirement. After the bundling occurred and after they found out, well,

it actually costs more to bundle, now there are security requirements, and that is the reason we have to bundle.

He then goes on to make the point that many of the larger contractors can’t meet the security requirements. They say special requirements are often not needed for service and because of the nature of some services, national carriers such as MCI-Worldcom,

AT&T and Sprint, cannot satisfy those requirements regardless of

their capitalization and the size of their national networks.

So it increasingly appears to the small business community and,

I have to say, to me, that bundling has become not a means to

some other end, but an end to itself. And what I begin to suspect,

Mr. Oliver, is that it does save, I think, time and frustration for

the procurement officers and the people who have to put out these

contracts. And I understand that.

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I mean, I can imagine that they are besieged. And so their desire

to save this time becomes the end in itself for bundling. Why don’t

you answer the security issue? I mean are these legitimate security

questions? And if they were, why aren’t they part of the contracts

before the bundling?

Mr. OLIVER. I need to go back and check, Mr. Chairman, because

when I talked to the people, they told me they were there ahead

of time. Now I know there are some other problems. For example,

you said that only large contractors could bid. I know there were

two small contractors who bid. I know, for example, one of them

bid, and his bid was 7 percent higher. And it was submitted on

Sprint stationery that was marked off.

But I know these two small contractors bid. I also know that

they put a limit that that some people had to bid at least for 5 percent of the business. In other words, they had to—they were trying

to get fewer than 20 contractors involved. But I will go back and

check on whether the security was a problem before. But I know

two of the other factors that the man will testify on were not true.

Let me talk about one other thing that you mentioned, sir.

Chairman TALENT. Sure.

Mr. OLIVER. You talked about short contracts versus large contracts, and that is an interesting problem. The first bundling contract that I remember was up in Bangor, Maine when they bundled

the base, and it was really—I mean, it was changed and, of course,

if you think that this Congress or constituents don’t like change,

you ought to try to do change in the military. I will tell you that

nobody wanted to do it. And there were lots of arguments against

it. The interesting thing from my perspective was how much it improved the efficiency and the state of life on that base. In other

words, it was much better for the military person, because you actually had somebody competent instead of a bunch of small groups

of people that was not the core capability, they really weren’t interested in it, they were not a flat organization.

The other thing that was fascinating was that each time the contract was rebid, somebody else won. Because what happened was

someone else, and in all cases—Lockheed won the first one, small

businesses won—because what happened is thereafter, what happens is they would think about how to do it, and they would figure

out a better way to do it. And they would combine trucks to do both

leaf picking-up and also do other stuff, whereas the first guy had

had separate vehicles for it. It was really interesting to watch. And

the costs to the government went down each time.

And more importantly in this case, because I know this is why

this was done, the service to the service member went up significantly, it was much preferable to have—I can go on, to be honest

with you, for a long time about that because that was interesting

to watch. But the interesting part, with longer contracts what you

see is the guys that put forward their bid and proposal money, they

lose money in the first year, whatever, what you see is it takes

them about 2 or 3 years in which they introduce process changes.

In other words, what they do is they take it over and what normally happens is they take the people who have been doing it and

just bring in new management. It takes that new management

12

with those people to do a culture change and to start doing process

changes frequently, 18 to 24, 36 months.

So while small, short contracts may be good to make sure you

are continually reopening this and ratcheting the price down, on

the other hand our experiences are it is not good. And there are

a couple of studies that say this with respect to getting the process

changes and innovation, and so that tends for you to go to longer

contracts, to 5 to 10 years.

When I was in industry, it was—there was a terrific contract, I

thought, done by IBM, in which IBM said we are going to give up

the management of all of our facilities—and I was talking to the

people who did the contract, the people who won it, and there they

are then managing—IBM is managing all the facilities and IBM

recognized that was not the core competency, so they went to somebody else.

And that somebody else gave them a bid of 40 percent less in the

first year, plus they would give them 8 percent less each following

year, plus they would eat inflation. And the interesting part about

it was the company that came in and bid that had a bunch of people who really cared about insulation. There is nobody in this room

that cares about insulation.

There is a group of people in Dayton, Ohio that care about insulation and can tell you, based on which way the building faces and

which way the wind blows, whether you want 2 inches or 2–1/2

inches, and they will take that half inch of savings because it gives

you the same stuff.

I don’t want to spend my life, but there are people that want to

do that, that is their core competency. We are best off if we employ

them rather than having government people putting 4 inches of insulation on each building in accordance with the government spec.

What I am saying, it is a balancing issue.

Chairman TALENT. I agree with that. What you just gave really

is an argument for contracting, but not necessarily for bundling it

seems to me. But I am going to—I know members of the Committee have questions so I am going to defer the rest of mine and

recognize the gentlelady from New York.

Ms. VELA ́ZQUEZ. Thank you, Mr. Chairman.

Mr. Oliver, before we get into the questions, I ask unanimous

consent of the Chairman to include into the record this letter.

And——

Chairman TALENT. Sure. The gentlelady is describing a letter

that——

Ms. VELA ́ZQUEZ. I will explain it.

Chairman TALENT. Oh, I am sorry. Without objection.

Ms. VELA ́ZQUEZ. This letter will be sent to Mr. Oliver today, requesting of him information regarding the Warner Robbins contract

bundle, whether or not Warner Robbins Air Force Base has determined the FAST contract to be a bundle.

This information is very important to this Committee. And we

are requesting a clear definition of the requirement; a listing of all

activities that will be authorized to use the FAST program; a list

of the standard industrial classification codes anticipated to be included in the acquisition; an estimate of the number of contracts

that will be replaced by the FAST contract at all locations; a list

13

of contracts currently being performed by small businesses, names

and contract numbers of all small businesses, minority-owned businesses and women-owned businesses; the expiration dates of contracts in place and whether or not options apply; finally, the dollar

amount of all options that will be exercised for all locations.

And I request, Mr. Chairman, that this information be provided

to my office within the next 10 days.

Chairman TALENT. I will certainly put the letter in the record,

and should read that it is going to be—I guess it is from the

gentlelady from New York, and we will put it in the record. And

the gentlelady’s request for a 10-day turn around time is noted.

[The information may be found in the appendix.]

Chairman TALENT. And I think this should—perhaps we should

add this is because of the statements on the part of some of your

people that this contract is not a bundle and therefore they don’t

have to go through the various requirements required under the

law.

Mr. OLIVER. It is a bundle.

Ms. VELA ́ZQUEZ. It is a bundle.

Mr. OLIVER. It is a bundle and I will work. Ten days may be

tough for some of the stuff, and I will also provide to you our rationale for why we intend to do it.

Ms. VELA ́ZQUEZ. Ten days, what?

Mr. OLIVER. Ten days may be tough.

Ms. VELA ́ZQUEZ. I know. Since 1993, you will be conducting the

first study to determine the impact of contract bundling. So it has

taken 6 years. I hope it will not take 6 years——

Mr. OLIVER. It will not, ma’am.

Ms. VELA ́ZQUEZ [continuing]. Each time around.

Mr. OLIVER. There are a actually a couple of decent studies. The

Center for Naval Analysis has one and so does Rand. I will be

happy to provide you copies.

Ms. VELA ́ZQUEZ. I guess it is refreshing that you come before this

Committee today and say you will be asking for a study.

Mr. Oliver, a kickoff was held for the FAST requirement at Warner Robbins Air Force Base in Georgia on August 24th and 25th,

1999. Mr. Dave Burton, the head of the contracting activity at Warner Robbins stated at the kickoff that he had received a message

from General Goddard that a contractor had claimed that FAST is

a violation of law. Mr. Burton commented, and I quote, ‘‘as soon as

someone says we are breaking the law, then I know we are doing

the right thing.’’ .

Mr. Burton also stated that the Air Force has been too concerned

with following the law. He said, and I quote, ‘‘We can be shortsighted and comply with the law or be longsighted and help small

businesses.’’ finally, Mr. Burton said we ought to have the leeway

to make our own policy.

Mr. Oliver, what is your response to the fact that the Department of Defense employees are not only talking about breaking the

law, but bragging about it?

Mr. OLIVER. Ms. Congresswoman, that is obviously not right. If

I could have a copy of that, I will get back to you.

Ms. VELA ́ZQUEZ. You will get back to me.

Mr. OLIVER. I will take that for the record. I would also——

14

Ms. VELA ́ZQUEZ. Mr. Oliver, you know what is also the point that

I want to make this morning. There is a notion out there that the

Department of Defense has disregard for small businesses, and

today I am giving you an opportunity to show me otherwise.

Mr. OLIVER. Yes, ma’am. What I was trying to say in my opening

statement is there is a balance that we are interested in doing, all

right? In other words, I talked about there is a scope problem,

there is scope reasons. There are reasons for management

responsibility——

Ms. VELA ́ZQUEZ. Mr. Oliver——

Mr. OLIVER [continuing]. That has to be balanced with——

Ms. VELA ́ZQUEZ. I know you like to give long answers, but there

are too many questions that we want to ask this morning. I am

only asking you what is your reaction and your response to the fact

of the attitudes that was exhibited by this gentleman.

Mr. OLIVER. I think it is wrong. I think it is wrong, Ms. Congresswoman, period.

Ms. VELA ́ZQUEZ. Would you talk to him?

Mr. OLIVER. That is the reason I asked you for the paper.

Ms. VELA ́ZQUEZ. Pardon?

Mr. OLIVER. Yes, ma’am.

Ms. VELA ́ZQUEZ. How many small businesses participate in DOD

telecommunication contracts as large as the one we are talking

about?

Mr. OLIVER. I don’t know. I have to find out, ma’am.

Ms. VELA ́ZQUEZ. Mr. Brooks, and he knows his industry, says

that there are around 50 firms currently able to perform smaller

DOD contracts, but none who can perform this one. Is there still

a place for these 50 firms to do business with DOD?

Mr. OLIVER. I think, yes, ma’am. Do you remember me

saying——

Ms. VELA ́ZQUEZ. Not as subcontractor, as prime contractor.

Mr. OLIVER. Do you remember me saying this was 2 percent of

all of DTS–CE’s awards. I mean what you are talking about, that

prime, is 2 percent of DST–CE’s awards. There is 98 percent left

that are not involved in this very specific security high effort. And

so therefore there is obviously rooms for those other 50 firms to

compete in a great majority of things.

Ms. VELA ́ZQUEZ. You will talk to your contracting officer and

make sure of that?

Mr. OLIVER. I did this week.

Ms. VELA ́ZQUEZ. You did?

Mr. OLIVER. Yes, ma’am. I am supportive of this. I absolutely am

supportive of small business.

Ms. VELA ́ZQUEZ. Mr. Oliver, but you are telling me that you

spoke to your contracting officer this week.

Mr. OLIVER. Right.

Ms. VELA ́ZQUEZ. How long have you been in your position?

Mr. OLIVER. Sixteen months.

Ms. VELA ́ZQUEZ. So we are holding this hearing today and you

are telling me this week you spoke to your contracting officer about

practices?

Mr. OLIVER. I have a whole organization of small business, and

the fact is that the individual in charge of small business reports

15

to me; I talk to him several times a week on all sorts of issues and

how to keep small business high. I talk to his people. I go over and

have lunch with his people. I have more contact with them than

I do with anyone else on my staff, because I want to keep them encouraged because theirs is a tough area.

Ms. VELA ́ZQUEZ. I am glad you talked to them.

Mr. OLIVER. But you are talking about one specific contractor,

DST–CE.

Ms. VELA ́

ZQUEZ. I am talking about practices.

Mr. OLIVER. I am telling you how much I pay attention to this

area.

Ms. VELA ́ZQUEZ. As we all know, the Federal Government for

small business participation is 23 percent. Yet the Department of

Defense, by far the largest Federal buyer, has a goal of 20.6 percent. The Department of Defense purchases more than all other

agencies combined.

Would you please explain to me why the Department of Defense

has negotiated a lower goal than the rest of the Federal Government?

Mr. OLIVER. Actually, what happens is it gets set each year.

What you will see, of course, is among other things, that while we

are talking—you are talking primes, and as I said to you, the numbers indicate that there has not been a significant change. Our

number was—we have—we adjust those numbers based on what

the budget is and how many large-ticket items you are going to be

buying, as opposed to those things which will go to small business.

