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70–782 2011

[H.A.S.C. No. 112–66] 

CHALLENGES TO DOING BUSINESS 

WITH THE DEPARTMENT OF DEFENSE 

HEARING 

BEFORE THE

PANEL ON BUSINESS CHALLENGES 

WITHIN THE DEFENSE INDUSTRY 

OF THE

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

SEPTEMBER 20, 2011 
(II) 

PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

BILL SHUSTER, Pennsylvania, Chairman 

BOBBY SCHILLING, Illinois 

JON RUNYAN, New Jersey 

ALLEN B. WEST, Florida 

RICK LARSEN, Washington 

BETTY SUTTON, Ohio 

COLLEEN HANABUSA, Hawaii 

LYNN WILLIAMS, Professional Staff Member 

TIMOTHY MCCLEES, Professional Staff Member 

CATHERINE SENDAK, Research Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2011 

Page 

HEARING: 

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

APPENDIX: 

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

TUESDAY, SEPTEMBER 20, 2011 

CHALLENGES TO DOING BUSINESS WITH THE DEPARTMENT OF 

DEFENSE 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

Larsen, Hon. Rick, a Representative from Washington, Ranking Member, 

Panel on Business Challenges within the Defense Industry ............................ 2 

Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman, Panel 

on Business Challenges within the Defense Industry ...................................... 1 

WITNESSES 

Hodgkins, A.R. ‘‘Trey,’’ III, Senior Vice President for National Security and 

Procurement Policy, TechAmerica ...................................................................... 4 

Jacobus, Heidi, Chairman and CEO, Cybernet Systems Corporation ................ 9 

Smith, Bradford L., Jr., President and CEO, Civil Services Strategic Analysis, 

Inc. ......................................................................................................................... 6

APPENDIX 

PREPARED STATEMENTS: 

Hodgkins, A.R. ‘‘Trey,’’ III ................................................................................ 36 

Jacobus, Heidi ................................................................................................... 65 

Larsen, Hon. Rick ............................................................................................. 35 

Shuster, Hon. Bill ............................................................................................. 33 

Smith, Bradford L., Jr. ..................................................................................... 49 

DOCUMENTS SUBMITTED FOR THE RECORD: 

Organizational Plan of the Panel on Business Challenges within the 

Defense Industry ........................................................................................... 95 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

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

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

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

(1) 

CHALLENGES TO DOING BUSINESS WITH THE 

DEPARTMENT OF DEFENSE 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE

INDUSTRY, Washington, DC, Tuesday, September 20, 2011. 

The panel met, pursuant to call, at 3:01 p.m. in room 2212, Rayburn House Office Building, Hon. Bill Shuster (chairman of the 

panel) presiding. 

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

Mr. SHUSTER. The hearing will come to order. 

Good afternoon. I want to take the opportunity to welcome our 

three witnesses today. Thank you very much for taking your valuable time and spending some of that with us here today and, of 

course, those in the audience that are interested. 

This is our first in a series of hearings this panel will hold examining the business challenges in the defense industry today. Chairman McKeon and Ranking Member Smith established this panel to 

take a deep dive into the challenges facings firms that already 

work with the Department of Defense and those that want to do 

business with the Department. I am honored that Chairman 

McKeon asked me to lead this panel, alongside my good friend from 

Washington State, Rick Larsen. 

And I might add for one of our witnesses, you may know the 

town. As you drive to your farm in Bedford County, you may pass 

through Everett. Well, that is the important Everett: Pennsylvania. 

He is from Everett, Washington. So I am going to keep making references every chance I get so I can elevate Everett, Pennsylvania, 

to a rank above the great city of Everett, Washington. But I am 

glad that Mr. Larsen is leading this panel with me. 

And rounding out our panel members are: Bobby Schilling from 

Illinois, who I don’t believe is going to be making it in today. Bobby 

represents the 17th District in Illinois, which contains Rock Island 

Arsenal. Bobby is a small-business owner and has firsthand experience with the difficulties dealing with the Government at all levels. 

Betty Sutton, who represents the 13th District of Ohio. As the 

co-chair of the Congressional Task Force on Job Creation, Betty is 

dedicated to promoting good business practices and creating American jobs. 

Jon Runyan from New Jersey. Jon represents the Third District 

of New Jersey, which contains Fort Dix and McGuire Air Force 
2 

Base, and has a vested interest in defense business practices across 

the board. 

Colleen Hanabusa is from the First District of Hawaii and has 

been involved in Hawaii politics since 1998. With a large defense 

presence in Hawaii, Colleen understands how important it is to 

bring efficiency and effectiveness to the defense industry. 

And Allen West from the 22nd District of Florida. Allen retired 

from the Army in 2004 after 22 years and brings a unique perspective of experience on both sides of the table, Government and industry. 

Again, I want to thank everybody for being here today and taking the time to lend your expertise to this effort. 

We have all heard in our districts and across the country from 

businesses that find it extremely difficult to successfully navigate 

the DOD [Department of Defense] acquisition system. This is particularly true for small businesses and those involved in science 

and technology efforts. While there are programs out there that assist businesses in transitioning innovative ideas and technologies to 

a final end product that satisfies a military requirement, there are 

many obstacles in the way. 

In these current economic times, we must make good use of every 

tax dollar we spend on defense, and we can do this by leveraging 

the heart of the American workforce: Small businesses. By reducing barriers to entry, we can generate competition, spur innovation, 

and stimulate the economy. So I look forward to working with my 

fellow panel members here as we move forward. 

And with that, I will yield to the ranking member, Mr. Larsen, 

if he has any comments. 

[The prepared statement of Mr. Shuster can be found in the Appendix on page 33.] 

STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE 

FROM WASHINGTON, RANKING MEMBER, PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

Mr. LARSEN. Thank you, Mr. Chairman. 

And I want to thank Chairman McKeon and Ranking Member 

Smith, as well, for putting this panel together. In 6 months, we will 

have substantive solutions to the challenges that small and medium-sized businesses face when they approach the Department of 

Defense. 

The Federal budget is increasingly strained, and we have to ensure that the needs of our military to provide for national security 

and defense are not shortchanged. In order to accomplish this, 

DOD will need to stretch their dollar and maintain robust competition. Better contracting also offers a chance for job creation and 

growth for companies that often have the best products but find 

barriers in their path when they approach the DOD. How to make 

and implement improvements is something we will aim to discover 

over the next few months. 

Small and medium-sized businesses need to be part of the defense industrial base, and that means rethinking the current 

model. Our goal must be to break down barriers and improve competition for defense contracting to get better prices, better products, 

and better services for the warfighter. 
3 

So I want to thank our witnesses for participating today to help 

us understand their issues as well as the general framework for 

the challenges that we are going to face as we help identify solutions. 

Last month, Bill joined me in Everett, Washington—which we 

have heard so much about already, but I will tell you the truth 

about it—which is in my district, where we held a roundtable with 

about 20 local businesses. We spoke with them about their successes and their failures in working with the DOD. One individual 

spoke of having to outline technical specifics to the DOD in order 

to have a proposal released, only then to have the competition have 

access to those specifics. Another spoke of the very simple issue of 

not receiving payment on time—a serious concern for small companies who are not flush with cash. We need to continue to talk and 

to listen to these businesses and to find solutions for them. 

So I want to thank all my colleagues for agreeing to serve on this 

panel. I believe this entire group of Members brings a diverse perspective on these issues. We are all here because we want to improve the chance for competition, for job growth, and for making 

certain our women and men in the military have the best options 

and capabilities available to them. 

Thanks again. 

[The prepared statement of Mr. Larsen can be found in the Appendix on page 35.] 

Mr. SHUSTER. Thank you. 

Before I turn to our witnesses, we have a piece of administrative 

work that we have to take care of. So I ask unanimous consent that 

the work plan for the panel, which has been distributed to all 

members, be entered into the record. 

And, without objection, so ordered. 

[The information referred to can be found in the Appendix on 

page 95.] 

Mr. SHUSTER. Again, that will be an official part of the record. 

And we are going to get started here. And, again, I want to 

thank our witnesses for being here today. I will introduce all of you 

now and then go to each of you for your testimony. 

First, Mr. A.R. ‘‘Trey’’ Hodgkins III, senior Vice President for national security and procurement policy, TechAmerica. Glad to have 

you here, and glad to know you have some sort of roots planted in 

Pennsylvania. 

Mr. Bradford L. Smith, Jr., President and CEO [Chief Executive 

Officer] of Strategic Analysis, Incorporated. And, again, Mr. Smith 

informs me that his family is from Butler County, Pennsylvania. 

So, somehow, if I can just get some kind of Pennsylvania—I can go 

back to my district and say, everybody who testified in front of me 

today were Pennsylvanians or had some connection. 

Ms. Heidi Jacobus is the CEO of Cybernet Systems Corporation. 

Thank you for being here. 

I again welcome you all. 

And we will turn to Mr. Hodgkins first, and you may proceed. 
4 

STATEMENT OF A.R. ‘‘TREY’’ HODGKINS III, SENIOR VICE 

PRESIDENT FOR NATIONAL SECURITY AND PROCUREMENT 

POLICY, TECHAMERICA 

Mr. HODGKINS. Thank you, Mr. Chairman and Ranking Member 

Larsen and members of the panel. 

My name is Trey Hodgkins, and I am the senior vice president 

for national security and procurement policy at TechAmerica. I 

want to thank you for the opportunity to testify about business 

challenges within the defense industry and highlight tech-sector 

perspectives on those challenges. Technology is ubiquitous in the 

missions of the Department, and we believe it is a significant 

differentiator in the success of those missions. 

TechAmerica is a leading voice for the U.S. technology industry, 

representing approximately a thousand companies of all sizes from 

the public and commercial sectors of the economy. Our members 

range from traditional defense industrial base integrators, or DIB 

[defense industrial base] companies, to the most innovative and 

agile of small technology firms. They function as prime suppliers, 

subcontractors, and many are commercial in nature and choose to 

operate entirely outside of the Federal market. 

Most have a commercial business model, meaning they offer commercial items for sale around the world that are developed and 

manufactured using a global supply chain. These conditions impact 

how they view Government actions and whether or not they are interpreted as barriers, impediments, or incentives. 

When commercial companies choose to sell to the Department, 

they rely upon ’90s-era reforms that created a preference for commercial items in Federal Government acquisitions. The same laws 

require those transactions be as close as possible to commercial 

transactions for the same items and not include Governmentunique requirements. These reforms gave DOD access to commercial technology and innovation while driving savings for the taxpayer. 

Unfortunately, many of those premises have been forgotten or 

abandoned, and doing business with DOD no longer bears any 

meaningful resemblance to commercial business for the same or 

similar items. The Federal Government and DOD market share is 

also shrinking, and for many technology companies it now represents 5 percent or less of their total global market. 

Making the business case for accepting the conditions we will 

discuss today is increasingly difficult in a global company or a 

small business. This impacts DOD access to innovation, competition, and mission success. For some commercial companies, business with the Federal Government has become too burdensome or 

too risky, and they choose to stay out. 

I would like to elaborate on some of those barriers and will start 

with regulations and their burdens as an example. 