It was 23 percent in 1995 when we had more money, it is 20 percent now. The other thing you have to consider is, it is over 40 percent of the subcontracts are going to small businesses. I don’t think

that is a bad record. And also what I am saying to you is there are

no statistics for——

Ms. VELA ́ZQUEZ. You said 20 percent. You don’t consider 20 percent—when you have the largest budget compared to all the other

agencies combined?

Mr. OLIVER. But I am also buying things that other agencies

aren’t buying that tend to be not small business. It is very difficult—there are lots of subs, for example, in the F–22 and the joint

strike fighter that are small businesses, but there are not a lot of

primes that are in that kind of business, building warships and

tanks, et cetera; whereas in many other agencies, they are not

building big-ticket items, they are not appropriate.

Chairman TALENT. All right. I think this is a good time. We will

break for the vote and then come back for round two.

Mr. OLIVER. Round two is not the right way to refer to this.

[Recess.]

Chairman TALENT. Okay. The Committee will come to order. And

I will recognize the gentlelady from New York.

Ms. VELA ́ZQUEZ. Mr. Oliver, before we went to vote, you maintained that it is big-ticket items that prevent you from achieving

the 23 percent goal. But isn’t it just as plausible that it is all the

bundling that you are doing that is reducing the opportunities for

small businesses? We have a witness—yes, sir.

Mr. OLIVER. Go ahead, ma’am.

16

Ms. VELA ́ZQUEZ. We have a witness coming up on the next panel

who will testify that bundling has a big impact on small business

prime contracting opportunities, so——

Mr. OLIVER. And what I have said to you, I was unable to get

data that said one way or the other and what I was left with was

people who have said, ‘‘This is what we think,’’ and I don’t particularly like that. And I am going to commission, as I said to you, a

study to get some of the data, which I will be happy to share with

the Committee as soon as I get it.

Ms. VELA ́ZQUEZ. Mr. Oliver, I am concerned that over the past

several years, the Department of Defense has been combining its

procurement goal for 8(a) and small disadvantaged businesses into

one goal. Can we be clear that for fiscal year 2000, these goals will

in fact be separate, like they are for every other Federal agency?

Mr. OLIVER. To be honest with you, I have to check what the law

says. We will do whatever the law says.

Ms. VELA ́ZQUEZ. Well, the law says that 8(a) is one and that you

should not combine.

Mr. OLIVER. Let me see those charts. Yes, ma’am. I am going to

follow along.

Ms. VELA ́ZQUEZ. Good.

Mr. OLIVER. Yes, ma’am, and what I think—what I need to do

is check the law, but I think there is a different set of statutes that

applies to us. But in my reporting that my people do and the reports they submit to me, they do break them out. So we can monitor that, but we are going to comply——

Ms. VELA ́ZQUEZ. You are going to comply.

Mr. OLIVER [continuing]. Whatever it is.

Ms. VELA ́ZQUEZ. Because I haven’t seen that law that would

allow the Department of Defense to combine.

Mr. OLIVER. Whatever is the law, we are going to comply.

Ms. VELA ́ZQUEZ. Very good.

Mr. Oliver, as of the third quarter, fiscal quarter of fiscal year

1999, the Department of Defense did 1.5 percent of its procurements with women-owned businesses. It is clear that the Department of Defense is not going to meet its 5 percent goal for this

year.

Can you tell me what the Department of Defense is going to do

differently in fiscal year 2000 than you did in fiscal year 1999 so

that we can increase the number of contracts with women-owned

businesses?

Mr. OLIVER. Yes, ma’am, let me get back to you, please.

[The information may be found in the appendix]

Ms. VELA ́ZQUEZ. Mr. Chairman, Congressman Underwood from

Guam was here and he asked me to ask this question on his behalf.

At the U.S. Navy base in Guam, the SBA had to intercede when

the Navy had established a preconceived notion of small business

participation in a bundled contract for base operating support services at the Navy base; essentially, the Navy has declared that small

businesses will reap only subcontract awards. After intense negotiating, the Navy committed in principle to open both the prime contract to small businesses, and establish some direct small business

set-asides. Out of a possible total contract, a $230 million contract,

$60 million will go to the small businesses as set-asides.

17

How is the Department of Defense ensuring that small businesses will share in prime contracts?

Mr. OLIVER. I think the SBA guidance in which the factors for

evaluating the bids which include what the plan is for the inclusion

of small business as a factor in evaluation, and also in using a fact

of the past performance, a factor which has to do with what that

organization’s performance has been in using small business are

good, safety measures which we are going to use.

Ms. VELA ́ZQUEZ. Thank you, Mr. Chairman.

Chairman TALENT. I will recognize Mrs. Kelly from New York.

Mrs. KELLY. Thank you very much.

Mr. Oliver, this seems a little bit difficult for you to answer some

of the questions we are asking you today. How long have you had

to prepare for this testimony?

Mr. OLIVER. Let’s see when I was in Russia, 10 days is when I

was notified I was going to speak.

Mrs. KELLY. So you have had 10 days?

Mr. OLIVER. Yes, ma’am.

Mrs. KELLY. Okay. Do you feel that has been somewhat of an inhibition on your ability to respond to some of the questions that

the——

Mr. OLIVER. No, ma’am.

Mrs. KELLY. You do not. There are a couple of things I am interested in here. You said you are going to commission a study. Are

you willing to work with us as the Small Business Committee to

let us take a look at the specifications and to select a contractor

to do the study or to let us take a look at the draft statement of

scope of the work and things like that?

Mr. OLIVER. Yes, ma’am. Let me tell you what I will do. I will

let you—I would ask for you to help me with the statement of work

and also to look at specific contractors—or not contractors, at specific contracts to look at. I will select the contractor.

Mrs. KELLY. You will select—will you let us have a look at——

Mr. OLIVER. You bet.

Mrs. KELLY [continuing]. Who is doing that, who is in that running?

Mr. OLIVER. You will understand whose study it is. I will be

happy to.

Mrs. KELLY. I am not asking you to abrogate your responsibility,

but I am asking that this Committee, which is so focused on small

business and has concern for minority businesses and women-own

businesses, in particular, to have a chance to take a look at what

you are doing with this.

Mr. OLIVER. Let us do a couple of things. Let me get the statement of work over to all the Committee members, and I will give

it to the Chairman and ask for you to get back to me in something

like 10 days, and then we will talk about it. And the other part we

will do is, to make sure none of us are surprised, I will hold meetings about every 2 months with the contractors to see how his

progress is going and ask the Committee if they would like to send

staff to listen to that so that we can all be comfortable that what

is going on is professional.

18

Mrs. KELLY. You will let us have a look at the specifications and

perhaps have some—look at the contract, is that what I am hearing

you saying?

Mr. OLIVER. I am going to send it to you, and I would like to get

your comments back in 10 days. And we will resolve them. And I

will—you know, but if we disagree, we will go with my favorite person.

Mrs. KELLY. Being you?

Mr. OLIVER. Yes.

Mrs. KELLY. I just wanted to get that on record.

A couple of things about things that you said I need to understand. One of things you said here in front of us today was that

you were talking about the process of contracting and putting—and

bundling of the contracts. And you said even though contracting,

unbundling the contracts might lower the prices, the process of

putting the thing together is still more convenient on long-term

contracts to bundle.

So basically what I understood you to say is the process takes

precedence over getting the price down in some cases. And I want

you to clarify that; will you please?

Mr. OLIVER. Yes, ma’am, I would be happy to. I don’t think I said

that, and if I did, I misspoke. I think I was responding to the

Chairman—I think the Chairman said that.

Mrs. KELLY. Actually you did, and I copied it down here.

Mr. OLIVER. Then I misspoke. Because what I was trying to say

is, it is not just costs that is important. It is important if you can

get—if you can align yourself with where technology is going, the

scope economics, if you can align yourself with better management,

if you can provide better support to the people, to the field so

that—say, for example, the full operational capability of a particular airplane increases by 15 or 20 percent, you may well want

to do that.

Let me give you an example that I am very familiar with, which

is moving expenses, moving people in the Services. We are deliberately going to spend more money to move the people in the Services because it is one of the great dissatisfactions with military life;

that is, a bundled contract deliberately done and that we know we

are going to spend more money, but we are going to get a much

higher quality level of moving.

Those are deliberate decisions, so you may well do that at some

point. I do not intend to say that I think it is more expensive to

do bundling in each case, because I don’t.

Mrs. KELLY. What you are saying, there are instances where you

have bundled contracts deliberately, and they are more expensive

because you have bundled them?

Mr. OLIVER. And I have gotten one helluva lot better deal.

Mrs. KELLY. How?

Mr. OLIVER. You get much better performance.

Mrs. KELLY. If you are getting better performance, what is the

end yield, is it money, is it time, is it quality, what is the end

yield?

Mr. OLIVER. Well, I think that is the problem with the Committee’s questions, to be with you, and what I have tried to say to you

is there has to be three things that you are worrying about.

19

You are worrying about—you are terribly worried about performance. You may very well spend more money to get better performance for the soldiers, sailors, airmen, and Marines. I mean if the

performance is not good, you very well may spend more money,

more money for that. At the same time, you may be money neutral

but want to get out of the business of managing something so you

can take those soldiers, sailors, airmen and Marines and turn them

into real war fighters instead of people who are doing non-core jobs.

Mrs. KELLY. I am sorry, I still don’t get the answer I am asking

you; and that is when you are saying you are willing to pay a higher cost because of a bundled contract, what is your bottom yield?

Mr. OLIVER. I am willing to pay a higher cost for performance,

into doing that, the decision is that you have to bundle that contract.

Mrs. KELLY. For performance?

Mr. OLIVER. For performance.

Mrs. KELLY. Is that measured in quality? Is that measured in

time?

Mr. OLIVER. Quality, quality.

Mrs. KELLY. Okay.

Mr. OLIVER. That particular one is measured in quality.

Mrs. KELLY. Okay. I really question the efficacy of this, and I

wish you would have given us some supporting facts and figures

on why you feel this is better. You say you talk each week with

your counterparts about these bundled contracts and so on. Apparently, the talk isn’t having a whole lot of a effect on unbundling

some of the contracts and letting some of these smaller contractors

have a shot at some of the contracts. So what else can you do besides talk?

Mr. OLIVER. Ms. Congresswoman, here is the problem, I have

come before you and said that I don’t have data which I am comfortable with that proves that bundling doesn’t have an effect on

small business, except for the general—my look at the general Department of Defense in which I know it, that I know small businesses is continuing to win the same amount of awards.

Mrs. KELLY. But you have said——

Mr. OLIVER. I don’t think you have data that says it is the other

way.

Mrs. KELLY. But you have said, sir, that the big ticket items, it

is just too expensive to include small businesses and, therefore, no

small businesses can be involved.

Mr. OLIVER. No, I did not say that.

Mrs. KELLY. Again——

Mr. OLIVER. I didn’t say that.

Mrs. KELLY [continuing]. I wrote this down when you said this.

Mr. OLIVER. This may be a failure of the paper, because what I

said, I hope, was in that case it is not going to be the prime. The

absolute is going to be the sub. There are going to be lots of subs.

But you would not expect a small business to be the prime in that

case. And so, therefore, if you are only measuring it by primes in

cases where you buy lots of big ticket items, you are going to have

fewer subs— or small businesses as primes. You are going to have

lots of small businesses involved in subcontracting.

20

Mrs. KELLY. Okay. Mr. Oliver, I think we have all—we are all

kind of going at the same thing here. I think you can get an understanding of what we are trying to ask you. I hope you will be able

to give us some clear answers. Thank you.

Chairman TALENT. All right. In view of the large number of

Members who want to ask Mr. Oliver questions and the fact that

we do have another panel, I am going to put the lights on. And so

we will try and stick to the 5-minute rule if we can, but I want

to recognize Mrs. Napolitano.

Ms. NAPOLITANO. Thank you, Mr. Chair. And I just briefly discussed this with you in the hallway, Mr. Oliver, is the Marine

Corps bundling the food service contracts, they are going to consolidate 15 contracts into two regional cook and chill contracts, and

they relied on a study performed by large business as justification

for this bundling. But according to the small business owners being

affected, this bundling—and he testified, I believe, at our last hearing in August—the costs to the government for this bundling will

cost more to the administration for the 15 original contracts.