A barrier to entry for innovation technology in small businesses 

is the regulatory burden on companies that sell to DOD. For example, TechAmerica identified an apparent increase in the use of interim acquisition rules with immediate enforcement requirements. 

The chart I included in my written statement shows that there is 

a clear and pronounced upward trend, from 8 cases in 2008 to 38 

cases last year. This means companies and agencies have less time 
5 

to react to proposals and respond to become compliant. It also 

means that public participation is minimized in the process. 

Another trend is the increase in acquisition regulation reporting 

burdens. Waivers from the Paperwork Reduction Act have become 

commonplace and fail to acknowledge the significant cumulative 

and Government-unique burden these requirements place on businesses. In calculating the reporting burden, the methodology the 

Government uses only accounts for time to complete the form, not 

the time needed to collect the data, and we believe it is a gross 

underestimation of the burden on industry. 

DOD-specific regulatory trends are no better, with a marked increase in the use of guidance as a replacement for what industry 

feels should be promulgated regulatory actions. Compliance burdens associated with guidance or regulations are barriers to successful entry and sustainment in the DIB. 

Other barriers are just as daunting and discouraging. Commercial companies look at the levels of disclosure and conclude with 

relative ease that they are a sufficient deterrent to doing business 

with the Federal Government. This apprehension is growing as requirements for reporting and disclosure expanded to subcontractors 

and suppliers. 

Another barrier is the 3-percent withholding tax on Government 

contractors. TechAmerica commends the Armed Services Committee for their leadership in the effort to repeal this provision and 

encourage your continued efforts. The reduction in cash flow as a 

result of this withholding often forecloses considerations small 

businesses might have for bringing their innovations to Government. 

Long procurement lead times typically encountered at DOD are 

also a barrier, particularly for commercial companies. They are unaccustomed to such long lead times and usually operate in environments using agile development in incremental models for short cycles of 6 months to a year. The DOD’s 24-or-more-month lead times 

are not conducive to attracting the innovation these companies 

could bring to bear. 

I would like to turn to challenges to bringing innovation to the 

public sector and DOD and point to Government-unique requirements placed on companies. I have already touched on some of 

those above. Others include the recent increases in efforts to 

change the ownership of intellectual property when companies sell 

to the Government. Governing laws in case decisions define specific 

points when ownership changes, but new proposals would blur 

those lines and make the Government a part owner for even relatively minor investments into an innovation for adoption by the 

Government. 

Another impediment to effective adoption of technology and innovation is the emphasis placed in acquisitions on ‘‘lowest priced, 

technically acceptable.’’ The practice has become the preference and 

now forces behavior that overlooks better or more secure products 

to save on the price. There now exists an aversion to consider for 

award products or services that are not ‘‘lowest priced, technically 

acceptable,’’ even if the offering is more innovative and is the real 

best value for the taxpayer. An example where this policy is causing harmful consequences is in the assurance of the supply chain 
6 

for the Department. TechAmerica supports a change to require that 

acquisitions of information-technology hardware, software, and 

services are limited to the original equipment manufacturers or 

their authorized suppliers. But ‘‘lowest priced, technically acceptable’’ does not support such a need. 

I will close by touching on financial impediments to the innovation adoption. TechAmerica believes the panel should focus on how 

funding limitations frequently pose a far bigger problem for 

transitioning technology for DOD. Current processes require the 

identification of technology desired before starting the multiyear 

funding request process. Frequently, the product is several generations old before that process can be completed. As was recommended in our GTO–21 [Government Technology Opportunity in 

the 21st Century] report to OMB [Office of Management and Budget], Congress should examine the way it funds technology acquisition and deployment because it is a real barrier to the successful 

adoption of innovation in the Department. 

Again, I appreciate the opportunity to raise these issues for consideration with you this afternoon and look forward to further engagement with you on these issues. 

[The prepared statement of Mr. Hodgkins can be found in the 

Appendix on page 36.] 

Mr. SHUSTER. Thank you very much. 

And, Mr. Smith, please proceed. 

STATEMENT OF BRADFORD L. SMITH, JR., PRESIDENT AND 

CEO, CIVIL SERVICES STRATEGIC ANALYSIS, INC. 

Mr. SMITH. I also want to thank you for the opportunity to testify. 

My name is Bradford Smith. My company, Strategic Analysis, Incorporated, is a small to midsized company. We have been providing professional services to Federal agencies. We are a servicedisabled, veteran-owned, founded in 1986, and have approximately 

250 employees. We have offices in Arlington, Virginia; Washington, 

D.C.; Colorado Springs; and Dayton, Ohio. 

And the types of services we provide are systems engineering, 

advisory services, intelligence support services, information technology, and conference planning. So it is a variety of services for 

the Departments of Defense, Energy, and Homeland Security. For 

most procurements, our 250-employee company is considered a 

large business, so we must compete full and open. For some, we are 

a small business. For SBIR [Small Business Innovation and Research], for research work we do, it is small. 

I am making these comments after working in services for these 

agencies and departments for about 38 years. And, again, I understand that the format is to provide some brief comments ahead of 

fielding questions, so I would like to raise a few issues that I outline in my paper. 

One specific concern of mine comes from the current trend to 

using ultra-large, indefinite-delivery, indefinite-quantity contracts 

for set-asides for very small businesses. The tendency to bundle is 

both prevalent in full and open competitions as well as in smallbusiness set-aside. And, likely, with the highly constrained envi-
7 

ronment, there will be an increasing tendency to bundle. There are 

efficiencies from the Government side. 

I am very concerned that the very small companies that win such 

ultra-large set-asides must focus resources on strong proposal and 

program management capabilities—we have seen it across the 

spectrum of competitions we have been involved with—rather than 

on the unique skills and capabilities that they bring to bear. From 

my point of view, this is a tremendous deterrent to innovation in 

the sector of our industrial base, where much of our innovation 

starts. 

Secondly, as a midsized business owner, I am quite concerned 

about being excluded from many set-asides or any set-aside competitions as a prime contractor. As a midsized company for almost 

all of the procurements that we go after, we compete full and open. 

I find it hard to believe that a company with 250 employees is too 

big to compete for a $1 billion, 5-year service contract. And that is 

the case today, with the exception of the Air Force. The Air Force 

has set aside—has created NAICS [North American Industry Classification System] codes where larger small businesses—500, 1,000, 

1,200—can compete for service contracts. 

For us, growth to midsize has been over a long period of time. 

We are celebrating our 25th anniversary. We have done it through 

vertical and horizontal movement to various client areas. Our reputation precedes us into the marketplace. We have not really been 

focused on set-asides, but we now find ourselves to be in a position 

where, because of set-asides, we find it more difficult to compete 

for the same work we have been doing over the period of our life. 

And, again, I have to say, many owners of companies in my position now are choosing or have chosen to sell their companies to 

larger firms. But I truly believe that the Government is losing or 

could lose a significant sector in midsized businesses. And I am a 

strong advocate of midsized businesses because they have all the 

charm of small businesses and they don’t have any of the trappings 

and downside of larger businesses. 

And I commend to you a study done by David Berteau and his 

team on the services industrial sector—I will leave a copy of this— 

where it shows the trend of the sector in the middle—not the 

small, not the large, but the medium-sized companies—as being 

the one that has shrunk over the last 10 to 20 years. 

Again, I can’t reemphasize enough my belief that midsized companies are a significant resource for the Department of Defense. 

And, again, the differentiation of size is a continuum: Small, medium, large. Midsized companies are as innovative as small, I 

would argue; they are agile; and they have significant potential to 

create jobs. The conventional wisdom is that small businesses do 

that. I would argue that midsized businesses do it better and can 

be a more effective generator of jobs. 

I want to highlight one specific regulation that makes the problem worse for small business. I will call it the ‘‘51 percent rule.’’ 

Small businesses that win large prime contracts or any set-aside 

contract are required to, themselves, execute 51 percent of the effort, even while they may be teamed with other small businesses. 

And I do believe midsized companies or other small businesses are 
8 

much more effective at teaming with small business than larger 

firms. 

To get the work done, to get the small-business contribution 

counted on their team, small businesses are forced now to form 

joint ventures, which I view as a highly risky endeavor for a small 

business. So you now are seeing greater prevalence of joint ventures of small businesses going after half-a-billion-dollar service 

contracts as a team. So you create a new corporate entity. 

The 51 percent rule is very inflexibly applied, at this point. The 

Air Force, up until the GAO [Government Accountability Office] decision several years ago, was allowing the contribution of all the 

small businesses to be counted. And in recent times, based on that 

case, everybody is strident about it. Companies are disallowed unless their contributions are going to actually not only bid but perform. And if you have, I am going to notionally say, a half-a-billiondollar contract, that is $100 million a year. For a small business— 

and I mean ‘‘small’’ meaning $4-million-revenue companies—it is a 

huge extrapolation to perform that much work. 

So I recommend that—in fact, what is interesting about that is, 

it is frequent that such companies outgrow the ability to compete 

for follow-on work. So if you have a small business effectively performing a certain piece of work growing to the size to provide the 

types of service needed, at the end of that 5-year, or 10-year potentially, contract, they are no longer a small business and can’t compete. 

Although consideration of the definition of ‘‘inherently governmental’’ is not specifically on your agenda, I recommend you look 

at it. OMB recently issued a policy letter to attempt to clarify the 

definition of ‘‘inherently governmental.’’ I would suggest that the 

current FAR [Federal Acquisition Regulation] definition, regulations, and policies that were in place prior to that are quite effective. 

The new policy defines not only ‘‘inherently governmental’’ but 

functions that are closely associated with ‘‘inherently governmental’’ and functions that are ‘‘critical.’’ Not that one can’t define 

those, but what the net effect, I believe, will be unnecessary 

insourcing and, for the Government and the public, not necessarily 

the best value solution that comes from competition. 

My submission has a little bit more on each of these. I would like 

to make just a few specific suggestions. 

The midsized business ‘‘squeeze,’’ as I am calling it: I suggest the 

panel explore ways of supporting midsized businesses through, for 

example, creating a new set-aside program; modifying the NAICS 

codes, the definitions—the various—the fairly Byzantine NAICS 

codes set that are in place today; or modifying the small-business 

size standard to encompass midsized businesses. 

I would suggest the business that we are in, which is supporting 

Government agencies in a relatively close way—many of our employees work on Government facilities—is a good place to target for 

midsized businesses. Often, the agencies are needing more capacity, a broader set of technical skills, and strong program management capability, which one doesn’t typically find in a small business. You find that typically in a large business, but you can also 

find it in a small. And where you have strict constraints on organi-
9 

zational conflicts of interest, midsized companies can be quite effective at mitigating any concerns about organizational conflicts of interest. 

On the subject of very large, multi-award, indefinite-delivery, indefinite-quantity contracts that are set aside for small, I recommend that that is a poor choice for small businesses and that 

the panel look for other types of contracts that more effectively capture the strength of small business: Their innovation, their specific 

unique charm, the people. 

And then, lastly, I recommend you look at the new policy letter 

on ‘‘inherently governmental.’’ And I think the best solution would 

be for something akin to the A–76 [OMB Circular No. A–76 on 

‘‘Performance of Commercial Activities’’] process, where the Government can truly determine what is the best value. As soon as we 

start defining ‘‘inherently governmental,’’ ‘‘close to inherently,’’ 

‘‘slightly close to inherently governmental,’’ we are into increasing 

the size of the Government staff—and not that you shouldn’t. If it 

is the public trust that needs to be protected, if it is inherently governmental, it should be done by a Government employee. Anything 

else should be up for grabs as to whichever is the best value to the 

Government. 

Thank you. 

[The prepared statement of Mr. Smith can be found in the Appendix on page 49.] 

Mr. SHUSTER. Thank you, Mr. Smith. 

Ms. Jacobus. 

STATEMENT OF HEIDI JACOBUS, CHAIRMAN AND CEO, 

CYBERNET SYSTEMS CORPORATION 

Ms. JACOBUS. Mr. Chairman, Ranking Member Larsen, other 

members of the panel, thank you for the opportunity to speak to 

you today. 

I have submitted my written statement for the record. That 

may—— 

Mr. SHUSTER. It is going to be in the record, your full statement. 

But I would ask you to summarize it, keep it to within 5 minutes 

or so. 

Ms. JACOBUS. Thank you. 

Mr. SHUSTER. Thank you. 

Ms. JACOBUS. I am Heidi Jacobus. I am the founder, CEO, and 

majority stockholder of Cybernet Systems, a small business in Ann 

Arbor, Michigan. 

Twenty years ago, I started Cybernet on the basis of a single Department of Defense SBIR contract. That is the Small Business Innovation Research program. And during the question period, please 

ask me any questions about the structure of SBIR, because I have 

20 years of experience and know a lot about it. 

I am an unlikely entrepreneur. I am an unlikely Department of 

Defense contractor. I was born to parents who didn’t have any high 

school education. My mother was an immigrant from Germany and 

couldn’t speak English when I was born. My father was a first-generation American. He dropped out of high school, joined the CCC 

[Civilian Conservation Corps], then the Army, and worked in factories. 
10 

They valued education, and I complied. I was very fortunate to 

have obtained a very good education by scholarships, work-study 

programs, and my parents’ sacrifices, of course. I went to graduate 

school at the University of Illinois, Champaign-Urbana, where I 

studied computer science. I got my master’s degree and worked for 

3 more years towards my Ph.D. 

Then I got married, moved to Texas, worked at Texas Instruments in the research lab, and had children, dropped out of my research for a while, and a few years later picked up my research 

again. 

When I was at the university engineering library, I opened up a 

book, and the book was an RFP [request for proposal] from the Department of Defense, and there was my research topic in the SBIR 

book. DARPA [Defense Advanced Research Projects Agency] was 

asking for a proposal on something I had been working on for the 

last 9 months. So I was pretty excited, because I had a 40-page 

working paper on the topic. I shaved it down to 25 pages, submitted it as an SBIR. And a few months later, I got a phone call 

from a DARPA colonel who said it was the best proposal he had 

ever read. 

So, I was up and running. I went in, I quit the university, I hung 

up a shingle, I moved my daughter into her brother’s bedroom, and 

the first Cybernet was there. 

Now, we had to deal with regulations, and, having a German 

mother, I had to deal with the rules of the contract. And so when 

I got a contract that said ‘‘FAR clause so-and-so, jewel ball bearing,’’ I had to drive to a Federal library to find out what that 

meant, because I wasn’t going to sign the contract asserting something about jewel ball bearings that I couldn’t feasibly understand 

without the reference. 

I didn’t know what the word ‘‘overhead’’ meant. I was a technology person, I was an engineer—9 years of college, 5 years in 

computer science. I didn’t know about business or business structure. So I figured it out. And SBIR is a beautiful program where 

small businesses can slowly take their technology and create a 

business structure. The guidelines are very clear. The initial contracts, the Phase I’s, are very small. And the forms are easy to fill 

out. So, for overhead, we measured the square footage of my 

daughter’s bedroom, divided it by our house square footage, and 

there was my overhead rate. So I learned by doing. 

And now, 20 years later, I have 60 employees. We have 35 patents issued. We have SBIR equipment that comes, actually, from 

a Picatinny Arsenal SBIR and is now in Kuwait. It has been there 

6 years, and it is still very productive, saves the Army hundreds 

of millions of dollars. A four-star general who has visited the 

project many times—he is now retired—said at an AUSA [Association of the United States Army] conference that our machine saved 

the Army $27 million in its first 4 months of operation. Six years 

later, you can multiply. That is an extremely good investment for 

the Army to have made in that Picatinny Arsenal SBIR that, over 

some years, turned into this wonderful piece of equipment in the 

field called ATACS [Automated Tactical Ammunition Classification 

System], which is an ammunition sorter. 

I am nearly out of time, so I would like to stop. 
11 

Mr. SHUSTER. We will have plenty of time to ask you some questions. 

Ms. JACOBUS. Thank you. 

[The prepared statement of Ms. Jacobus can be found in the Appendix on page 65.] 

Mr. SHUSTER. Very interesting, the founding of your business. 

One question I have: Isn’t Cybernet—isn’t that the company on 

‘‘Terminator’’? 

Ms. JACOBUS. No. It is—— 

Mr. SHUSTER. Just want to clarify that—— 

Ms. JACOBUS. I was actually on ‘‘Squawk Box’’ last year in August before Mark Haines passed away, unfortunately, and Mark 

Haines asked me the same question. And I said, ‘‘Mr. Haines, we 

are ahead of ‘Terminator.’ Cybernet was formed a year before the 

‘Terminator’ movie came out.’’ 

And, actually, at the time, Cybernet had a Humvee, borrowed 

from the Marine Corps Arsenal in Detroit, that we were retrofitting 

with robotic controls. 

Mr. SHUSTER. Really? 

Ms. JACOBUS. So I think we were a little bit ahead of the curve. 

Mr. SHUSTER. I hope you got some money since they stole the 

name of your company and put it in the movie. But, anyway, thank 

you again for your testimony. 

Ms. JACOBUS. Thank you. 

Mr. SHUSTER. We are going to go through questions. I am going 

to start with a couple of questions. 

First, Mr. Hodgkins, you talked about the burdens and you said 

‘‘risk.’’ I don’t know if you really touched on the ‘‘risk’’ part, of why 

it is risky. Can you go through some of the things you see out there 

that are risky dealing with the Department of Defense, specifics of 

why you consider it risk? Because a lot of people would consider 

doing business with the Federal Government not very risky. Very 

burdensome, but—— 

Mr. HODGKINS. Sure. I touched on a few that businesses do see 

as risks. For example, the potential loss or partial loss of intellectual property because they do business with the Government. Many 

companies will walk away from the business on that basis alone. 

And the changes that are being proposed simply blur the lines. If 

you have a small business, as Ms. Jacobus described, some of those 

things can be impenetrable or very difficult to determine. And the 

idea that you would potentially forfeit your intellectual property by 

doing business with the Government makes many companies see 

that as an insurmountable risk. 

Another example would be in the disclosures that I talked about. 

Many of the things that the Government asks companies to disclose, either as part of the ordinary acquisition regulation reporting 

burden or as some of the contractor databases that we have built, 

things like that, some companies see that data as propriety, or certainly bordering on it. And the disclosure of what they team to be 

the secret sauce of the success of their company on a public Web 

site or in some form of a database that their competitors may see 

it, they see that as a risk that is just too big to overcome. And so 

they choose not to face those challenges, and face the commercial 

market instead. 
12 

Mr. SHUSTER. Intellectual property rights, is that something you 

are talking about? 

Mr. HODGKINS. Yes. Correct. I mean, you wouldn’t want to develop a great software program but when the Government wants 

to buy it, they want me to modify it, using their money, to include 

some encryption capability, for example. 

Mr. SHUSTER. Right. 

Mr. HODGKINS. It is our interpretation of the proposals that are 

on the table that the Government would own part or more, a significant part, of that software and the intellectual property involved in it. And companies look at those reasonable conclusions 

and say, it is just too risky; I don’t want to give up my intellectual 

property and the products that I have developed. 

Mr. SHUSTER. Right. And your association, you represent small 

companies, medium-sized, and large? 

Mr. HODGKINS. Absolutely. 

Mr. SHUSTER. And do you find—some of these things are across 

the board, they affect. But focus on those small and medium-sized. 

Do you find it a much greater problem for your members that are 

smaller members, like Mr. Smith or Ms. Jacobus? 

Mr. HODGKINS. Absolutely. The small or midsized companies, 

usually, you know, they have a collection of patents, as was noted, 

that to lose their rights in those patents would mean the company 

is gone. 

The larger companies face similar challenges and certainly don’t 

want to lose the intellectual property they have developed, but 

their business with the Government is more diverse. It covers more 

of the sectors of the defense market and the industrial base, and 

so they are better able to deal with those challenges. They also 

have more sophisticated administrative capabilities and legal staffs 

that can address and, you know, interpret those things for them. 

Mr. SHUSTER. Thank you. 

And, Ms. Jacobus, you said you had a lot of experience with the 

SBIR program. 

Ms. JACOBUS. Yes, indeed. 

Mr. SHUSTER. Can you tell us some of the hurdles you face and 

some of the things you see, as a small-business owner, that we 

could look at improving the program to make it easier for smaller 

companies? 

Ms. JACOBUS. Right. Well, stemming off of Mr. Hodgkins’ statement about the intellectual property, SBIR is an extremely good 

balance to the intellectual property program. Under SBIR, we have 

data rights. And it is balanced by the fact that we, as technology 

companies doing very special things for the Defense Department, 

we are overkill for the commercial market. So the machines we 

build would not be attractive to some factory automation, because 

factory automation is really easy compared to what we do in the 

field in Kuwait. 

So we have to have a good relationship with our Government 

customer. And I think, under SBIR, the intellectual property system has worked very well for 30 years now, and—— 

Mr. SHUSTER. Good. 

Ms. JACOBUS [continuing]. I hope it continues. 
13 

But one of the biggest challenges for SBIR companies is that the 

technology we develop is new technology. And so, in the military, 

there is a metric called technology readiness level, TRL, and it defines what a technology readiness level is. If something is on a 

piece of paper, it is 1. And if something is, you know, shrinkwrapped, off-the-shelf, tested, it is 10. 

The SBIR Phase I’s and Phase II’s, because what we are doing 

is new, the only reason we got an SBIR is that product or system 

could not have been purchased commercially. Everything innovative is new. And that is why SBIR companies get so many patents. 

We are automatically doing something new. 

SBIR funding takes us to Phase IV, TRL level IV. So we are not 

over the hump yet. What is needed for V, VI, and VII is testing 

and evaluation. And in the case of a Navy product we have developed, we had to take the product out to sea trial, which involves 

sending two engineers on a ship with Marines and using it out at 

sea. It is expensive. We had to drop it in saltwater, shake it. And 

you can imagine the rigor that has to be gone through for a military product compared to something that is a disposable, something 

at a big-box store. 