I am hoping that this is going to be something that I can get

from you, is the assurance that you would investigate and reevaluate the bundling and effect on this particular aspect. Part of it—

because I did visit this particular business. I flew in and went in

visually, and spoke to the owners and it is a very lean operation.

I mean without a doubt, I mean I thought it was one of my little

old businesses from 20 years ago, that is how lean they are.

And one of the things they brought to my attention is that the

quality in the new contract was not the same as called for in your

contract. That means our servicemen are not going to get the top

quality meat, the top quality beef, chicken, whatever. And I am

concerned, because we have them primary in our mind to do the

service and be sure that they are well fed. Well, part of this is

something that I am concerned.

Then some of the ones that are bidding on it, one is a foreign

contractor. So I am going to take very good exception to this particular one, and I certainly would look forward to working with you

on this.

And there is many other questions that—I read a lot of the report last night, and it really begs a lot of questions. And I will go

because I am on 5 minutes, I would yield to the next speaker, and

I am sure we will try and have another round. Thank you, Mr.

Speaker.

Chairman TALENT. We will stick to 5 minutes if I can.

Mr. OLIVER. I promise the Congresswoman I will look at that and

get back to her.

Chairman TALENT. This is cook and chill for these men and

women?

Ms. NAPOLITANO. Yes.

Chairman TALENT. I hope we don’t try and justify this one on the

basis of quality. That is airplane food, Mr. Oliver, I mean not cook

and chill.

Ms. VELA ́ZQUEZ. Not quality, not quality; security, security reasons.

Chairman TALENT. I should tell the Members Mr. Abercrombie

hasn’t come back. Mr. Oliver is our friend, so we should be grateful

21

that he is here. And I do appreciate the fact that you are willing

to take another look at all of this and that we have made the point

to you that you——

Mr. OLIVER. Yes, sir.

Chairman TALENT. Our next questioner is Mr. Hinojosa.

Mr. HINOJOSA. Thank you, Mr. Chairman.

Mr. Oliver, thank you for coming to meet with us. I want to piggyback on Congresswoman Napolitano’s questioning of food products. But before I do, I also want to share and associate myself

with the frustration that Congresswoman Kelly expressed in that

we just don’t feel that we are getting real answers that we can go

back to our constituents and discuss that we have had this meeting

and we found some solutions.

Honestly, I am very disappointed in what I have heard in this

first hour of this discussion. I know that in the Department of Defense different Secretaries of Army and other Forces have told us

that the goal is 5 percent, to buy 5 percent from small businesses.

And, actually, I think that the performance has been less than 2

percent on goods and services. You said that you wanted to talk

about big ticket items, that there is no data, you said, using your

words that would show that small businesses have negatively been

impacted—let me say that the reality is that in the area of goods

and services, I am going to divide my questions and stay within the

5 minutes on to big ticket items on food.

I have experience on that, so I will say that on food products

such as beef, pork, chicken and so forth, in the categories of raw

frozen meat products, in the area of cooked frozen products, charbroiled frozen ready, fully cooked frozen, in those areas are now

going to prime vendors, large national distributors. An example of

that would be my friend Ed Cisco, and what they have done is they

get these contracts and the interpretation of the law has been by

the Department of Defense that you can bundle and that you can

combine contracts for transportation, for janitorial supplies and

janitorial services, and throw them in with food products, and thus

show that you were meeting the 30 percent objective that was set

out by the Department of Defense to satisfy the small business

Committee.

And that doesn’t work, that doesn’t work, because you have

wiped out where we used to have over 30 small businesses bidding

on these categories that I gave you, they have just been knocked

out, because they cannot bid directly to you, to the Department of

Defense. They now have to give bids to Cisco or any national distributor and the way that it is working now, you have just done

away with the small businesses that we used to have such a hard

time creating because it is capital intensive; and, therefore, by discontinuing to buy from them and take their bids directly, they are

not getting it into the big distributors.

Also you have done away with using domestic beef, pork and

chicken, because a lot of those products are now imported, and they

are being sold as just commercial product to those distributors; and

thus our farmers and ranchers are negatively impacted because we

are not creating the demand that we once had. And if our farmers

and ranchers are complaining about commodity prices plummeting

because of innocent demand dropping and because our Department

22

of Defense is not using our products, then I think that this is proof

that it is negatively, I am talking of bundling and prime vendors,

is negatively impacting, not only our small businesses, but our

ranchers who produce the chickens and produce the pork and

produce the beef.

All of this to say that I didn’t like what you said that we did not

have data to show that small businesses are negatively impacted;

that is not our job, that is your job. Our job is to listen to our constituents who hire 10 people or 100 or 300 or more; and if they are

telling us that they lost the Department of Defense contracts and

friends like Solomon Ortiz, who is the ranking member of Armed

Forces and Silvestre Reyes from El Paso also on Armed Forces tell

us that one of the biggest concerns that they hear on their subcommittees is the loss of minorities supplying the military, then

there must be some truth to what we are hearing in Oklahoma and

in Texas that our small businesses are no longer supplying Department of Defense.

There has to be truth to what we have heard these last 3 years.

I would like to hear from you what you are going to do about it.

Mr. OLIVER. I am going to get the data. I am going to get the

data and determine facts. I am saying to you that when I looked

at this in the last 10 days, I do not think there is adequate data

at the moment.

Mr. HINOJOSA. I agree, there is no accurate data.

Mr. OLIVER. I will get it.

Mr. HINOJOSA. Can we get it by the spring?

Mr. OLIVER. That is fully my intention. And as I said, I will do

it with you. In other words, we will work on the statement of work

together. I would like you to have some people that participate in

our intermittent—when we get the data as it goes intermittent. We

ought to do this together, because otherwise I will just bring a report up here, and you will yell at me, and then that will hurt my

feelings. So let us do it together and be comfortable with it.

Mr. HINOJOSA. I am willing to do it together. And I am willing

to lower my volume. And I simply want to show you that after 3

years of listening to constituents who say you guys come down here

and you call these meetings of business, small business people, and

we tell you, and you do nothing. It is just a bunch of political rhetoric that you all come up here with.

And so I am telling you, I didn’t come to Congress to give political rhetoric to small business people. I came to try to find solutions that are going to create jobs.

Mr. OLIVER. And I didn’t come into government to not do anything, so it is a nice match.

Mr. HINOJOSA. Good. I look forward to working with you, Mr.

Chairman, and with the Ranking Member and, of course, with Mr.

Oliver. Thank you.

Chairman TALENT. All right. I am going to recognize next on the

list in the Democratic side is Ms. Christian-Christensen.

Ms. CHRISTENSEN. Thank you, Mr. Chairman, and thank you for

this very, very important hearing. I have a few questions.

As far as women, minorities, and other disadvantaged businesses, the process of bundling leaves much more of the responsibility for other subcontracting to the prime contractor; and, in the

23

past, we as the Federal Government have had to intervene on behalf of women-owned, minority, and disadvantaged businesses.

How has contract bundling in your estimation—I don’t know if you

were able to answer in the last questioning, how has it really affected the minority small businesses? Have they increased or decreased? Do you have numbers?

Mr. OLIVER. Let me say this again. I am really a fan of real data.

And, for example—let me give you an example. There is an effort

going forward in the Department of Defense to use credit cards for

minor purchases. It seems to me that there is a logical question

that if you use credit cards and you allow the people to use credit

cards, there is a question about whether or not that impacts small

businesses as that credit card limit rises.

Right now it is $2500. There are a whole bunch of people who say we want to be $10,000 and above that. I won’t let that happen,

because nobody’s produced the data to show me what has happened

with respect to small businesses, you know, before we started and

all that.

And I have got all of these companies that are supposedly producing all this—have data and all of that, and they can’t tell me

where the impact is, but you guys have to pass it. But I won’t bring

that forward, because there is no data that enables me to come testify to you and say I am comfortable with it.

I would like to say this again. I do not think there is sufficient

data to say something either way. There are a couple of studies

that talk very nicely about why bundling could be good and can be

good in some circumstances. And I think we have to be careful

about rejecting change in all areas because as I talked about in

some technology areas, you may want to do that. At the same time

there is a balance that we are interested in maintaining, it has to

do with society and it has to do with other things that we believe

in.

I am not comfortable with this data. I will work to get some,

Congresswoman.

Ms. CHRISTENSEN. Okay. My next question. I am also a member

of the Travel and Tourism Caucus Steering Committee. And we are

going to hear testimony from the Society of Travel Agents in Government. But while I have you here, I would like to ask you a question about some of the issues that they are concerned about.

It appears that what the Department of Defense has done has

made it just about impossible for small businesses to participate

because most travel agencies are small and, on the other hand, it

may have made it impossible for even some of the larger travel

agencies to compete, because they already have very large contracts to manage. And then looking through that testimony also,

the official travel is large in and of itself, but then you have attached leisure travel to those contracts making them more impossible.

How do you foresee fulfilling the responsibility of the Department

of Defense to small businesses in the travel industry under those

circumstances?

Mr. OLIVER. Let me get back to you, Congresswoman, because I

was looking at that this week, and I am not comfortable that I fully

understand all of the ramifications. I will get back to you on that.

24

[The information may be found in the appendix.]

Ms. CHRISTENSEN. Okay. I think my other questions would probably be repetitive, so I am going to move on, Mr. Chairman, and

I will have some of my other colleagues to ask questions.

Mrs. KELLY [presiding]. Next I would like to call on Mr. Manzullo.

Mr. MANZULLO. Thank you. I just have a couple of questions.

And I am sorry I didn’t have the opportunity to listen to your testimony, though I have read most of it while I have been waiting

here.

My question concerns itself with, how you are going to do this

study. I mean who is going to be hired? How are we going to have

people who have been aggrieved who have contacted us involved,

and who is chosen to do this study? Is it going to be a think tank

that doesn’t know what small businesses are about? Can you give

us some guidelines that you are thinking about?

Mr. OLIVER. Yes, sir. Yes, sir. What I said is that I would get

the draft statement of work over to the Chairman and each member of the Committee today or by the end of this week. And I would

like all of you to have your staffs take a look at this within the

next 10 days, and then we will talk about it then. In other words

I would like to do this together. I mean it is important, I don’t

want you to think——

Mr. MANZULLO. You want our input on how to do the study?

Mr. OLIVER. Yeah, I would like your input on how to do the

study. I would like your input—I would like to get some of the people who have come to you and feel they have been aggrieved.

Ms. VELA ́ZQUEZ. Mr. Manzullo, would you yield?

Mr. MANZULLO. Of course.

Ms. VELA ́

ZQUEZ. I would just like to suggest to the gentlemen

that maybe he should be working with the Office of Advocacy so

that they could help identify an independent firm to conduct the

study. That is a suggestion.

Mr. OLIVER. Yes, ma’am. I will take that. I mean, to be honest

with you, what I said was that I worked the Committee completely

I think, and I will take everything on. I want to have somebody

that I think is competent do the study. And I know a lot about this,

okay? So what happens is that is the only reservation I said is if

we end up with disagreements over who is going to do the study,

I am going to choose it. Because I want to have somebody who I

think is competent.

But I really like to work with it and rather—and in addition,

once we get it established, what I would like to do is I would like

to hold—I am going to hold meetings every 2 weeks—every couple

of months and say what are you doing and how are you doing, because if you care about a study, that is what you do, and you don’t

wait until the end and the guy delivers you a piece of paper that

you think they missed the whole point.

I will invite your staffs to be part of that. I am willing to be completely cooperative, I know this is surprising, Congressman Manzullo.

Mr. MANZULLO. We still vote on your appropriations bill; I would

remind you.

25

Mr. OLIVER. I noticed that, sir, that is the only reason I am here.

I am just saying let us make this—let us do this together.

Mr. MANZULLO. We are very much concerned, because the little

business people are going to get squashed. You are going to hear

from four groups here today, what I would like to see—in addition,

I would like to see not only the people that you propose, I want to

know their background; I want to know what studies in the past

they have conducted; I want to know if they worked with small

businesses; I want to know if the people who are going to do the

study have any small business background themselves.