So the conundrum for small businesses is that there is literally 

no funding source anyplace for the test and evaluation. 

Now, there is something new on the horizon, the RIF program, 

the Rapid Innovation Fund. And that has promised that it can 

serve as a competitive way to try to get some test and evaluation 

money so that you can bridge TRL levels V, VI, VII, and then get 

to the end, where you can literally field it and sell it to the military. That is a good goal. But the RIF program is very small, it is 

not yet activated, it is only partially announced, and it is really uncertain how many projects it will be able to fund. 

Mr. SHUSTER. Right. And I am not even familiar with the RIF 

program 

Mr. SHUSTER. We will get into that. I am going to—my time has 

expired. We are going to stay on the 5-minute clock, but we can do 

a couple rounds of questions because I think we have plenty of 

time. 

So, with that, I will yield to Mr. Larsen for a question. 

Mr. LARSEN. Thanks. 

Mr. Hodgkins, with regards to your testimony, on page 6 I think 

it is, you said, ‘‘TechAmerica members are on record supporting a 

change in policy to require that sourcing for acquisitions of information-technology hardware, software, and services are limited to 

original manufacturers or suppliers who are authorized by those 

manufacturers.’’ 

Can you go into a little more detail on why that is and why that 

would be helpful? 

Mr. HODGKINS. Well, we believe it is a policy challenge the Government faces where it potentially conflicts with small-business incentive programs that you have, particularly when you look at 

things like the GSA [General Services Administration] schedules 

and acquiring products those people may be reselling. 

The problem the Government is faced with—and, certainly, as 

members of this committee, you have probably had briefings that 

I don’t have access to regarding the challenges with counterfeits 
14 

and other malicious products that are successfully or unsuccessfully inserted in the DOD supply chain. There are a number of legislative and regulatory initiatives that are attempting to address 

that. And this committee has generated a couple of those. 

The problem we see is that the Government—and when you couple it with the ‘‘lowest price, technically acceptable’’ preference I 

discussed, the acquisition community’s behavior is to go out and 

find ‘‘what can I get at the lowest price’’ versus ‘‘what can I get 

that I know actually came from that vendor, and I have some degree of assurance that there is not a counterfeit chip in it or some 

malicious code in the firmware that would give access to someone 

else.’’ 

So we have supported the concept that, for purposes—certainly, 

for critical systems like we might find at DOD, the Government 

should look at a policy that says, we are only going to buy from 

trusted sources like the original equipment manufacturer, people 

they have authorized to resell their products. And there are a few 

other programs where vendors can go through and be certified as 

a trusted source. 

Mr. LARSEN. Okay. 

Can you explain, in your testimony, on page 2—or, maybe not explain—provide an opinion about why, in TechAmerica’s view, we 

drifted away from the Clinger-Cohen reforms, focusing on off-theshelf, commercial technologies, into what you are describing today? 

Mr. HODGKINS. I think there are a lot of reasons. 

Some of the issues that I also discussed drive us—reporting requirements, for example. In a commercial transaction, I wouldn’t 

have the kind of reporting requirements I would have if I wanted 

to do business with the Government. Much of that is understandable; the Government has a different set of shareholders, if you 

will, and so there are different things we have to disclose if we are 

doing business with the Government. 

But the idea that I am buying generally commodity items, now, 

even, we have to make disclosures about what is my price, how did 

I arrive at that price. That is a perfect example. Generally speaking, when I have a commercial item acquisition, if I go out and buy 

something that is offered out in the market and I buy it for whatever the price it is offered for in the market, then it is automatically presumed I got a fair price, because the market has set that 

price. 

We have seen a drive at DOD and other agencies to, even though 

it is a commercial item, we want you to now share with me information about how you built that price. What are your personnel 

rates? What are you are compensation package components? What 

are the other things that you are including in that price? Which 

gets us away from the tenet of the Clinger-Cohen era, was that if 

I buy a commercial product from the commercial marketplace, I am 

assumed to have achieved a fair and reasonable price. 

Mr. LARSEN. How would you address that, say, in a situation like 

with Ms. Jacobus, where the technology of the product maybe 

doesn’t have the commercial application as clearly as another product? 

Mr. HODGKINS. Well, I think her example was a good one. I 

would point to, actually, the reverse as a good model. And we see 
15 

this a lot, whether we are dealing with innovative research all the 

way up to the largest integrations of weapons systems, where you 

have a lot of commercial products are now—the preference for 

many of the functionalities and capabilities in the weapons systems 

or in the research that we may be deploying. 

So you look at data capabilities for deployed soldiers. We are 

looking at commercially available handheld devices and how do we 

get the data to them on an iPhone or an Android phone. When you 

look at a weapons platform on aircraft, you are probably assimilating commercially available guidance systems or radar systems, 

communications systems. Even some of the sensor systems are now 

commercially available. And so you have an amalgamation of those. 

And it is the practices and policies around the Governmentunique elements of a weapons system that are now bleeding over 

into incorporating those commercial things. And the benefit those 

commercial things brings is that the private sector paid for all that 

innovation and research and you are getting the benefit of commercially available products at a price that is set by the commercial 

market, not a price—if you had to build those radar systems or com 

systems or guidance systems from scratch based on Government 

specs, it would be far more costly than the same systems you could 

get at a commercial variant. 

Mr. LARSEN. Uh-huh. 

Mr. Smith, can you explain a little bit more, on page 1 of your 

testimony, the last couple of lines of the second-to-last paragraph 

there, the concern that the small companies that win the ultralarge set-asides must focus their resources on strong proposal and 

program management capabilities rather than their unique skill 

sets and people? Could you explain to me why that is a problem? 

Mr. SMITH. Over the last several years, as we have grown out of 

the ability to compete for contracts that have been set aside, we 

have necessarily joined teams of other companies, many of whom 

are small businesses who are primes. 

We have seen very innovative companies. Again, we are service 

providers; we are not creating intellectual property except associated with the delivery of service. We have seen these companies 

have to hire program managers, people from larger firms. And, frequently, as contracts are set aside for small, the incumbent larger 

firms are offering mentorship and assistance and personnel to come 

in to help them manage what will be large contracts for them. 

And the larger service contracts do have a fairly large regulatory 

burden associated with them. You would have a fiduciary responsibility to make sure that the service provided is actually provided 

and is of the quality that you are expecting out of your own company. And when you build larger teams, as opposed to nurture a 

particular small business, the skill set is different. 

I think it is bad because you are losing the up-close innovation, 

the agility of smaller firms. You are turning smaller firms, who 

don’t have even the strengths of larger firms, into management organizations rather than innovative organizations. 

Mr. LARSEN. Thank you. 

Mr. SHUSTER. Mr. Runyan. 

Mr. RUNYAN. Thank you, Chairman. 

And thank all of you for being here. 
16 

It is kind of a general question for all of you, if you want to. I 

think we are kind of touching on it. But, as a Federal Government, 

do you feel we have a coherent industrial policy to actually, look 

at our national security? 

Ms. JACOBUS. No. 

Mr. RUNYAN. No? 

Ms. JACOBUS. No. And I think there are lots of studies that have 

been done that say that we don’t value our defense industrial base 

like other countries do. 

For example, there was a procurement for the newest, greatest 

ground vehicle, called the Ground Combat Vehicle. The solicitation 

came out 2 years ago. I was at the meeting of AUSA in Fort Lauderdale when it came out, 11 o’clock on a Thursday, and everybody 

in the room jumped up, went out and got their cell phones, 

downloaded the proposal. It was so eagerly anticipated. Nine 

months later, the Government pulled the contract, the RFP. It just 

vaporized. It was gone. So, for 9 months, the defense industry of 

this country had been spending enormous amounts of their brain 

power working on this proposal to design and build the next class 

of ground vehicles. 

Well, that wasn’t the end of it. We had teamed with a large company on that proposal. So the large company was spending, I would 

guess, tens of millions of dollars. We were spending hundreds of 

thousands of dollars. Two months later, the next new GCV [Ground 

Combat Vehicle] instantiation comes out, the new proposal. And it 

is not that different than the first one, but it is different enough 

that we work for another 9 months, everyone spending lots of 

money, lots of time. 

One prime contractor at a conference in Warren, Michigan, said 

that 30 percent of their engineering time had been spent addressing, writing to this RFP. Now, we have a limited amount of scientists and engineers in this country. If a massive number are 

writing to RFPs that get pulled and get turned into nothing or, as 

GCV worked out, the three selections that were on the board 

turned into two, there is a lot of work that went into designing and 

doing something. 

And that is more and more for the large companies. Before you 

do something new, you have to build it and show it and then sell 

it. It is not really a design contract. So we are losing the competition and innovation for new systems. And I think that is a policy 

issue. 

Mr. RUNYAN. Thank you. 

Mr. SMITH. I would say the principal dysfunction is the adversarial relationship that is evolving between companies who do business for the Government and the Government. I think there is a 

fiduciary responsibility that the Government employees have to 

live up to. All of the disclosures associated with doing business 

with the Government, for us, are associated with the fact that 

there is a lack of trust. 

Ms. JACOBUS. Uh-huh. 

Mr. SMITH. And there has to be a better environment, where— 

you know, some baseline information needs to be disclosed. Service 

providers for Government, we are probably the most highly regulated industry in the country. And there is not one fact about me, 
17 

my finances, the company’s finances that isn’t known and soon 

won’t be disclosed publicly. And I think that is all based on a lack 

of trust between the companies and the Government. 

Mr. RUNYAN. Thank you. 

Mr. Smith, just talking about growing from small, medium, to a 

large company, have you or anyone you know ever thought twice 

about getting into a contract, with fear of climbing that ladder too 

fast? 

Mr. SMITH. That thought never crossed my mind. I know there 

are people with whom we do business that are small, a company 

that is 50 people, about the size of Cybernet, that because of the 

regulatory environment, there is some 50-person threshold, they 

won’t hire more than 50 people. 

But I think, typically, company owners don’t think that way. 

They just grow into whatever they grow into. And then, all of a 

sudden, you look back and you can’t do what you did before. 

Mr. RUNYAN. And it looks like once you take on the big contract, 

like you said, 5, 10 years down the road, I am not at a place to 

where I can get any of the small business, but I am not big enough 

to compete at that higher level. 

Mr. SMITH. Right. The midsized companies are a very interesting 

and dicey place to be. We just happen to be there now at a time 

when the budgets are constrained, and, you know, the environment 

is not exactly conducive to where we are right now. But I am really 

positive. I actually believe small and midsized companies have a lot 

to contribute to this Nation. And I encourage you to think about 

not only small but midsized companies. 

Mr. RUNYAN. Chairman, my time has expired. I yield back. 

Mr. SHUSTER. Thank you. 

Just to clarify, you are considered a small business, not because 

of the number, because 500 is one of the metrics. How much money 

and what is the dollar figure that puts you over the top? 

Mr. SMITH. In many procurements, surprisingly, it is either $4.5 million or $7 million. 

Mr. SMITH. So we are far over it. 

Mr. SHUSTER. Right. And 250 employees. 

Mr. SMITH. By definition, if you have technical people—our staff 

is technical, our staff is administrative. But, by definition, if you 

have that many people, you are operating revenues, unless you are 

losing money, that are more than the $7 million. 

The service-disabled, veteran-owned program that the Veterans Department has just begun a certification process for is $7 million. 

So even though we are a service-disabled, veteran-owned company, 

we are not small by the VA’s [U.S. Department of Veterans Affairs] 

definition. 

Mr. SHUSTER. Right. Okay, thank you. 

Ms. Hanabusa. 

Ms. HANABUSA. Thank you, Mr. Chair. 

Let me begin with Mr. Hodgkins. I am curious about your description throughout your testimony about your members. And, 

also, in your disclosure, you don’t seem to have any contracts. So 

can you tell me who your members are and how you come to be 

able to testify about the problems you are facing with military contracts? 
18 

Mr. HODGKINS. Sure. My members are manufacturers and then 

distributors and resellers and integrators of information technology 

hardware, software, and then the services necessary to put those 

things together, build those things, and then operate those things. 

They also include companies that are working around those others. 

They range from the largest integrators selling the largest IT [information technology] systems to the Federal Government down to 

one-, two-, three-man shops in Silicon Valley writing software— 

very unique, very specific analytic software that might be used in 

the intelligence community, or they may be selling commercial 

products like laptops or software that run those laptops. 

Ms. HANABUSA. So what I am trying to understand is, as you 

come here and you testify and you submit testimony to us, I want 

to know, what is it that you do for your members that gives you 

the insight to come here and to tell us about the shortfalls of the 

system? 

Mr. HODGKINS. Sure. Well, we are a trade association, so we represent the corporations. Those corporations, hundreds of the members of our total member base, are Government contractors. And 

we have centers of focus within the trade association that look at 

the issues they raise with us of being of concern, and they range 

from regulatory, legislative, and administrative initiatives. 

Ms. HANABUSA. So this is really something that you are garnering from what they have told you as their representative, 

and—— 

Mr. HODGKINS. Yes. 

Ms. HANABUSA [continuing]. That is what you are relaying to us? 

Mr. HODGKINS. And then my interactions on their behalf in those 

arenas. 

Ms. HANABUSA. But you, personally, do not have any experience 

in terms of actually submitting a proposal like Ms. Jacobus? 

Mr. HODGKINS. No. I work for a trade association, and we don’t— 

we are not Government contractors. 

Ms. HANABUSA. I just wanted to be clear as to what your format 

was. 

Mr. HODGKINS. Sure. 

Ms. HANABUSA. And, Mr. Smith, one of the things that you said 

that was very interesting is you made a distinction that you are a 

service provider and you are not, like, a creator. So I believe Ms. 

Jacobus is sort of in a different category from the two of you. 

So when you say you are a service provider, and you were complaining about the 51 percent rule in particular, what exactly do 

you mean when you say you are a service provider and not an intellectual property creator? 

Mr. SMITH. We do generate, create intellectual property associated with services. 

And, again, if we are—I will take systems engineering as a service. I am an electronic engineer. I also went to school in Pennsylvania; I am a Carnegie Tech grad. But we provide advice on an 

hourly, time-and-materials basis, often, to agencies that do R&D 

[Research and Development] management: DARPA, the Office of 

Naval Research, organizations in other departments, as well, that 

do research. They seek support in making sure they are up on the 

right technologies. They seek support in evaluating the progress of 
19 

an R&D endeavor. They seek support for judging whether a particular R&D provider has satisfactorily met the terms and conditions of a contract from a technical point of view. 

So we have engineers and scientists in specific disciplines that 

change over time because the areas of interests of different agencies change over time. 

Ms. HANABUSA. Can you tell me what kind of contract you would 

be bidding for with the Government? 

Mr. SMITH. Well, the term of art—the two terms of art that we 

use are ‘‘SETA’’ and ‘‘A&AS.’’ 

‘‘SETA’’ is systems engineering and technical assistance contracts. Many acquisition organizations in the services or in OSD 

[Office of the Secretary of Defense] or defense agencies have competitions to seek companies to provide systems engineering. So we 

will help them from a technical point of view or—again, we run 

meetings. We actually have a very strong capability in conference 

coordination. So we help bring together and facilitate meetings of 

technical folks, with the end objective of the particular meeting to 

bring diverse technologies together and come up with a common vision for how to proceed forward or a common approach to a particular problem. So, SETA is one nature of a contract we go after. 

A&AS is the other, advisory and assistance services contracts. 

And these can range from studies; what is the balance of the requirements versus technological capabilities in a particular area of 

emphasis by an agency of the Department of Defense? What are 

the trends? We often look at worldwide technology trends. What 

other countries are doing research in a particular area of interest 

to the Department of Defense, and how does our research stack up 

against their research? 

Program managers—DARPA is a somewhat unique agency in 

that they bring in program managers for a relatively short period 

of time, 4 to 6 years. So we help program managers in the process 

of learning about acquisitions, we help program managers in the 

process of creating programs that are good and executing and monitoring programs that are good. 

Ms. HANABUSA. Thank you. 

Thank you, Mr. Chair. 

Mr. SHUSTER. Thank you. 

I am going to next turn to Mr. West, but before I do, since I have 

a core of the committee here, we are looking at having a field hearing—I should have said this in the beginning—October the 7th, if 

we get five Members. Votes are on a Thursday night, and then Friday morning flying out to Quad Cities, Rock Island. We will get mil 

air and be back the same day. So I just wanted to alert everybody 

to that if your schedule so fits. I know that Mr. West has a very 

important speaking engagement in Pennsylvania on Thursday the 

6th. 

Mr. WEST. At your request. 

Mr. SHUSTER. But, with that—again, I just wanted to bring it to 

Members’ attention so you heard it firsthand. 

And, with that, I will turn to Mr. West. 

Mr. WEST. Thank you, Mr. Chairman and also Mr. Ranking 

Member. 
20 

I want to look at this from a different perspective because, as you 

said, I spent 22 years in the military. So, you know, I remember 

going out as a battalion commander in 2003 in Iraq and a lot of 

things that we did not have and wish we did have. 

My question is, you know, as we start to look at rapid force initiatives and off-the-shelf type of technologies and innovations, there 

are a lot of documents that get produced, you know, lessons 

learned, things of that nature. Do you feel that you have a good 

relationship with the military as far as getting a lot of those lessons-learned documents being tied in with the rapid force initiatives that we have I know definitely in the Army and maybe in the 

Marine Corps? 

And then, also, do you have a time with the combatant command 

so that—you know, I was there at Fort Lauderdale when that happened. You know, you get these blasts on the email, you kind of 

get an understanding of, you know, some of the needs and trends 

that are happening. Instead of that long procurement system, 

maybe we can look at some off-the-shelf type of technologies that 

can be rapidly developed. Is that type of relationship out there? 

Ms. JACOBUS. It is not easy for a small business that has one or 

two locations to be at every military base so that we know when 

people come out, you know, the door and go to the coffee shop that 

we can talk to them about what their problems are. It is even harder for us to get on a base and talk to a group of operators. 

And, really, the whole issue with SBIR is that we create magnificent technology at the request of the Army. They have put those 

RFPs. 

Mr. WEST. Yeah, I understand. 

Ms. JACOBUS. They put the requests in because they need something, and we have technology that can address their need. But 

they don’t know the whole range of technologies that can be applied, and we don’t know what is the issue in the field. 

Mr. WEST. The demand versus the supply. 

Ms. JACOBUS. Right. So having a good relationship with a customer—and in the SBIR case that we had from Picatinny Arsenal, 

we had good relationships at Picatinny. We were in the labs, we 

were picking up mortars, we were using them for test objects. And 

then when we went to design the ATACS machine—and we designed it in 90 days. That is essentially off-the-shelf. 

Mr. WEST. Uh-huh. 

Ms. JACOBUS [continuing]. Even though it is brand-new technology, because it takes 90 days to do an NDA [non-disclosure 

agreement] at a large company. 

So the rapid response capabilities of the agile small businesses 

really should not be overlooked. So when soldiers have a problem, 

we should know about it and brainstorm about it and try to help. 

I gave a talk at the Army War College on small-business acquisition. I used the same example of the machine. And after my talk, 

the group of 300 06s, typically, came up to me and said, I have 

never heard of a contractor who was good; you know, our feelings 

about contractors is that they are all bad people who don’t give us, 

you know, water bottles or whatever. They were shocked that here 

was something that worked the way it was supposed to work. 
21 

Now, the SBIR that turned into the ATACS was a fluke. It 

wasn’t planned. We had no idea the problem existed in the field. 

But because we had a little blurb that the SBIR puts on the Web— 

and we don’t mind having those abstracts public—they found us. 

And we got this phone call from a sergeant who said, we have a 

problem; can you solve it? And we did. So if there was more of looking at what the small-business capabilities are and for us to be 

able to understand and bridge, it would be great. 

But we have no money for the transition. We have R&D, and 

then somehow it is procured with procurement funds. Big companies have gigantic budgets in their cost structure. I talked about 

overhead. But they have something called IR&D, internal research 

and development. So if they make a $3 billion thing, they get a percentage that is audited for the dollar amount that says they can 

use so much of their cost structure for internal research and development. They can do anything they want with it, including 

ruggedizing equipment, getting it ready to be purchased. 

We small businesses have none of that. Historically, it is just a 

fact, many of those transitions have been handled by congressional 

interest money, because we had customers who were military who 

needed something and had no budget for it. When something is 

new technology, it outpaces the financial structure, the POM [Program Objective Memorandum], the description of what pays for 

what. 

And I will give you a really poignant example of what happened 

with the ammunition machine. So we got it done, we wanted to 

make more, and it turned out that there was no budget for it. But 

what we were replacing was a hundred people sitting in a warehouse doing, very expensively, the task. But the money was a different color. It was Operation and Maintenance Army money, OMA 

dollars. And there was no way heaven and earth could move that 

money to be able to purchase a machine for us that would do it in, 

you know, whatever percentage of the time and money—couldn’t be 

done. It took 2 extra years before we were able to get language in 

the POM cycle where our machine is now recognized. 

So the small advanced businesses are absolutely in a lurch when 

we have something new that hasn’t been described, there is no 

funding for it. Now we have no congressional interest funding to 

help us, because it is very transparent. We have done something, 

competed it, won contracts, built something. We have an Army customer who needs something who will answer the phone and say, 

‘‘Yes, indeed, I have seen the prototype. We really need it.’’ And 

that is gone. That is gone. And so, I really fear for all that technology that has been developed and may be on the shelf. 

Mr. WEST. My time is up, Mr. Chairman. I yield back. 

Mr. SHUSTER. Thank you. 

And just so I am clear on that, you have a new technology which 

would have replaced a hundred people working? 

Ms. JACOBUS. Yes. 

Mr. SHUSTER. And your technology would have done it by—automated it, and it couldn’t get the money? 

Ms. JACOBUS. Absolutely not. 

Mr. SHUSTER. Okay. Thank you. 

With that, Ms. Sutton. 
22 

Ms. SUTTON. Thank you very much, Mr. Chairman. 