Because small business people—I was raised in small business.

We think differently than people who work in government, including myself, we think differently than big people. That is just the

way we are. We are a very unusual breed of people and insist

that—I mean, we may come down to the fact that you may not

agree on the people to do the study, we will have another hearing.

And at that time, we will have some small business people have

the opportunity to have input on why they think that the people

that you want to choose may not be the particular people who—

for example, maybe somebody like the National Federation of Independent Businesses might be good people to contract with. They do

something like that, because they know small business people.

Mr. OLIVER. Congressman, I am absolutely open and willing to

discuss this period.

Mr. MANZULLO. I appreciate that.

Mr. OLIVER. If you don’t like it, you can call me back for another

hearing, because you guys are in charge.

Mr. MANZULLO. Thank you, I appreciate that. That is all I have.

Mrs. KELLY. Thank you, Mr. Manzullo.

Mr. Phelps.

Mr. PHELPS. Thank you, Madam Chairman. I just have really a

general question, and this can’t be a new thing that has been

brought to your attention, the idea and the mentality of womenowned and minority-owned businesses getting a piece of the action

of the Defense contracts.

So I guess my question is, none of this came up in the August

hearing. Do you have any policies set forth for your people to say,

your people to say I would like for us to meet this goal, that goal,

to make sure we are active? And I guess in that I would follow up

to Nydia’s questions and concerned working with the Advocacy Office and people in small business in every aspect to try to improve

the atmosphere.

You would think you would want to come before us, and say I

have got good news to report to you before you ask the questions

that are haunting us, this is what we would like to say we have

improved on; is that coming about?

Mr. OLIVER. Yes, sir. We have policies, which I think are very explicit about the importance of small business, minority-owned business signed by the Deputy Secretary of Defense.

Mr. PHELPS. Are these new policies, or have they always been

there?

Mr. OLIVER. They have been there for years. I think the first one,

the one that is currently—anyway they have been there for years.

We are tracking to—I get reports like this every quarter about how

26

we are doing with respect to our goals. I talk—how often do I talk

to you, Bob? I talk to Bob 2 or 3 times a week. I know where we

are in the goals, that is the reason I said at the beginning, I don’t

have data on how bundling is affecting specific things, but I do

have data on the overall picture, and in the overall picture there

has been no significant change since bundling started, okay?

And we have met our goals in most years, eight out of the last

ten, the goals have essentially been increasing. And I think the

amount that is going to—and in my indications statistically is an

amount that is going to small business is increasing over the years.

I think there is a good story there, but I am not sure that is the

issue of this hearing. But I want to tell you that I understand there

is a good story.

Mr. PHELPS. I understand. It is my understanding, of course I am

not a new member, that I guess this issue is somewhat focused, but

it involves many things that are not described as probably the

agenda.

Mr. OLIVER. Yes, sir.

Mr. PHELPS. I am just interested in knowing if this has been

such a policy that has been in the record, and it is part of the format and it is—and you are pushing to get these goals met, if they

haven’t been met, someone needs to answer why and then maybe

we can play a part, instead of blaming everybody, we are just trying to help.

Mr. OLIVER. Yes, sir. And——

Mr. PHELPS. But I know the data is maybe the key.

Mr. OLIVER. We have not met our goals in 2 years, I mean I

know——

Mr. PHELPS. Has anyone stepped forward and said perhaps this

is a reason why or why not?

Mr. OLIVER. Not meeting the goals in 2 years out of 17 to meet?

We have met our goals in 15 out of 17 years and every time you

meet the goal, what you tend to do is ratchet the goal up because

this is an important issue.

Mr. PHELPS. Raises the standard, I understand.

Mr. OLIVER. Yes. So we met our goal in 15 out of 17 years, what

I am saying is——

Mr. PHELPS. But the goal of minority-owned business is my specific question. You are saying you met that goal and you are pretty

much satisfied; is that what you are saying?

Mr. OLIVER. No, no, I am saying that——

Mr. PHELPS. You made the goals specifically.

Mr. OLIVER. I will tell you what I was thinking about with this

hearing. I may have interrupted. Instead of coming forward and

giving you a general thing that says—in fact, this is what my staff

said, they said, look, what you go over and do is, you say, look, we

met the goals 8 of the last 10, 15 out of the last 17, et cetera, et

cetera.

And you can talk about the changes in government procurement

and the changes and the money, where it goes to, I don’t think that

is the issue. This is me. I think your issue is what does bundling

have to do with what is going to happen to small business?

In other words, you are thinking about, you are doing in some

limited cases bundling of contracts. What is the impact of that on

27

small business, and what do you expect it to be? Do you understand what I am saying? I am not giving you platitudes in how we

are meeting this in 15 out of the 17, 8 out of the last 10. I am trying to address what I think is the Committee’s questions.

Mr. PHELPS. For a new Member, maybe I am out of place, you

keep referring to bundling as if it is already understood what it is,

and then part of the questions we have is can you define bundling.

Mr. OLIVER. Yes, sir. There is a very specific definition of bundling which is in the legislation or the SBA regulations that says

it is two or more contracts of $10 million which are put together,

which are currently out as smaller contracts. I think there is pretty

good guidance, which is good, because it means I have got thousands of people in the field that have a feel for what bundling is

and therefore then what small business restrictions they have to

make.

Mr. PHELPS. Thank you very much, sir.

Mrs. KELLY. Thank you, Mr. Phelps.

Mr. Davis.

Mr. DAVIS. Thank you very much, Madam Chairman.

Mr. Oliver, we were talking about the Office of Advocacy a moment ago. It is my understanding that they have developed statistics which show that for every $1 of bundling that small businesses

lose $1, but every time a contract is bundled, the dollar amount is

just the reverse for small business opportunity and small business

development. How would you respond to that?

Mr. OLIVER. Congressman, I will get that data and review, and

I will give you an answer. I need to review it.

[The information may be found in the appendix.]

Mr. DAVIS. Just a moment ago when there was a discussion relative to the meeting of goals, which goals were you talking about?

Mr. OLIVER. I was talking about small business prime contract.

As you know, there are a whole bunch of goals. I was just looking

down at small business primes.

Mr. DAVIS. So you are saying that DOD has been meeting those

rather consistently?

Mr. OLIVER. Yes, sir. Absolutely.

Mr. DAVIS. As an example of what is being met, having been met,

would you share—let us take it year to year.

Mr. OLIVER. Yes, let us take 1997, the goal was that you have—

21.7 percent of the primes would go to small businesses, we were

at 22.9 percent. Let me give you a year we don’t make it. 1998, the

goal was 21 percent, which is $23 billion and—or the goal was 22

percent, we made 21 percent. Eleven months this year, we are at

19.9 and the goal is 20.6. And I don’t know whether we are going

to make it. But I mean that is an example what I was looking at.

Ms. VELA ́ZQUEZ. Mr. Davis?

Mr. DAVIS. Yes.

Ms. VELA ́ZQUEZ. Would the gentleman yield? But he doesn’t say

to you that the goal for every other Federal agency has been set

at 23 percent, even though they have the largest budget of all the

Federal agencies combined.

Mr. DAVIS. I think—and that comes back to actually——

Mr. OLIVER. What you are buying.

28

Mr. DAVIS [continuing]. What you are buying. And the question

is, is there anything about the Department of Defense in terms of

structure or in terms of what it uses that makes it more difficult

to use small minority-owned business in procurement? Is it more

difficult for Defense to do it than somebody else?

Mr. OLIVER. I don’t know if it is more difficult, because we have

really good contracting officers, and whether or not members of the

Committee believe this, they really are pure of heart of people, I

mean that are interested in doing good government. And so the

people I have seen work really, really hard to do what roles are set

down by this body that are of the interests to the country.

Now with respect to—there are some questions, and I haven’t explained it well and I need to try better, but what happens is if you

are buying services or if you are buying things for the General

Services Administration that are relatively small items, and you

are buying aircraft carriers, there is a difference in the number of

small businesses that can be primes.

And I am telling you that we do—out of the money that we spend, approximately $60 billion a year goes to what I was referring to as big ticket items, really complex items that take a great

deal of experience, a great deal of experience, that is more difficult

for a small business to be prime on it, and at the same time when

I look at the numbers, I have got small businesses as subs for more

than 40 percent of what we are doing. And I don’t know if it is the

right number or not, but it hasn’t decreased. So I think there are

some special things about the Department of Defense.

Mr. DAVIS. Has the Department given any thought to looking at

other kinds of items and perhaps targeting or skewing those numbers towards small business?

Mr. OLIVER. Those numbers towards that.

Mr. DAVIS. Yes.

Mr. OLIVER. Yes, sir. And we have different goals in different

areas. And I will have to get them to you, but I know it is going

on, because in the construction business, for example, this is an

area specifically that you can go after.

Mr. DAVIS. Yes.

Mr. OLIVER. I will get back to you.

[The information may be found in the appendix.]

Mr. DAVIS. I appreciate that, because it seems to me there would

be just the opportunity to try and compensate or make up for the

inability to compete as effectively on the big ticket items that you

might make up on some others.

Mr. OLIVER. Yes, sir.

Mr. DAVIS. Thank you very much.

Mr. OLIVER. That is a good point.

Mrs. KELLY. Ms. Millender-McDonald.

Ms. MILLENDER-MCDONALD. Thank you, Madam Chair. Good

morning, Mr. Oliver. It is good to see you here. I hear you have

been in your position just for 18 months; am I correct in that?

Mr. OLIVER. Eighteen months, June of last year, whatever that

works out.

Ms. MILLENDER-MCDONALD. That is about 18 months. Madam

Chair, I do have a statement for the record. But I would just like

to just read excerpts from that statement, Mr. Oliver. And it states

29

here that the proposed Air Force bundle known as the Flexibility

Acquisition and Sustainment Tool which is FAST, bundle would

consolidate thousands of contract requirements into as few as three

prime contracts, for three out of five Air Force Bases. The estimated value of this bundle ranges from a high of $18 billion over

15 years to $3 billion over 5 years.

And this is a type of bundling because of its size that would exclude small business from prime contract opportunities. Given that

and given my position as Ranking Member on this Committee’s empowerment subcommittee, I am determined to ensure that small

businesses are empowered.

Now from that premise, we recognize that small businesses will

be the engine that drives the economy in the year 2000. I have

voted for the DOD budget because of the jobs that are in my district from the Defense budget. But by the year 2000 small businesses will be creating more of those jobs.

Given all of this, I have now read the GAO report that indicates

that you were asked, or the DOD, you were not there, that is why

I asked if you were there, but I need you to follow up on this. April

of 1994, the GAO report said that Congress to the DOD, in terms

of your contracting, that Congress had expressed concerns that

small businesses are losing opportunities to contract with the Federal Government because contracting agencies are packaging contract requirements into acquisitions that effectively may preclude

small businesses. This practice is known as contract bundling.

It goes on to say that DOD advised us it could not provide any

historical data from which we could have accessed or assessed, I

am sorry, the extent and impact of bundling. That was 1994.

Someone has done some type of empirical data, hopefully, to suggest why contract bundling has not been effective for DOD. This is

1994.

I would suggest that you go back and look at whomever was

there, because this GAO report suggests that someone should have

been looking into the impact, the negative impact of bundling as

it relates to small businesses in DOD.

I further call your attention to the fact that DOD officials and

others believe bundling could have a negative impact on small businesses that want to compete for government contracts. I am just

reading excerpts from this, because it is important that you understand this issue has been raised by a GAO report to DOD. And

there has to be some empirical data someplace that we can draw

from to see why is it that if your policy continues to be a bundling

policy, then we need to go back and revisit that, because it is important that, again, small businesses get those contracts from

DOD; or I will have to reassess my position when it comes time to

being on the floor.

Now, the other thing I want to know is that if you are looking

at the reports from your contracting officers and you are evaluating

that, do you not see that disparity between those contracts vis-avis prime, sub, small businesses, large contractors; and if you

haven’t, I really firmly suggest that you do that and report back

to this Member. And I am sure all other Members want it, because

we all have small businesses, but it is important that you go back

and see why is it that this was raised in the GAO report in 1994,

30

and yet you are saying that you do not have—I am thinking I hear

you saying—empirical data. Thank you, Madam Chair.