Mr. SHUSTER. Your mic. 

Ms. SUTTON. Thank you very much. 

And thank you to the witnesses. 

Just a point of clarification. Ms. Jacobus, when you talk about 

congressional interest money, are you talking about earmarks? 

Ms. JACOBUS. I am talking—we call them plus-ups. 

Mr. SHUSTER. We call them earmarks. 

Ms. SUTTON. We call plus-ups, earmarks. 

Ms. JACOBUS [continuing]. It is not the money that was budgeted 

someplace for something. 

Mr. SHUSTER. We have to get a new name. 

Ms. SUTTON. All right. 

Ms. JACOBUS. That is the name. 

Ms. SUTTON. I understand. I just want to make sure I am—— 

Ms. JACOBUS. But it has been a critical part of small businesses’ 

being able to put things in the field. I mean, it is just not realistic 

for us to do all that test and evaluation ourselves. 

Ms. SUTTON. I understand. I appreciate that. 

Okay. If we could just go back for a moment to another example 

I think that you speak of on page 3, because I think it really laid 

out the case pretty well. I am going to just sort of paraphrase here, 

and you tell me if this is right. 

Your testimony reads, ‘‘The large companies that desire the forward-looking work can apply massive internal research and development funds (IR&D or ‘IRAD’) which are for the most part also 

repurposed federally funds (allocated to the prime by overhead allowable funds that come with their large program work like the F– 

22 or Ground Combat Vehicle). 

And you also speak of the fact that they have marketing people 

everywhere and inevitably are connected, right? They are connected and know more about the project than you can ever know 

from openly published information sources. ‘‘Even in the case of a 

small ‘starter’ contract of several hundred thousand dollars, a larger prime can apply ‘loss-leader’ funds and ‘special knowledge pertaining to the bid’ to its bid-and-proposal-funded effort. The result 

is the smaller businesses won’t win, even when they are lower in 

cost and may have a technical edge.’’ 

And at the end of that page, you say, ‘‘As I understand it, what 

is done with that IR&D pool is not required to be delivered as part 

of a contract. Effectively, the Government provides pure investment 

money without strings to primes.’’ 

Ms. JACOBUS. That is what it seems. 

Ms. SUTTON. Okay. 

Would you all agree with that? 

Mr. SMITH. We actually have, as a service provider, have an 

IR&D program. So, actually, it is a budgeting issue. Bid-and-proposal money and IR&D are classified in a similar way in our accounting system and the way you account for costs. And if there 

is not a huge flurry of proposals that you have to do that particular 

year, you can take time to do innovation. 

And I think it scales totally with the amount of money that is 

coming in. If you are a huge company, you have a larger pool to 

draw from. It is discretionary. It is their rules. In the FAR associ-
23 

ated with IR&D, it has to be relevant to the mission of the agencies 

for whom you are working. So it is not without regulation, but it 

is possible to do some as part of your indirect cost structure in the 

course of normal business. 

Ms. SUTTON. And, Ms. Jacobus, it gives the big guys more opportunity to do flashy presentations? 

Ms. JACOBUS. Right. When it says ‘‘full and open competition,’’ 

we sometimes gathered up resources and put together these plain 

paper proposals, only to be faced with somebody who has made a 

movie with Hollywood actors in it showing the product in use. That 

is a true example. So you can only imagine. 

We compete in SBIR with companies 500 or under. So that is a 

pretty big range, 1 to 500. And we compete very fiercely for this. 

But the reason SBIR was put into place was that someone, 30 

years ago, smartly and bravely recognized that we would never 

have a chance to get these big R&D contracts. And the data 

showed close to 50 percent of scientists and engineers worked for 

small businesses. Small businesses, as a total, get 4 percent of 

R&D. That means there is a lot of people who are trained scientists, trained university graduates who are not using their brains 

to support the problems of the military. 

Ms. SUTTON. And, Ms. Jacobus, somewhere in your testimony I 

believe I read something that led me to believe that, in some cases, 

those who are actually winning these contracts are developing technology that actually already exists out there, but they do it this 

way because then they can own it. Is that correct? 

Ms. JACOBUS. We believe that. We believe that is true. 

Ms. SUTTON. Okay. Thank you. 

Mr. SHUSTER. We are going to go to a second round of questions, 

and I would like to just shorten them to 3 minutes. And if anybody—we will keep going as long as anybody wants. 

First, I just want to know if all of you agree, the sense that Mr. 

Smith brought out there, the trust. There doesn’t seem to be—the 

Department of Defense is looking at you like, ‘‘You guys are going 

to get us, but we are not going to let you get us.’’ And it seems to 

me, as being a small-business owner myself in my past, my suppliers were my partners. I mean, I needed them to be. And I trusted them until they gave me reason not to trust them. 

So, do all of you agree, do you get that sense that your association, your members are coming in there saying, they are looking at 

us like we are committing a crime before we even committed—do 

you all agree with that? Is there an agreement? 

Ms. Jacobus, yeah. 

Ms. JACOBUS. Sometimes we have to sign disclosures that are 

very complicated pieces of paper. 

Mr. SHUSTER. Right. 

Ms. JACOBUS. For example, an unfunded requirement that we 

have as an SBIR company is that, 10 years later, we are supposed 

to report the commercialization and impact of that technology. And 

that means we have to go to the open literature and see what other 

public companies—who don’t, of course, disclose the details, and we 

have to make a best estimate of what the impact of our early innovation was. That form sets criminal penalties if you get it wrong. 

Mr. SHUSTER. Right. I have seen those. 
24 

And, Mr. Smith, being in a midsized company, there are some 

out there that argue that we need to change the sizes and things 

like that to maybe smaller business or bigger. I mean, these things 

are based on numbers from probably 20 years ago when they first 

laid them out. And there is the other alternative, is, as you go from 

a small business to a midsized business, maybe you reduce the protections, you reduce the set-asides, so that small business can 

grow. 

Which of those would you think is a better route to go? 

Mr. SMITH. I totally understand your question. I actually would 

argue that you should relook at the NAICS codes and the relatively 

Byzantine way that we categorize small businesses. And I know 

the Small Business Administration does that routinely. 

Mr. SHUSTER. Right. That is not this committee’s jurisdiction. 

Mr. SMITH. Right. Right. 

Mr. SHUSTER. But I just wanted your input. 

Mr. SMITH. So I think, somehow, set-asides that are designed 

from where the Government thinks or you think that midsized 

businesses contribute. If midsized businesses—we necessarily now 

are going to compete for larger contracts. 

Mr. SHUSTER. So your preference would be to look at and say, 

let’s resize—— 

Mr. SMITH. Yes. 

Mr. SHUSTER [continuing]. Our metrics—— 

Mr. SMITH. Correct. Correct. 

Mr. SHUSTER [continuing]. And, you know, if it is 600 jobs or $17 

million. Okay. All right. 

Mr. SMITH. And one of the other interesting things we found with 

contracting offices, not just Department of Defense but others, is 

there is a tendency to pick the size standard that is the smallest 

that the contracting office believes will satisfy. And that has led, 

for me, to situations where we can’t compete. Again, I come back to a $5 billion procurement set-aside for $4 

million companies. The numbers don’t compute, in my mind. 

Mr. SHUSTER. Thank you very much. 

With that, Mr. Larsen. 

Mr. LARSEN. Thank you. 

Mr. Hodgkins, a couple of solutions, if you can help us out. You 

mentioned some of the problems. One is the forfeit of IP [intellectual property] in order to do business with DOD. We actually heard 

something similar from a business in my district that is doing some 

work for one of the services, writing up the specs so they can go 

out and compete for the job that the military wants them to do for 

them, meanwhile just basically opening up their books to everybody 

else who now wants to compete. 

What is the alternative, or what is the solution to that? 

Mr. HODGKINS. Well, we have advocated a couple of alternatives 

to the way the Government and DOD approaches contracting. We 

think, as Mr. West noted, that we can be more effective in a twoway communication: Knowing the problems in the field and then 

having companies, whether they are large or small, understand 

those problems and identify solutions to those problems. 

That communication is not as effective as it could be. And, as Mr. 

West probably experienced in the service, when we translate those 
25 

things into requirements and it gets handed off to a different community, there is frequently a disconnect completely. 

So we would propose that the Government look at more agile activities, certainly in the technology arena, that they look at doing 

things in a more rapid fashion, in a more agile fashion, in smaller 

increments, and you build capabilities in incremental fashions. 

For the contracting process itself, we think that there are ways 

that the Government can share—and there are other models that 

are used; British Columbia has an example as one—where the 

problem is provided to the community, the community responds, 

and pretty quickly the Government reviews those initial reactions, 

and they down-select to two or three companies they want to work 

with that they think actually offer something that they can achieve 

and they can afford. 

So there are models out there where you can more rapidly get 

to the solution; you don’t expose. 

And the lead-time issue, of course, is another one, where you are 

left out there trying to support, in the case of a small or midsized 

business, a maybe longer lead time than you have capital for. You 

are expected to hire people and keep that team in place while the 

Government makes these decisions, but you may have no income 

from that program yet. And that becomes very difficult. 

So, trying to do things more rapidly, in a more agile fashion, in 

a more incremental fashion. And the funding issue is also important that I raised, because if we have a 3-plus-year process of identifying what I want and then getting the money for it, that means 

that those companies are left hanging and the combatant commands are not able to deploy the technologies as quickly as they 

would like. So it is a combination of a number of things I have 

touched on that I think could improve the process. 

Mr. LARSEN. Great. Thank you. If you could get us some more 

detail on that question in your response in writing, I would appreciate it. 

Mr. HODGKINS. Certainly. 

[The information referred to can be found in the Appendix on 

page 99.] 

Mr. LARSEN. Thanks a lot. 

Mr. SHUSTER. Mr. Runyan. 

Mr. RUNYAN. Thank you, Mr. Chairman. 

Ms. Jacobus, you talk about the SBIR getting you to level IV. 

Can you give us, in your scenario, the hurdles that you had to 

jump to get to the next level, just so the panel can have an idea 

of what we have to go through? 

Ms. JACOBUS. Well, one of the reasons the ATACS ammunition 

machine worked was that there was a crisis over in Kuwait. It was 

not an important or regular problem for an operator. It was a 

mountain of ammunition that was being backed up, with the supply chain clogged as well. So it was an urgent problem, and I think 

people were willing to work with me. So we got some swept-up 

money to start the first machine. And we put a mod on an active 

SBIR at Picatinny Arsenal to do it. 

But then when the new money came in to build it, I am sorry 

Mr. Schilling from Rock Island isn’t here, but the people at Rock 

Island do essentially no R&D, zero. So they didn’t even know how 
26 

SBIR worked. And, luckily, with lots of phone calls, I found a gentleman at Picatinny who was able to take over the procurement, to 

put us on contract for that. 

And I think it was a special case because of the urgency, because 

we were able to put it in the field. We tested it along the way. But 

the Army had a safety feature, in that they had a full-time qualitycontrol person, a QUASAS [Quality Assurance Specialist Ammunition Specialist], it is called, operator with us at the machine. So we 

actually did have, you know, doctrine of following the inspector 

being there. 

Since then, we have gone through the, you know, millions of 

rounds of testing and done what, in the normal process, would have 

been done before we put it in the field. So it really is a great example of how quickly things can be done if people are motivated and 

they need it. And I am just really sorry that there must be hundreds of other companies out there that have solutions to problems, 

who really don’t have the way to transition them into the field. 

But for normal things, that lack of TRL-level test and evaluation 

money is a gigantic barrier for small businesses—gigantic. 

Mr. RUNYAN. Thank you, Chairman. Yield back. 

Mr. SHUSTER. Thank you very much. 

Ms. Hanabusa for questions. 

Ms. HANABUSA. Thank you, Mr. Chairman. 

Maybe this question is for Mr. Hodgkins. We have heard recently 

the whole concept about the fact that the DOD is not going to let 

contract bundling take place. Can you tell me how contract bundling has hurt the small businesses? 

Mr. HODGKINS. Well, contract bundling has been a practice 

that—the intent is to move together and buy, as the Government 

is trying to do in a number of areas, in bulk things that are related. 

What has come out of it, and I would identify as one of the conflicts in our socioeconomic policies, is that when you bundle things, 

as Mr. Smith noted, sometimes the job gets too big for a small business. And so—or they are moved into performing some unnatural 

role that they didn’t start the small business to do. 

So I think the bundling practice has pluses and minuses. What 

we have to figure out is the balance on how to do that in a way 

that we get efficiencies of scale for acquisition for the Government, 

perhaps for commodity items, but find ways for small businesses to 

compete in those. 

Ms. HANABUSA. Mr. Smith, do you want to add anything on that? 

Mr. SMITH. No. I think we live with it as a fact of life. And I actually believe, with the budget constraints we are likely to see in 

the next 10 years, there will be more of it. 

And the only thing I would seek your thoughts on is how to allow 

for some of the procurements to be set-asides in ways that are logical for small and midsized companies to compete for. There is a 

lot of value—the personal touch of a small business or the personal 

touch of a midsized business can lead to a building of trust that 

is, I think, healthy, and the ebb and flow, arm’s-length relationship 

between companies and the Government. The larger the contracts, 

the more fiduciary responsibility, the more distrust, the more regulation. 
27 

Ms. HANABUSA. So you actually feel that bundling has a role in 

the future as we start to cut the budget. You think that that is 

something that should be kept. 

Mr. SMITH. I think it is a fact of life. I don’t know if it should 

be kept. It is efficient, from the Government’s point of view. As the 

budget is cut, they are going to have fewer people to acquire on the 

acquisition side. That means fewer contracts, which means each of 

the individual contracts are bigger. 

I think it is not preferable. I think more defined contracts, smaller contracts are preferable, from the Government’s interest point of 

view. 

Ms. HANABUSA. Thank you. 

Thank you, Mr. Chair. 

Mr. SHUSTER. Ms. Sutton. 

Ms. SUTTON. Thank you, Mr. Chairman. 

Mr. Smith, if you could just help to clarify. I know that you point 

out in your testimony that the lack of clarity regarding inherently 

governmental functions is a problem. So could you just expand on 

what you think those governmental—how that should be defined? 

Mr. SMITH. I actually think it is very adequately defined in the 

FAR today, prior to the issuing of the policy letter that just came 

out within the last week or two. I think the definitions—you or I 

would probably agree that something is or is not inherently governmental. I don’t think that is the issue. 

When you add other layers, things that are closely associated 

with you, it seems to me that you are no longer putting yourself 

in a position to look at something from what is the best thing for 

the Government. I mean, if companies are better at doing certain 

services, why would the Government not buy from them? Or if they 

are any less expensive for doing certain services at the same quality, why would the Government not want to buy from a company? 

Companies come and go. Companies do not have the long-term— 

necessarily have the long-term tale of Government employees. So 

I see it as an advantage to the Government, to be able to buy something now and be able to stop buying it later. When you build an 

employee staff, I think you don’t have that flexibility. You don’t get 

the change of disciplines you might want. You are interested in biology today; you are going to be interested in electronics tomorrow. 

Ms. SUTTON. Thank you. 

I yield back. 

Mr. SHUSTER. Thank you very much. 

And I want to thank all of you again for being here today. We 

appreciate you spending your valuable time. And I know small and 

medium-sized businesses or wherever you are—I mean, it is confusing to you, dealing with the Government. I know. But I appreciate you taking the time, and I know how valuable that time is 

to you. 

And also to you, Mr. Hodgkins, and your association for letting 

you come here today and sharing your insights with us. So we appreciate it. 

For the members of the panel, tentatively October 7th. If your 

staff hasn’t been contacted, they will be contacted. And if you 

could, in rather quick form, yea or nay, that will make it easier for 

us to decide to move forward or not. 
28 

Also, on October the 11th, that is the Tuesday after the—after 

the 10th?—Columbus Day, we are going to have another hearing 

here with the panel. And your input—certainly we will be talking 

to the committee staff to get your input on that hearing also. 

So, with that, again, I thank everybody for coming today, and 

this hearing is adjourned. 

[Whereupon, at 4:30 p.m., the panel was adjourned.] 
A P P E N D I X 

SEPTEMBER 20, 2011 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

SEPTEMBER 20, 2011 

(33) 

Statement of Hon. Bill Shuster 

Chairman, Panel on Business Challenges 

within the Defense Industry 

Hearing on 

Challenges to Doing Business 

with the Department of Defense 

September 20, 2011 

Good afternoon. I’d like to welcome everyone to the first of a series of hearings this panel will hold examining business challenges 

in the defense industry. Chairman McKeon and Ranking Member 

Smith established this panel to take a deep-dive into the challenges 

facing firms that already work with the Department of Defense and 

those that want to do business with the Department. I’m honored 

that Chairman McKeon asked me to lead this panel alongside my 

friend from Washington State, Rick Larsen. 

Rounding out the panel membership are: 

• Bobby Schilling, from Illinois. Bobby represents the 17th district of Illinois which contains Rock Island Arsenal. Bobby is 

a small-business owner and has firsthand experience of the 

difficulties dealing with Federal and State Governments. 

• Betty Sutton represents the 13th district of Ohio. As co-chair 

of the Congressional Task Force on job creation, Betty is 

dedicated to promoting good business practices and creating 

American jobs. 

• Jon Runyan from New Jersey. Jon represents the 3rd district 

of New Jersey which contains Ft. Dix/Maguire AFB and has 

a vested interest in defense business practices across the 

board. 

• Colleen Hanabusa is from the 1st district of Hawaii. She has 

been involved in Hawaii politics since 1998. With a large defense presence in Hawaii, Colleen understands how important it is bring efficiency and effectiveness to the defense industry. 

• Allen West from the 22nd district of Florida. Allen retired 

from the Army in 2004 after 22 years and brings a unique 

perspective of experience on both sides of the table—Government and industry. 

I want to thank all of the members of the panel for taking time 

to lend their expertise to this effort. We’ve all heard, in our districts and across the country, from businesses that find it extremely difficult to successfully navigate the DOD acquisition system. This is particularly true for small businesses and those involved in science and technology efforts. While there are programs 
34 

out there to assist businesses in transitioning innovative ideas and 

technologies to a final end-product that satisfies a military requirement, there are many obstacles in the way. 

In these current economic times, we must make good use of every 

tax-dollar we spend on defense and we can do this by leveraging 

the heart of the American workforce—small businesses. By reducing barriers to entry, we can generate competition, spur innovation, 

and stimulate the economy. I look forward to working with Rick 

and the other members of the panel to find ways to do just that. 
35 

Statement of Hon. Rick Larsen 

Ranking Member, Panel on Business Challenges 

within the Defense Industry 

Hearing on 

Challenges to Doing Business 

with the Department of Defense 

September 20, 2011 

I want to thank Chairman McKeon and Ranking Member Smith 

for putting this panel together. In 6 months we will have substantive solutions to the challenges small and medium-sized businesses face when they approach DOD. 

The Federal budget is increasingly strained, and the military is 

not immune to cuts. However, we must ensure that the needs of 

the military to provide for national security and defense are not 

shortchanged. 

In order to accomplish this, the DOD will need to stretch their 

dollar and maintain robust competition. Better contracting will also 

offer a chance for job creation and growth for companies that often 

have the best products but find barriers in their path when they 

approach DOD. How to make and implement improvements is 

something we will aim to discover over the next few months. 

Small and medium-sized businesses need to be part of the defense industrial base, and that means rethinking the current 

model. Our goal must be to break down barriers and improve competition for defense contracting to get better prices and better products and services for the warfighter. 

I thank our witnesses for their participation today. Understanding the general framework of the challenges we face will help 

identify solutions. 

Last month, the Chairman joined me in Everett, Washington, in 

my district when I held a roundtable with local leaders. We spoke 

with them about their successes and their failures in working with 

DOD. One individual spoke of having to outline technical specifics 

to DOD in order to have a proposal released, only to then have the 

competition have access to those specifics. Another spoke of not receiving payment on time—a serious concern for small companies 

not flush with cash. We need to continue to talk and listen to these 

businesses and find solutions. 

I want to thank all my colleagues on this panel. I believe this entire group of members brings a diverse perspective on the issues. 

We are all here because we want to improve the chance for competition, for job growth and for making certain our military and our 

soldiers have the best options and capabilities available to them. 
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DOCUMENTS SUBMITTED FOR THE RECORD 

SEPTEMBER 20, 2011 

(95) 
96 
WITNESS RESPONSES TO QUESTIONS ASKED DURING 

THE HEARING 

SEPTEMBER 20, 2011 

(99) 

RESPONSE TO QUESTION SUBMITTED BY MR. LARSEN 

Mr. HODGKINS. [The information was not available at the time of printing.] [See 

page 25.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING 

SEPTEMBER 20, 2011 

(103) 

QUESTIONS SUBMITTED BY MR. SCHILLING 

Mr. SCHILLING. How can we help industry deliver vital innovation and cuttingedge solutions? 

Mr. HODGKINS. [The information was not available at the time of printing.] 

Mr. SCHILLING. What measures can we take to ensure that the best and brightest 

our national STEM [science, technology, engineering, mathematics] efforts have to 

offer find opportunities inside the national defense industrial base, and overall national industrial base? 

Mr. HODGKINS. [The information was not available at the time of printing.] 

Mr. SCHILLING. United States manufacturing exports create good technology jobs 

across the country. What can be done to support foreign military sales that benefit 

job growth and make the U.S. industrial base more competitive globally? 

Mr. HODGKINS. [The information was not available at the time of printing.] 

Mr. SCHILLING. How can we help industry deliver vital innovation and cuttingedge solutions? 

Mr. SMITH. I am answering this question from the vantage point of a Federal professional services provider who has primarily supported clients in the science and 

technology (S&T) domain. Strategic Analysis Inc. (SA) is lucky enough to have been 

part of many programs and contracts that have delivered vital innovation and cutting-edge solutions as: A consultant to the Government, advising on the ideas and 

efforts of other businesses and organizations, both large and small; and as a developer of innovation and cutting-edge solutions ourselves. 