Mr. OLIVER. Congresswoman, there are a couple of things you

might want to have your staff look into. One is with respect to

FAST, the people told me that they are specifically including three

contracts and a contract which has to be awarded to a small business association. One of the primes has to be a small business,

okay?

Ms. MILLENDER-MCDONALD. Okay.

Mr. OLIVER. And secondly, the other criteria they are looking at

very carefully——

Ms. MILLENDER-MCDONALD. One of the three.

Mr. OLIVER. I think it is three in one. And I think they are going

to—they intend to award 4 contracts, one has to be a small contract.

Ms. MILLENDER-MCDONALD. One in four, okay.

Mr. OLIVER. The other part is they have—they are looking at

very specific criteria to insist that the other three—the three

primes are not small businesses, have significant small business inclusion. So somebody—there may be a data flaw there.

Ms. MILLENDER-MCDONALD. Would you double-check that and

then get back to me on that?

Mr. OLIVER. Yes, ma’am I am.

[The information may be found in the appendix]

Ms. MILLENDER-MCDONALD. I am also understanding your prime

gets paid within 10 days, and your subs that are related to the

primes have a much longer wait for their money, which is absolutely unacceptable.

Mr. OLIVER. It is a separate issue. And I will take it Ms. Congresswoman. As you know it is a separate issue, but I will get back

to you.

Ms. MILLENDER-MCDONALD. Please do.

[The information may be found in the appendix.]

Mr. OLIVER. Let me—there is another—something you said

and—anyway, if my staff—I mean all the people who work this

work for Jack Gansler and me, they have been unable in 10 days

to locate any data. I don’t think the data exists.

Ms. MILLENDER-MCDONALD. Someone has just given you a blue

note.

Mr. OLIVER. I will read it to you verbatim just to show how much

I share with the Committee. I hope it doesn’t say anything about

my laundry. All 8(a) contracts will remain. What he is trying to tell

me is that the 8(a) contracts—that currently all the stuff that

FAST is going to do with this, the 8(a)s are going to be exempted

from it. Do you understand what I mean? They are not going to be

bound up in the bundles that is besides the point.

Ms. MILLENDER-MCDONALD. That is a different program altogether?

Mr. OLIVER. Yes, ma’am. We will get back to you.

Ms. MILLENDER-MCDONALD. I understand that.

Mr. OLIVER. What I am pledging is to go out and get data in cooperation with the Committee so the Committee can see all of this.

And we will determine that. And that is it.

31

Ms. MILLENDER-MCDONALD. All I am saying is, sir, we need to

have you go back and look at this 1994 report as to why data was

not collected at that time, given the question raised on the GAO

report. Thank you.

Mr. OLIVER. Yes, ma’am.

Mrs. KELLY. Thank you, Ms. Millender-McDonald.

Ms. MILLENDER-MCDONALD. Thank you.

Chairman TALENT. Mr. Oliver, I just want to ask two quick questions here. I would like to know what effect, what the effect of this

change will be on the small business primes? How many of them

are likely to be wiped out?

And the other thing is that they may be able to bid on—the

small businesses may be in the initial contract, but when that contract then is reupped, they are going to be out.

Mr. OLIVER. Yes.

Mrs. KELLY. So we want to make sure that doesn’t happen, and

I want to go on record as saying that.

And now I am going to call on Ms. Tubbs Jones so that she can

quickly ask some questions here.

Ms. JONES. So you won’t have to be here after the break.

Mr. OLIVER. Yes, ma’am.

Ms. JONES. Mr. Oliver, I am reading from your statement on

page 6, and it says, in the DTS–CE program for example we were

unable to award prime contracts to small business. We required

the successful contractors to commit a 20 percent business subcontracting goal.

My question is, how did they do?

Mr. OLIVER. I will find out, ma’am.

[The information may be found in the appendix.]

Ms. JONES. Okay. Secondly, I keep hearing you say that we can

continue to meet 20, 21 percent with small businesses. My question

is, in light of the fact that we are in a bull economy and the economy is supposed to be doing so well, why would it not be that you

are exceeding the 20, 21 percent for small business so that small

business enjoys in the fruitful—in the fruit of this great booming

economy? Because what it would suggest to me if you are still at

20—at that level, that small business may not be really——

Mr. OLIVER. My economy isn’t increasing. My economy is dependent upon you guys completely, and you guys are reducing my economy.

Ms. JONES. Not you guys, because I have only been here 11

months, so it is not me yet, but if you don’t continue to deal with

small business, I will move to reduce it.

Mr. OLIVER. You will help to reduce that.

Ms. JONES. Yes, sir. Thank you. But I want to associate myself

with the comments of my other colleagues, and only because we are

short of time, but it is clear to me that we need to be sure and understand the impact that bundling has on small business and for

me particularly minority and women businesses and to understand

if it is not doing what we need it to do, then we need to figure out

bundling is not what government needs to do.

I would like that to be my statement for the record. I am done.

Mrs. KELLY. Would you like me to hold the hearing open so you

can continue?

32

Ms. JONES. No, I don’t want to be accused of that. No, no, I associate myself with the rest of my colleagues.

Mrs. KELLY. Mr. Oliver, I am going to hold the hearing record

open for a certain period of time because there are written questions and there are people who were not able to be here to ask

their questions, so you should expect that.

At this time I am going to—we are going to adjourn just simply

to go and vote for a certain space of time and then we will be back.

Ten, 15 minutes. When we come back, I am going to impanel the

second panel.

[Recess.]

Chairman TALENT. All right. If the witnesses for the second

panel will come forward, please, we will get that part of the hearing going. And I want to thank these witnesses, many of whom

came a distance for being willing to do that. When we get to—we

can turn that down when we get—when we need it I think.

Our first witness on the second panel is Mr. Paul Murphy, who

is the President of Eagle Eye Publishers of Fairfax, Virginia. We

will have members of the Committee coming back in, but I want

to get going because we are a little behind time, Mr. Murphy.

STATEMENT OF PAUL MURPHY, PRESIDENT EAGLE EYE

PUBLISHERS, INC.

Mr. MURPHY. Good morning, Mr. Talent, members of the House

Committee on Small Business, thank you for the opportunity to

testify today about the impacts of contract bundling. As you may

be aware, Eagle Eye is currently under contract with the Office of

Advocacy at the U.S. Small Business Administration to update our

1997 study about the impacts of contract bundling on small businesses.

Our new study is in the final stages of completion. And I am

sharing with you today several of our key findings that will be incorporated into the final analysis, and the final report should be

available later this month.

According to our latest figures, contract consolidation in general

and bundling in particular are at their highest levels since the

start of year-by-year measures in fiscal 1992. The share of all contracts that are bundled reached a new high of 12.9 percent in fiscal

1998, up from 11.6 percent in 1992.

The annual share of bundled contracts bottomed out in fiscal

1995 at 10 percent and has risen steadily since. I reference table

1 at the back of the testimony there. The increasing tendency towards bundled contracts has occurred during a period of overall

contract consolidation. Since fiscal 1992, accounts of prime contracts valued at least $25,000 have declined at least 16 percent

from 200,198 to 167,255 in fiscal 1998.

Total prime contract dollars remained a relatively stable $184

billion in fiscal 1998 leading to a growth in average contract size

from $915,000 to $1.1 million. Although the number of large contracts valued at least a million dollars declined with the overall decrease in the number of contracts, the share of large contracts; that

is, contracts greater than $1 million grew from 18 to 21 percent.

At the same time, the share of small contracts valued less than $1

million dropped from 80 to 79 percent.

33

During this 10-year period, the average size of a large contract

became smaller, while the average size of a smaller contract became larger. Now as the average prime contract grew in size, the

number of individual contractors as measured by unique DUNS

numbers shrank 16 percent from 83,915 in fiscal 1992 to 70,755 in

fiscal 1998. In fiscal 1992, small businesses represented 69 percent

of all contractors but constituted only 66 percent by fiscal 1998.

So in other words, our data show that larger and larger contracts

are being awarded to a shrinking number of prime contractors, a

growing percentage of which are large businesses.

Let me talk a little bit about our methodology in analyzing bundled contracts. Our study captures only a portion of the bundling

that actually occurs. And there are a number of reasons for this.

The first has to do with how we define a bundled contract. As we

did in our first analysis, Eagle Eye still considers as bundled those

contracts exhibiting dissimilar standard industrial classification or

SIC codes, contract type, and place of performance codes.

Differing product service codes, another market indicator, are

also a potential sign of bundling as they would show differences in

the type of work being performed on a contract, similar to differences in SIC codes.

Chairman TALENT. Mr. Murphy, let me ask you a question to

clarify this section of it. So you only consider contracts as bundled

if the bids that are put together have dissimilar SIC codes?

Mr. MURPHY. Yes.

Chairman TALENT. So they are different kinds of work?

Mr. MURPHY. Yes.

Chairman TALENT. I mean I don’t understand the logic of that,

because let us take the travel agent-type of contracts, they wouldn’t

have dissimilar SIC codes, but if they put together all the different

travel agent bids for several bases, that certainly is a bundle isn’t

it? Or would they have different SIC codes?

Mr. MURPHY. You anticipate my third paragraph there.

Chairman TALENT. Okay, all right. Go ahead, then I will probably ask about that later then.

Mr. MURPHY. Okay. Differing product service codes are a potential indicator of bundling as they would show differences in the

type of work being performed on a contract similar to differences

in SIC codes as we said. However, we found many differences in

PSCs to be spurious as a result of changes in the PSC coding system over time. Also some differences in PSCs are subtle and need

further study before we treat them as indicators of bundling.

For instance, I am thinking there in terms of R&D codes which

show different stages of R&D which can sometimes be very subtle

differences and we didn’t necessarily think that was an indication

of bundling. Had we included the 72,749 contracts fiscal 1989 to

1998 that exhibited differences in PSCs in our assessment of bundling, the bundled contracts share we are measuring likely would

have jumped to well over 20 percent a year.

A second reason our measure of bundling is understated is that

in this analysis, we altered our methodology to include a 4–year

lookback period in determining instances of bundling on each contract. In our year-by-year measure of bundling that is fiscal 1992,

1993, 1994 we began in fiscal 1992, in our year-by-year measure,

34

we flag a contract as being bundled only if it exhibits differences

in SIC, contract type and place of performance code up to and including the year being measured.

This controls for the tendency of older contracts to show increased signs of bundling over time. Am I——

Chairman TALENT. Now, you go ahead.

Mr. MURPHY [continuing]. To rush? This controls for the tendency of older contracts to show increased signs of bundling over

time which has the effect of boosting bundled contract rates in the

later years of the analysis. We estimate as much as 1/3 of all bundling that eventually occurs over the life of longer contracts is

missed using this lookback strategy.

A third reason the study understates bundling is that, by definition, a bundled contract requires a modification. If a contract shows

no mods in the database; that is, only one action, then it cannot

be considered bundled.

A fourth source of understatement is the fact that bundling, and

here is your point, Mr. Talent, is the fact that bundling can occur

within the same SIC contract type and place performance codes. If

modifications occur on a contract that show no differences in these

codes, then again the contract cannot be considered bundled according to our methodology.

Still another source of understatement is that our measure relies

on contract officers who are willing to go to the trouble of reclassifying contracts as the work performed under a contract changes

over the contract’s life. Given the increased workload COs must

perform, we must assume that many bundled actions go undetected

because COs are simply trying to push work off their desk as

quickly as possible.

Finally our bundled contract measure is understated because our

methodology only captures 62 percent of all dollars on contracts

worth at least a billion dollars. Most people would agree that contracts this large are by definition bundled.

Distribution of bundled distributions. Bundled contracts are distributed disproportionately to large businesses. Our data show that

between fiscal 1992 and 1998 small businesses received a total of

784,427 contracts or 62 percent of all prime contracts awarded during this period. However, small businesses receive only 53 percent

of the bundled contracts. In terms of dollars, the $310 billion small

businesses received in the 10–year period constituted 17 percent of

all prime contract dollars, yet their $106 billion share of bundled

contracts constituted only 10.8 percent of all bundled dollars. That

is referenced in table 3.

So in conclusion, contract bundling and contract consolidation

are occurring. And it is working to the detriment of the small Federal contractors. Average contract sizes and rates of contract bundling are at their highest levels since fiscal 1992, having grown

steadily since the mid–1990s.

The trend toward contract consolidation benefits large businesses

at the expense of small businesses, because large firms are better

able to position themselves as recipients of contracts of increasing

size and complexity. Overall declines in the numbers of small businesses may be linked to recent declines in small business Federal

market dollar shares. Plans for further bundling and contract conVerDate 11-MAY-2000 09:19 Nov 30, 2000 Jkt 010199 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HEARINGS\65422P2.XXX pfrm08 PsN: 65422P2
35

solidation by DOD and other agencies will only exacerbate these

trends.

I brought along our database if we have time to take a look at

it. RPTS SEBO

Chairman TALENT. Yes, please.

Mr. MURPHY. Ms. Vela ́zquez had asked some questions about

Warner Robbins. Eagle Eye has the Federal Procurement Data

Center’s database on CD–ROM, and about 3 years ago we put it

all on Windows to enable quick, interactive reporting. And the

database, as you know, is a database of all the prime contracts,

$25,000 and up. It is a database of all the transactions, which is

all the task and delivery orders on the contracts. But we have

taken the data and presented a top-down view, basically a view

10,000 feet, if you will, to show key trends very quickly.

We are looking at contract transactions that occurred on contracts that were active between fiscal 1994 and fiscal 1998. And we

present eight screens with which to view the data. You can view

the same selection of data by agency, by claimant area, contract

number, company, place performance, product performance, SIC

codes and weapon codes. Right now we are looking at the agency

screen with no filter set.

I am going to switch to the place of performance screen to show

you the same set of data, ranked by place. And as we scroll down,

obviously we see California is ranked first. California received $130

billion over this 5-year period. These are contractors doing business

in California, not just with street addresses in California.

Then comes Virginia, Texas, Maryland, and so forth, until you

get down to 11, which is Georgia. And they received——

Ms. JONES. Can you blow it up?

Mr. MURPHY. That is what I am going to exactly.

So you get down in Georgia here in the lower window here, you

see all the cities in Georgia ranked by their 5-year dollar totals of

the Federal prime contracts that were received by all agencies,

DOD, DOE, NASA, etc.

Now, what I did before coming here to save time was—let me

just jump here to the company screen and show you again the

same information by company, Lockheed, Boeing, Raytheon; and as

you scroll down in the top window, you see all the subsidiaries and

the divisions of those companies change.

And the same thing with contract. You have contract numbers up

here, and down below you have all the mods on those contracts,

and you can tap this data around and see who received the contract, who awarded it, the Air Force, headquarters, what work was

done, the contract, product service, SIC code, where it was performed—this one happens to have been an area—and various

terms and conditions of the contract until we get back to the mod

record itself.

Prior to coming here, I set a filter—since I knew somebody was

going to be talking about the Warner Robbins situation here, I set

a filter on place of performance Robbins Air Force Base or Warner

Robbins. There were actually two place performance designations

for Robbins in the database. If you are familiar with the data, you

also know there is a code called the type of business code that

starts with ABC and goes down to JK and L. Type A represents

36

all the SDBs, all the minority-owned businesses 8As and so forth.

And business type B are all the other types of small businesses.

When you set this filter on the data and then you look at the

Agency screen, we can see not surprisingly that DOD spent 99 percent of the money at Warner Robbins in the 5-year period.

But when we go to the company screen now, Ms. Vela ́zquez, here

is an answer to one of your questions. Here are the small businesses, ranked in dollar order by the work that they are doing at

Warner Robbins. And this number up here tells you these companies—these small businesses received a total of $398 million over

the 5-year period. A total of 347 contractors received that $398 million.

And I did another analysis without the type A and business type

A and B filter set. And I know the total amount of money spent

at Warner Robbins was over $900 million over the 5-year period.

These dollars represent about 41 percent of that total. If you want

to know what kind of work they are doing on these contracts, you

can just go to the SIC codes and see that there is a lot of 1542

work, nonresidential construction, that was a significant part of it,

102 million; 42 million of it was engineering services; 37 million

plumbing, heating and air conditioning; a lot of the kinds of services that small businesses provide.

If you go to the contract screen, you can see the same data, sorted, totaled and ranked by contractor. Here we see that small businesses received 712 contracts; that is what this 712 number represents, 712 contracts at Warner Robbins over the 5-year period,

the largest one being $16 million total, and then followed by 11

million, 9 million, 9 million.

So, the question that arises as far as bundling at Warner Robbins goes is—is it too much of a burden to ask the government to

maintain this group of contracts and these 300 or so small business

vendors or; is it better, more efficient, better value to consolidate

under one contract?

There are a lot of considerations that arise, but you are talking

about eliminating as many as 712 contracts and a total of 347 companies. So this gives us a sense of the scope of the impact of the

proposal to bundle the contract.

Chairman TALENT. Very briefly. We want to go to the other witnesses. Show us how many of those are just SDBs, small and disadvantaged businesses. Which was it, filter A? Let us just see how

many there were.

Mr. MURPHY. Yes. Now it is just going to be filtered by Warner.

Chairman TALENT. Just how many at Warner are small and disadvantaged businesses?

Mr. MURPHY. I have to go back in and set business type A. It will

take a few seconds. It is actually pulling over 2 million records of

data and setting these filters. So we go into the contract fields. And

there is a field down here called ‘‘Business Type.’’ Let’s see if I can

pull it out here quickly. You just go in here, enter, filter, add business type A.

It is actually doing a subselect of all the business type A contracts over the 5-year period, and then when I click okay, it will

merge it with Warner. Also, I might point out that Eagle Eye, my

firm, is the company that developed the Federal Funds Express

37

Website for the House, and you have some capability to do this on

your Federal Funds Website.

We didn’t—we weren’t asked to provide all of the fields like business type fields that you see here to select the data, because there

was a limited number of fields that the House Information Resources felt that they needed to provide to fulfill their mandate.

But the system that we have on-line for you is built in a modular

fashion and can readily be modified.

Okay. We should see—it should come up here momentarily.

There we go. Over 5 years there were 328,000 actions with the

SDBs. I am going to click okay. And it is going to merge that with

Warner. As you can see the filter says business type A and then

place performance, Robbins and Warner Robbins. So now we are in

the contract screen. We are looking at a total of $118 million, 117.5

million worth of contract over 5 years, 179 contracts. And now I am

switching to company. Here we see that we are talking about 93

minority-owned firms, SDBs.

Chairman TALENT. These are as primes?

Mr. MURPHY. These are the just the primes, working on contracts

worth $25,000 and up, unclassified work being performed.

Chairman TALENT. The minute you bundle all of these, they are

just gone?

Mr. MURPHY. They go away.

Chairman TALENT. Okay. Thank you for your testimony, Mr.

Murphy.

[Mr. Murphy’s statement may be found in the appendix.]

Chairman TALENT. Next, Mr. Brooks will be next, if we can have

your testimony. Again, thank you for coming. I have already gone

over some of it in your questions. I found your testimony very helpful, Mr. Brooks.

Mr. BROOKS. Thank you so much. I appreciate that. I have basically summed up my written testimony in a brief prepared statement.

Chairman TALENT. Go ahead.

STATEMENT OF CRAIG BROOKS, PRESIDENT, ELECTRA INT’L

TELECOMMUNICATIONS

Mr. BROOKS. Thank you. Good afternoon, Chairman Talent and

distinguished members of the Committee. I appreciate the opportunity to speak before you today. My name is Craig Brooks. I am

president of Electra, a small business that provides telecommunications services to the Department of Defense. I appreciate this opportunity to describe how arbitrary, unjustified and what I believe

to be illegal bundling has had a devastating impact on my company.

In 1989, Electra began to participate in the DOD’s open competitive market for telecommunications services. Since then, Electra

and as many as 50 other vendors, including other small businesses,

have competed vigorously for contracts. Although the market was

successful for both participating vendors and DOD agencies, it has

now been all but eliminated by a single bundled contract, and that

is the DISN Transmission Services-CONUS Extension. We know it

as DTS–CE.

38

I will cite a few specific ways in which contract bundling severely

harms small businesses and follow each with examples from the

DTS–CE contract. First contract bundling favors the largest market participants. With respect to the DTS–CE, the DOD claimed to

have structured a contract for as many as six awardees, including

one small business; however, the contract went to three industry

giants, AT&T, MCI-Worldcom and Sprint.

The Small Businesses Reauthorization Act defines contract bundling as consolidating two or more procurement requirements into

a single contract unlikely for award to a small business. The DTS–

CE contract bundled 600 services and special requirements into essentially a single bundled contract that then became what I consider a large business set-aside.

Second, the decision to bundle services is often arbitrary, unjustified and without supporting market research, as required by the

SBRA. With respect to the DTS–CE, SBR required the DOD to conduct market research to determine whether consolidation of contract requirements was necessary and justified. I am unaware of

any type of research in this area that has been conducted at all by

DOD.

SBRA further states that DOD should identify benefits of such

bundling, as well as impediments caused to small businesses. Once

again, I am unaware of any study that DOD has done prior to, as

opposed to after the fact, taking a look at that. And I think what

we just heard from Eagle Eye supports that.

Third, small businesses lack the capital, facilities, geographic diversity and ability to assume risks inherent in large bundled contracts. With respect to DTS–CE using the SBRA definition of bundling, the contract, DTS–CE, employed diversity and size of performance elements. This made it all but impossible for small businesses to provide multiple diverse services within the required delivery intervals.

It employed geographical dispersion of contract performance

sites. This placed small businesses at a significant disadvantage to

companies with large national networks. And, third, it employed

specialized performance elements. These elements in the DTS–CE

were unjustified, discriminatory, and they added unnecessary risk.

I am going to stray for one moment, and maybe you and I are

on the same wavelength, but security requirements fall right in

here.

Chairman TALENT. Before you get into this, because I think your

testimony is particularly good, Mr. Brooks, is step back, we are all

lay people in terms of procurement and telecommunications.

Mr. BROOKS. I understand.

Chairman TALENT. Tell us what kind of services we are talking

about here for lay people, how they used to do it and procure, how

and how they do it now. I think you can do this in a minute or two.

Mr. BROOKS. Right. I can give you a very simplified answer. And

I will keep it low on the acronyms. Essentially, let us take an example local to us here. Let us say we have Andrews Air Force Base

in Maryland, and we have—for some reason they need to talk to

Fort Belvoir in Virginia, that communications—the DOD would

specify that we need a fiber-optic communications line to go between those two sites.

39

And the way they used to do it is they had an electronic bid bulletin board, and essentially this became—I am sure you are familiar with the concept of an IFQ, an invitation for quote, or an invitation for bid. And they put out this with very simple specs, here is

where one side is, it is this building at Andrews Air Force Base,

the other side is this other building is at Fort Belvoir, we need a

fiber-optic line between there.

There are a variety of folks that can bid on this, and on average,

on this electronic bulletin board, you would have 7, 8 and as many

as 50 people registered to bid under this bulletin board by putting

in essentially a BOA, to be able to put in a bid. So you put in a

bid, and the government selects based on various very basic criteria

we are all familiar with; meeting the technical specs, meeting the

delivery requirements, and a price at that point.

Now, if security is in the technical specs, then you have to meet

it, it is that simple. The examples that I had given in my written

testimony, Mr. Chairman, that particular one that you read to the

gentleman from DOD was one of those specifications. How is the

government—and I think this speaks to really the heart of what I

consider kind of some back and forth and some misrepresentation

of some of the facts. How does the government achieve security on

that type of situation?

Well, it is very simple: Encryption devices on each side, and the

government equipment is in a government-owned and governmentcontrolled facility, so they are asking for a COTS solution, commercial off-the-shelf solution. They need a fiber line that is available

from the commercial carriers in the area, Bell Atlantic, MFS

Telecom, Winstar, go down the list. Some are large businesses,

some are small businesses. They need that service. We bid. Those

services are awarded. We install. The government controls security

of the data across that line to prevent hacking by encrypting the

data and ensuring that the access to get the data into that line is

controlled through their own people in their own facilities.