The challenges to delivering innovation begin with simply trying to ‘‘get in the 

door’’ to understand the needs of a Federal client or identify if a technology or idea 

could apply or be useful to a Federal client. When my company started, companies 

had the ability to offer innovative ideas to potential buyers of services. Government 

managers that sought contractor support were willing to discuss their requirements 

as well as to listen to innovative ideas, tools and methodologies. Companies such 

as mine were willing to offer proprietary approaches hoping that the discussion 

might lead to procurement opportunities and knowing that their innovations would 

be protected from competitors. 

Today, discussions with program managers are limited any time a procurement 

is anticipated. New contracting constraints are being practiced and concerns of unfair competitions that could lead to a protest have resulted in limited scope Task 

Orders that are awarded on a lowest-price technically acceptable basis with no room 

(both within the scope of individual Performance Work Statements and the overall 

scope of the base contract) to do more than what is ‘‘technically acceptable.’’ Contracting officers are very reluctant to have the program managers entertain innovative ideas for fear that it would give a company a competitive advantage. The approach is either to communicate the entire discussion between the program manager 

and the contractor, compromising any proprietary information discussed, or to prevent the discussion from occurring altogether. Overall, companies have become more 

in the dark on what their clients might need and more reluctant to share their 

ideas. Many companies now worry that ideas discussed will be compromised during 

the procurement process. This concerns companies because they might no longer 

have the differentiator that wins the next award. 

In general, the conversations not only need to be allowed but even encouraged. 

To level the playing field, the process has to be open to everyone and each organization needs to identify a process for keeping ideas coming in the door. This does not 

mean just more industry days. It means allowing companies the opportunity for 1- 

on-1s prior to finalizing any particular solicitation. This also could include easier 

base access, open access to program managers and/or their staff representation, and 

training, when needed, of individuals involved with a procurement. The U.S. Government should allow for the opportunity to discuss innovations without fear of compromise during the procurement process. 

For 25 years as a consultant to the Government, SA has provided advice and expertise that has supported decisions by the Government to fund, not fund, continue 

funding or terminate programs and projects that develop the next generation of 

technologies. One of the greatest challenges for moving new technology from the 
104 

R&D phase to the hands of the operators is technology transition. Many technologies do not find an operational home because of a mismatch of what the operational community needs or wants and what they get. What we believe will help 

is to continue to increase the number of opportunities to expose industry, academia 

and other Federal organizations to the end-user to provide them with the opportunity to understand what is really needed. The DOD should facilitate meetings 

with DOD users to understand gaps (there are very few DOD organizations that facilitate face-to-faces with the decision makers); and provide visibility of funding to 

help a small business know where to focus. The SBIR and STTR programs are invaluable in this regard with early seed money as well as funding through TRL 4. 

Internally, SA has also developed cutting-edge solutions. We have done so for two 

reasons: To develop innovations that reduce the cost of services while not diminishing vital mission support such as through business process re-engineering; and 

developing solutions that answer technical problems our clients are trying to solve 

including submitting ideas through Federal BAA and SBIR programs. Government 

services contractors can be a significant contributor to innovation if allowed to do 

so through the procurement system. But, there are now significant deterrents to innovation within the DOD acquisition system for professional services, such as those 

imposed as a result of new contracting practices and organizational conflict of interest (OCI) implementations. 

For a service provider such as my company, innovation can be a key differentiator 

among the many companies competing for work. We have developed innovations internally primarily through independent research and development (IR&D). To do so, 

we have looked at our client needs and have identified modest investments that 

solve or try to solve specific problems that they have expressed to our employees. 

We are small, but we have exceptional people in support of our clients. They see 

opportunities for improvement. We are not contractually tasked with such IR&D. 

We do it in order to add value to our clients. Our solutions have included innovative 

office automation approaches and tools tied to the specific business processes of the 

offices where we work. All in all, we have tried to capture the best ideas from our 

staff. Our clients have found the result of such investments quite valuable. Innovative solutions can be achieved through changes in business processes, through creative re-engineering of an organization and through the introduction of new ‘‘solutions.’’ 

The challenge that we have recently encountered is the difficulty in providing 

such innovations under the contract that it was identified for. We are finding that 

in order to help our clients by offering solutions, we have to provide the solutions 

under an entirely different contract vehicle. We believe the contracting environment 

has become hypersensitive on compartmentalizing functions to the point of deterring 

new ideas or pursuit of the ‘‘best’’ ideas. Further, we have become reluctant to invest in innovation as it no longer can be a discriminator in contract awards. The 

requirements for services have become stylized descriptions of labor categories and 

the competitions become all about the lowest price offerings, leaving, once again, no 

room or rewards for innovation. We recommend strongly that, in S&T environments, 

lowest-price contracting strategies be avoided because you will get what you pay for. 

Additionally, we believe all contracts should put in place options for innovation even 

if not funded on Day 1. 

SA has and continues to develop ideas through the Federal BAA and SBIR programs. When a conflict of interest poses a threat to the viability of the idea, SA has 

either spun off an R&D company or terminated the pursuit. Spinning off small subsidiaries in specific technology areas and facilitating their success through investment has enabled the technology to be investigated free of any restrictions. Even 

as a small company, we have employed this approach, sometimes successfully; sometimes not. In each case, the seed of the technical innovation was an employee with 

an idea and the motivation to carry it further. Our innovations have included software, advanced sensors, renewable energy study methodologies and novel materials 

ideas. Two of the companies remain viable today. There has been one business that 

had to be closed because of OCI issues in a zero-tolerant environment to affiliates. 

OCI is one area that has become much more restrictive to companies providing 

both technical consulting and developing technical solutions to the same clients. 

While a clean line reduces even the appearance of impropriety, it also may prevent 

ideas from being fully explored. Companies will simply not invest their intellectual 

capital on a path that might lead to a contract that has the appearance of an OCI 

concern. They see no return on their investment. For a small business with a limited set of clients in their portfolio and a limited set of assets, hitting a dead end 

with a client because of a possible OCI could mean death to the idea. We have many 

smart people with good ideas that will lay dormant over this concern. 
105 

Mr. SCHILLING. What measures can we take to ensure that the best and brightest 

our national STEM [science, technology, engineering, mathematics] efforts have to 

offer find opportunities inside the national defense industrial base, and overall national industrial base? 

Mr. SMITH. We believe that the STEM issue is a National Security issue. Without 

a workforce properly trained in STEM domains, we will not have the warfighters 

needed to defend our Nation on the next generation of battlefields, battlefields that 

include the cyber domain. Industry has always been challenged with providing a 

workforce that supplements the Federal Government’s workforce providing expertise 

that can ebb and flow with the fluctuations of needs. Industry has just as much interest in addressing the STEM negative trend as the Federal Government. Industry 

invests in training, education and charitable contributions to STEM initiatives. Industry organizations such as NDIA and WID have implemented scholarship programs and funded and supported initiatives in the different communities where 

their chapters reside. Businesses have also put aside hundreds of thousands of dollars towards STEM initiatives nationwide including scholarships and grants. Competitions, conferences, classroom lectures and financial donations to schools are all 

ways that industry is addressing this issue. The Department of Defense has significant ongoing programs aimed at fostering STEM education. The DOD Science, Technology, Engineering, and Mathematics (STEM) Development Office focuses on education and outreach to inspire, develop, attract, and retain highly-qualified, diverse, 

world-class STEM talent to meet the DOD and the Nation’s current and future complex scientific and technological challenges. Many such programs fall under the National Defense Education Program (NDEP), outlined below. 

• K–12 teachers and students: NDEP’s K–12 Programs tap into educational 

innovation. NDEP has cast a nationwide net in search of some of the best and 

most innovative K–12 science and engineering education initiatives in the 

country. 

• Undergraduate and graduate students: The Science, Mathematics And 

Research for Transformation (SMART) Scholarship for Service Program supports undergraduate and graduate students pursuing degrees in STEM disciplines. The program aims to increase the number of civilian scientists and 

engineers primarily working at DOD laboratories. 

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

on topics of interest to DOD. 

• R&D programs aimed at STEM: There are also R&D programs to develop 

tools and techniques in support of STEM education. The DARPA Computer 

Science in Science, Technology, Engineering, and Mathematics Education 

(CS–STEM) program is an example. 

With all things being equal, the solution, we believe, resides somewhere in the 

collaboration of Government and the defense business sector. The U.S. Cyber Challenge Coalition is a great example of how Industry and the Federal Government can 

successfully partner to tackle one area of the STEM domain without the ‘‘your 

money’’ or ‘‘my money’’ driving the dialogue. However, one partner that is not apparent in many initiatives is the educators and educational administrators. The educational domain has to be part of any solution, idea or initiative that is proposed. 

In the end, the teachers and other educational professionals carry the weight of any 

successful model every day and they should be enlisted to fight this battle. We believe DOD should increase its emphasis on fostering enthusiasm and interest in 

STEM at an early age. Research is clear that the earlier one can reach a child in 

their educational development, the more lasting the effect. In fact, our family feels 

so strongly that more needs to be done in this area that we started a non-profit organization in 2010 that is beginning a research and mentorship thrust in middle 

school STEM education, The Leadville Institute. This organization has starting by 

supporting specific STEM programs in the two communities where we are located, 

Arlington, VA, and Colorado Springs, CO. We are taking small steps in 2011, with 

aspirations to gain broader support from the defense industrial community, particularly small and midsize companies. 

So what more can DOD undertake? DOD and its contractor base should be partners in local communities across the country. A coordinated outreach and 

mentorship program would pay significant dividends in addressing emerging defense workforce gaps. The huge projected shortcoming in computer sciences is such 

an area. We recommend initiatives that reach middle school students and include 

participants from both Government and the private sector. DOD might find unique 
106 

ways of challenging youth such as through ‘‘Grand Challenges,’’ focused games, online games like FoldIt.it and technical competitions. Many such competitions exist 

on a national scale. We need competitions aimed at younger students, as well. There 

is a critical need to reach younger children—give them a challenge to overcome and 

then empower them with a sense of ownership in their successes. 

Mr. SCHILLING. United States manufacturing exports create good technology jobs 

across the country. What can be done to support foreign military sales that benefit 

job growth and make the U.S. industrial base more competitive globally? 

Mr. SMITH. Since my company is a service provider, not a manufacturer, with facilities and staff all located inside the CONUS, I cannot provide any personal experience or analysis to fully address this question. 

Mr. SCHILLING. How can we help industry deliver vital innovation and cuttingedge solutions? 

Ms. JACOBUS. [The information was not available at the time of printing.] 

Mr. SCHILLING. What measures can we take to ensure that the best and brightest 

our national STEM efforts have to offer find opportunities inside the national defense industrial base, and overall national industrial base? 

Ms. JACOBUS. [The information was not available at the time of printing.] 

Mr. SCHILLING. United States manufacturing exports create good technology jobs 

across the country. What can be done to support foreign military sales that benefit 

job growth and make the U.S. industrial base more competitive globally? 

Ms. JACOBUS. [The information was not available at the time of printing.] 

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