That is what most of these contracts involved, and over 5,000 of

them my company was involved in. We won over 20 percent, we

beat AT&T, Sprint, MCI, and now basically we are locked out because of this bundling.

Chairman TALENT. A crude but accurate comparison. This is like

we in our homes buy long distance telephone service.

Mr. BROOKS. Yes, exactly.

Chairman TALENT. It is as if we decided—and probably most people have the larger carriers, but you can buy the longer carriers if

you want for your own home.

Mr. BROOKS. Correct, correct.

Chairman TALENT. Go ahead.

Mr. BROOKS. I will just briefly continue here. Anyway, that does

describe accurately the special performance elements that were in

this contract.

My personal opinion is I believe that those were added in by the

large contractors in my discussion with them. Unfortunately, I

can’t get anything in writing, as you know, through some discovery

process to find that out. That is just my personal belief.

There is another worst aspect to bundling even beyond what we

have heard with these contracts that are let and then the winners

40

walk away with this large money and the small businesses are left

to the side, and that is something that we consider the gatekeeping

aspects of bundling.

Bundled contracts function as market gatekeepers, preventing all

noncontract awardees from competing for future business. Now this

is business that wasn’t included in the original contract. In terms

of DTS–CE, the DOD without contractual requirement made the

arbitrary and unjustified decision to allow DTS–CE contractors to

split bids for future requirements. In essence, the DOD created a

bundled contract that only the largest companies could compete on

and now uses that contract to prevent small businesses from competing on any future requirements.

Mr. Chairman, in my opinion, the problem can be summed up in

one statement, and that is Federal agencies are not in compliance

with the SBRA. I know that this hearing is focused on the DOD,

but I could speak for hours about situations that are going on with

GSA, with FTS2001, DOJ, et cetera. Bundling should be used only

in those rare instances when it is properly justified and its impact

on small business is minimal.

What small businesses really need is an environment that stimulates full and open competition. With that respect, I would just like

to offer just very three brief suggestions. The first is that telecom

services could be offered on the GSA’s Federal supply schedule.

Right now, believe it or not, the GSA doesn’t allow a vendor like

myself to submit a schedule for telecom services. It says right in

the schedule solicitation, don’t submit, because this interferes with

FTS2001, so if I wanted to go to the DOD and say, I have my

telecom services on GSA schedule, you are not allowed to.

Secondly, our experience has showed that these electronic bid

bulletin boards are very helpful for small businesses. They allow

for rapid turnaround, and I believe that they decrease the administration burden on the government, and I think that those are some

recommendations that the Committee should look at as far as stimulating small business participation.

And, third, agencies and departments should be empowered to

encourage competition, not forced to use these bundled contracts

that we have seen here today.

In conclusion, you can tell I am a little passionate about this. I

am very frustrated about the impact that the bundling situation

has had on my business. All I am really asking for is an opportunity to continue to be able to compete in this marketplace.

Thank you very much. I appreciate your time.

Chairman TALENT. Thank you, Mr. Brooks.

[Mr. Brooks’ statement may be found in the appendix.]

Chairman TALENT. I would encourage Members to have their

staff—if they don’t have time to read Mr. Brooks whole statement,

have their staff pull for them those portions of his statement showing how much more the government is paying per line under the

bundled contract than it used to pay.

Mr. BROOKS. Absolutely.

Chairman TALENT. Our next witness is Ms. Josephine Ursini——

Ms. URSINI. That is correct.

Chairman TALENT [continuing]. Who is here on behalf of the Society for Travel Agents in Government.

41

STATEMENT OF JOSEPHINE L. URSINI, COUNSEL, SOCIETY

FOR TRAVEL AGENTS IN GOVERNMENT

Ms. URSINI. Thank you. On behalf of Society of the Travel Agents

in Government, which we refer to as STAG, I want to express our

appreciation for allowing us to come forward. It is something that

we have wanted to do for quite some time.

STAG is comprised of organizations who currently have or are

seeking contracts with the government. Seventy percent of travel

agencies are women-owned, and all four officers of STAG are

women. So we are acutely aware of not only the small, but the

women-owned aspects of the industry.

I would like to echo Mr. Brooks’ comments that we are concentrating on DOD, but most of what I will have to say today has relevance to the GSA travel contracts as well. I would like to summarize the points from our written submission there. There are a

number of items I would like to amplify on from our written submission.

There are three aspects of bundling that I want to address, the

first of which is not unique, the second of which is unique to travel,

and the third affects all of government contracting.

The first is the bundling of like requirements. I provided as an

attachment to our testimony the recent Department of Defense

travel procurement that was issued last week on-line. It contains

the workload data’s for each of the regions that DOD has now designated. As in any other industry, the unnecessary consolidation of

requirements will reduce the opportunities for small and small-disadvantaged businesses to participate.

The DOD is in the process of reengineering its travel acquisition

requirements and started with the award of what was referred to

as the Defense Travel Region 6 or DTR6. This 1,300-page RFP, request for proposal, is what all businesses are to face. Of the 1,300

pages in this RFP that was issued, I guess about 2 years ago, only

30 have to do with travel services. The rest have to do with the

technology associated with travel services.

But that is what the travel contractors have to face, small and

large. For a small business in travel, the small business-size standard for travel agencies is far different than the size standard for

everyone else. It is based on revenue received and works out to

about 14 to 16 people, employees, rather than the 500 employee

standard for other industries. You can see how a small travel agency with 15 employees would take one look at a request for proposal

of this magnitude and just sort of shake their heads. It should not

be necessary to have a 1,300-page RFP to make travel reservations.

So that is obstacle number one.

But the bundling of the requirements into procurements of even $20 million as in the new RFP that was issued last week is still

too large. If you look at the breakdown, there is one aspect that is

not reflected in the written testimony. If you look at the set-asides

in the DOD RFP which is the second page of the attachment to the

testimony, all of those set-asides are Air Force set-asides. The Air

Force is the one service department within DOD that does not use

the DOD credit card, which means that the travel agency has to

float the government, that the travel agency pays for the travel, for

the airline travel, and then has to bill the government for payment.

42

The other service departments do use the travel credit card. This

means that, ironically, it is the small businesses that have to have

the lines of credit to float the government and not the large businesses. So although the Air Force may seem magnanimous in its

set-asides for these small businesses—for small businesses, it is actually more of a burden for a small business to perform an Air

Force contract than it is to perform a contract for any of the other

service departments, and that is something that is not reflected in

the testimony.

One other thing to point out about the workload data in the attachment is that they don’t include leisure travel. That is the second aspect of the bundling of travel contracts that is unique to

travel, and that is the bundling of leisure and official travel into

one single procurement.

We fought this hard and long; finally got a circuit court of appeals to agree that bundling of official and leisure was improper,

and DOD turned around and snuck in a provision in last year’s

DOD authorization bill to allow them to do that. This is as ridiculous a situation as bundling a mess attendant services contract

with a McDonald’s concession.

That is all there is to it. It is ridiculous to combine the leisure

travel and the official travel procurements. There is no excuse.

They are very, very different. In official travel you have agents that

really have no discretion with the arrangements that are made.

The airfares are set by the city pair contracts that are negotiated

by the General Services Administration. If you have to be at a

meeting tomorrow 2 o’clock in San Diego, then the applicable citypair is used. But with leisure travel, it is far more labor-intensive.

I mean, many of us know that you go into a travel agency, you may

sit with a travel agent, look through brochures and really never

order anything, never make reservations.

So the discretionary travel is much more labor-intensive and requires different skills, which, to be perfectly honest, the small businesses are better at providing than the large businesses. So we

have the traditional bundling of requirements that don’t need to be

bundled. The DOD accounts have been going along very nicely for

about 20 years now unbundled.

We have the nontraditional bundling, which is the bundling of

leisure and official travel, which makes no sense at all. The Navy,

which accounts for about a third of all DOD travel, has not combined leisure with official at all and doesn’t want to do it. But the

Navy is going to be forced to bundle because Navy will now come

under the overall DOD—the new reengineered defense travel system, and now the Navy will be forced to bundle a procurement that

they didn’t want to in the first place.

Then we have the third. The third area is the area that I think

should be of most concern to this Committee, and that is how the

subcontracting, the small business, SDB, whatever, is being reported to SBA and to Congress. The travel agencies are not being

paid by the government for the services that they perform. Zero

procurement dollars are going to the travel agencies. The money

goes to the airlines, but DOD is reporting it as dollars—they are

reporting it on a gross volume basis, and they are reporting it as

dollars that go to the travel agencies. And because of that, they are

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inflating their compliance figures to this Committee, to SBA and to

Congress.

I could use an example of real estate agents. If you sell a house for $300,000, and the real estate agent makes a commission of

$18,000, DOD would report it as $300,000 going to the real estate

agent, and that is assuming that procurement dollars were involved in the purchase of that house. But no procurement dollars

are involved in the travel services contracts. These are no-cost contracts.

So if no procurement dollars are going to the travel agencies,

how can anything be reported back as being small business subcontracting? And on the volume of travel that is involved within DOD,

that accounts for a lot of money. So when Mr. Oliver says he likes

clean data, you better be sure you are getting clean data because

we don’t believe that you are.

Ms. VELA ́ZQUEZ [presiding]. Sure.

Ms. URSINI. Basically those are the three points I wanted to

cover. So I would be happy to answer any questions.

[Ms. Ursini’s statement may be found in the appendix]

Ms. VELA ́ZQUEZ. Are you telling us that they are cooking the

books?

Ms. URSINI. Yes, I am, in major numbers, because the numbers

are just so large on travel that—you know, I gave some examples

in the written testimony. If you use the figures from just the RFP

that was issued last week, you are talking in the neighborhood of

$145 million that is phantom money, and it is not accurate.

Ms. VELA ́ZQUEZ. Thank you, Ms. Ursini.

And then our next witness is Mr. Maurice Allain. Thank you.

Welcome.

STATEMENT OF MAURICE ALLAIN, PRESIDENT AND CEO,

PHOENIX SCIENTIFIC CORPORATION

Mr. ALLAIN. Good afternoon, Madam Chairman and members of

the Committee and staff. This has been—it has gotten kind of late

in the day, so I am not going to read everything that I have already

prepared and sent to you.

What I would like to say is there is a lot of confusion that is

being passed around about what it is that hopefully we are doing.

In 1953, right after the Second World War, your predecessor Committee decided that there should be a fair portion of the budget

that procurements that go out from the Federal Government

should go to small business. Fairness is a distributive justice issue,

and it was based on a period of time when we were a heavy manufacturing, mining, extracting, in other words, material-based society.

Mr. Oliver was correct in pointing out that the revolution that

has occurred in information has created another type of economy.

This economy, however, is basically driven by small business, because you have a situation where you can get rid of a lot of middle

management by going to these new communication processes. Big

companies, like General Electric, decided to reduce the size of their

work force from 400,000 down to 212,000. I believe that is a figure

that I got from the Office of Advocacy. And that is typical, so what

you are seeing is a different kind of organization; however, because

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of the change in our defense posture, instead of the 100 businesses

that control 67 percent of the economy in 1946, you have got about

three really large ones, giant ones.

Now, what does this mean? If you talk about just the distributive

justice issue, that is important to society. But now if you go away

from the static dynamics, static economics of mass production society to the dynamic conditions in an information economy, where a

small business that might have been suboptimal in reaching the

scales necessary to do the manufacturing is not suboptimal in that

field, in fact, they would be preferred.

If you look at the differences in our economic performances compared to Europe, compared to Japan, we are doing a lot better than

they are. But our new business formation is a lot higher as one of

the keys. Now, Dr. Gansler, besides being an excellent, a very good

civil servant, is also—has contributed very heavily to the literature

on defense contracting in three principal books.

He said in his earlier book, I believe, The Defense Industry,

which came out in the early 1980s, in order to understand the economic operation of the U.S. Defense industry, and I am quoting

him, it is first absolutely essential to recognize that there is no free

market at work in this area, and there likely cannot be one because

of the dominant role played by the Federal Government. The combination of a single buyer and few large firms in each segment of

the industry and a small number of extremely expensive weapons

programs that constitute a unique structure for doing business

have created large barriers to entry and exit, and these barriers result in each firm managing to keep its share of the business even

in a shrinking market.

The history of American military technology indicates that it has

often been the small inventor-led firms that have made the qualitative breakthrough so critical to military superiority. Thus their

disappearance affects our long-range future as well. If these small,

lower-tier firms are so critical, why does the Congress and the Department of Defense think only in terms of the giants—these are

Dr. Gansler’s words—such as Lockheed, Boeing, McDonnell-Douglas, and assume there is uniformity across the overall defense industry?

In his later book, the next one, which is Affording Defense, he

says, many have attempted to describe the very special buyer/seller

relationship that exists in the realm of defense. The economist Walter Adams called it a closed system of buyer and seller, interrelated

for common interest, that defies analysis by conventional economic

tools. The economist James McKee said that it is a relationship of

participation in which the large buyer has a direct influence on the

policies and decisions of the large sellers, and that what we observe

is the kind of behavior that is not adequately described by any of

the commonly employed models of market relationships and economics.

And now I will quote, that is what Dr. Gansler said. Further in

his book he says that the Department of Defense operates—the defense market is a dual market at the top level of the market’s plan.

I am going to buy an F–22, I am going to buy an Arleigh Burke

class destroyer or any of the other large weapons systems.

45

Here he is correct. You need a large organization, but 60 percent

often of those procurements are done on the subtier level by small

businesses, by small disadvantaged business, women-owned business, what have you. He said in that book that it is going to be

real hard to get competition. We have superrivalries, et cetera, et

cetera, in the first tier.

He says the DOD can save more money by coming up with more

competition at the lower end, the subcontractor level, component

level, parts level. That is where the true savings come.

Now, it is very interesting that if the American industry in general has looked at the gains to be made through information technology and how they organize their businesses and firms, we are

looking at a trend that is just the opposite, stronger and stronger

vertical integration, and now we are down to the point there is no

more money to give them, let us get some from small businesses.

If you look at what is being asked for under FAST, this procurement—this is government data, this is off their Web page—FAST

will establish the means for procurement of services to include advisory and assistance, modifications, spares, repairs and systems

acquisition. The program will include, but will not be limited to, direct support for design, integration, testing, modification, maintenance, configuration management, quality assurance, system safety, hazardous materials management and technical and engineering data, support and analysis, and packing, handling—I mean, I

can go on. What is left? Everything will be under FAST. And you

have had various estimates of the size of the contract and its duration.

Another problem that underlies this whole issue, you have a lot

of goal displacement. Everybody counts numbers. Well, we are giving the small business these many numbers, it is the quality of

these numbers that are important as well.

The Office of Advocacy found, for instance, that it greatly enhances the chance of a small business growing up to be a big business or staying in business if it has a Federal contract. We are

talking major significance of about 30 percent—I am sorry.

Ms. VELA ́ZQUEZ. Would you please summarize, because there is

a vote, and we need to recess.

Mr. ALLAIN. The bottom line to a lot of this is I would urge you

to consider legislation that would tighten up this whole notion of

what the values we are buying when we do a bundle to something

that is measurable. The ABA recommended 20 percent as a minimum in difference of value, however you want to measure it.

I would also urge the Committee not to allow the projected savings to be the determinant of whether or not something should be

bundled or represents a substantial advantage to the government.

I don’t have to tell you the basis, you know, the kind of estimates

and projections that have not panned out in the past. This is a

major effort that will be copied, by the way; if this goes through,

this will be copied by other services.

Ms. VELA ́ZQUEZ. Thank you.

[Mr. Allain’s statement may be found in the appendix.]

Ms. VELA ́ZQUEZ. We are going to take—we will be back in the

next—we have got to go to the floor and vote, so we will rush back

as soon as we can. Okay.

46

[Recess.]

Chairman TALENT [presiding]. Okay. If we can reconvene the

hearing. And I again appreciate your patience and thank the Ranking Member for chairing the Committee while I was gone.

I wanted to ask Ms. Ursini a couple of questions because I think

she can respond to one of the points that Mr. Oliver made about

one of the advantages of bundling. He talked—you may have already done this, and I am sorry if you have, but he mentioned that

one of the advantages of bundling is because he is assuming that

the bigger contractors have more flexibility in terms of their ability

to meet the needs of the Department, so they have more people. He

was talking about the security officers at a particular base.

If you get one big contractor handling everything, they have

more people, they are more flexible. You made a point in your written statement anyway that I thought addressed this very well, to

the extent that they—I am not trying to put words in your mouth,

was that—when the Department’s bundling contracts in a business

like yours where all the contractors are relatively small, and one

contractor does bid and get a bundled contract, that is everything

that they can do? In other words, they don’t have any capacity then

left over to bid on another contract? They don’t have a lot of extra

capacity; is that correct?

Ms. URSINI. That is correct. If you are limiting it to the big—the

big three are really the only ones right now that can do the large

size contracts. I mean—I don’t want to exclude anybody, but let us

talk about the big three. AMEX was awarded the contract for the

DTR6, May of 1998. They still haven’t implemented. They are having problems. And also, unless the Department of Defense changes

its compensation policies, AMEX may not be interested in the next

batch anyway. But that is another issue.

But if each time you go out for one of these larger-sized procurements, you are eliminating one of the big companies, then you keep

restricting competition for the subsequent—or at least the closely

followed-on subsequent procurements because they are too busy

doing the implementation of the earlier one.

The other problem that there is on the small business side even

is that, because of the way the small business-size standard is established for travel agencies, once they get one, they are now large,

so they can’t even bid on the next small procurement. So that is

one thing that the Committee might want to look at is possibly

changing the size standard for travel agents, which is much different than the size standards for everybody else, so that small

businesses can continue to even compete for the—for what few

pieces of small travel business there are out there.

Chairman TALENT. And as to the economies of scale issue,

wouldn’t you expect that if in a particular segment of the economy,

there are very significant economies of scale, wouldn’t you expect

to see the private market organize itself so that there were just,

you know, a few large contractors? In other words, if there are

economies of scale in the travel agency business, why are there so

many small travel agencies? Why wouldn’t they just in response to

the market resolve themselves into a few big or merged companies?

Ms. URSINI. I think you are correct. I think what happens with

the small travel agencies is they develop specialties, particularly on

47

the leisure travel side. You have the larger companies, the American Expresses and the Carlsons, having large corporate accounts,

for example, that the smaller companies can not handle, they leave

the smaller accounts and leisure travel to the smaller businesses.

That is one of the reasons—I think I point out in the testimony

about another reason why the bundling of leisure and official is ridiculous, because the smaller businesses can really handle the leisure much better than the large ones.

Chairman TALENT. So they are making an argument based supposedly on economic efficiency, but it flies in the face of what the

private market has organized itself?

Ms. URSINI. That is absolutely correct.

Chairman TALENT. And really the best indicator of efficiencies in

a market is how it has organized itself?

Ms. URSINI. That is correct.

Chairman TALENT. And I have seen this same thing with the

kinds of issues that Ms. Napolitano was raising, food service and

private service. If you look around the country, they tend to be—

these businesses tend to be dominated, these segments of the economy, by smaller businesses, which tells us that in the real nongovernmental world, those are—that is the most efficient way of organizing a business in that area.

Ms. URSINI. Yes.

There is one aspect of—one excuse that DOD has given for bundling that I don’t think holds water that I haven’t addressed. And

there is a valid objective behind it, but it doesn’t require the bundling of the travel. And that is that DOD would like, and we applaud their decision to try to get, more valid across-the-board departmental data about their travel so that if they can have an accounting system that accounts for all of the travel on a DOD-wide

basis, they can get better data, maybe better data to negotiate

fares with the airlines, et cetera.

But consolidating the accounting requirements or the computer

fields, et cetera, because all of the service departments have different formats doesn’t require that you bundle the travel services

contract requirements themselves; it just requires that the individual contractors meet the various technological requirements.

But it doesn’t require that you have—that you have $79 million or

$300 million contracts.

Chairman TALENT. This is what I have encountered over and

over again. And this is what I think is at the heart of this bundling. Mr. Oliver talked about core competencies. And I think that

the DOD is having difficulty managing and administering its various functions. And so it turns to bundling really as a way of not

managing and not administering. It is easier for them.

We just have a couple of big companies who do everything, and

it may not save money, it may not be better quality, but it is easier

for them. And the problem is you still have to manage the enterprise, even if you are contracting out particular functions.

Mr. Allain, the Warner Robbins thing, and we are having a hearing on it, it is really more of an issue whether they are going to

privatize base management——

Mr. ALLAIN [continuing]. Yes, sir.

48

Chairman TALENT. As opposed to bundling, and clearly they

don’t feel they can manage the bases anymore. The thing is if you

get—suppose you get a huge contractor in like a property management company might. They now are going to run Warner Robbins

Air Force Base. You still have to tell them what goals you want

them to achieve in management. You still have to manage that.

And my concern is they will get somebody in big and not tell them

what they want them to manage the base to achieve, and so, in effect, they are hiring a private contractor to tell them what they

want and tell them how to manage the base, and you are just going

to be sent into chaos.

Mr. ALLAIN. You know, carry that point further, Mr. Chairman.

What you are having here is a complete blurring of accountability.

I mean you, the people’s representatives, delegate to the administration to perform certain missions. They subdelegate it to an agency. In the case of, well, we are going to have small business get

larger shares of these contracts as subcontractors, you now have

changed my due process, which I could appeal; say to the contracting official who has to operate under the laws that you have

passed, now it is a private matter between me and this large contractor. That is very dangerous.

And unless Congress wants this to occur and explicitly tells them

to do it, then fine. They shouldn’t be allowed to go and do this on

their own.

Chairman TALENT. And here is the other thing. I pointed this out

in the context of household goods and moving services with regard

to the departments, which I know the travel agents know about as

well, when you bundle up huge kinds of contracts and then say,

well, small business will be subcontracted out into the process.

Now think about this for a minute. What you are basically saying

is since one of the points of bundling is supposedly to save money,

let us suppose you actually get some kind of discounted bundled

price, knowing they are going to have to subcontract it out. Now

you have got two layers of businesses which have to survive on one

squeezed profit margin. What is that going to do in terms of the

quality that has been given to our service people?

So I have no—I have no doubt that they are going to do with—

what do they call it, chill and serve, what was it—cook and chill.

Ms. URSINI. I would like to respond. I am glad you brought up

household goods. In my alter ego, I am a Navy wife, we have had

to contend with four moves in the last 2 years, none of which,

thank God, did I use the military movers. We chose to use movers

selected on our own. It cost us about a third of what the government would have spent had they moved us. DOD has a pilot—in

fact, I think it is the Navy’s pilot program—that allows service

members to contract on their own with local companies. It is only

a pilot program, but it has proven to be very effective, from what

I understand, and certainly in our experience. Every time we said

that we were going to do it on our own, the response that we would

get is, well, you know, if something gets broken, put in a claim. I

don’t want my household goods to—I don’t want my crystal shattered. I don’t want my furniture chipped. I want to be able to control what is going on.

49

Chairman TALENT. Yes. So I mean the point I think they have

to confront, and I have some hopes Mr. Oliver is going to do it, is,

yes, whether it is within their core competency or not, they have

to manage their assets. Now, managing may entail contracting,

may entail contracting out certain functions, but they still have to

tell the contractor, big or small, what it is they want that contract

to achieve; what you are going to achieve when you, Warner Robbins—what goals you are going to have.

So they still have to put the effort into identifying the goals and

managing the enterprise. And my concern about this whole trend

is just really simply an intent to abdicate a certain function,

whether they call it a core function or not, and just sort of spew

it out to other contractors in the guise of reforms. And we are going

to continue looking at it.

The Ranking Member wants to ask a few questions.

Ms. VELA ́ZQUEZ. No. Mr. Chairman, basically you covered most

of the questions that I had. I just wanted to thank you, and I look

forward to continuing to working with all of you.

Chairman TALENT. All right. We are not going to make you wait

through another vote here. I do appreciate your all being here. I

hope you will be available in the future as we need you, because

we are going to follow up on this issue. I believe we already kept

the record open for 10 days for written questions so the Committee

hearing is adjourned.

[Whereupon, at 1:55 p.m., the committee was adjourned.]

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