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i 

71–456 2012

[H.A.S.C. No. 112–85] 

THE DEFENSE INDUSTRIAL BASE: THE 

ROLE OF 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 

NOVEMBER 1, 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, November 1, 2011, The Defense Industrial Base: The Role of the 

Department of Defense ........................................................................................ 1 

APPENDIX: 

Tuesday, November 1, 2011 .................................................................................... 35 

TUESDAY, NOVEMBER 1, 2011 

THE DEFENSE INDUSTRIAL BASE: THE ROLE OF 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 

Gudger, Andre J., Director, Office of Small Business Programs, U.S. Department of Defense .................................................................................................... 6 

Lambert, Brett B., Deputy Assistant Secretary of Defense for Manufacturing 

and Industrial Base Policy, U.S. Department of Defense ................................. 3 

APPENDIX 

PREPARED STATEMENTS: 

Gudger, Andre J. .............................................................................................. 52 

Lambert, Brett B. ............................................................................................. 42 

Larsen, Hon. Rick ............................................................................................. 41 

Shuster, Hon. Bill ............................................................................................. 39 

DOCUMENTS SUBMITTED FOR THE RECORD: 

‘‘DOD Best Practices and FY12 Strategy,’’ Submitted by Brett B. Lambert ................................................................................................................. 67 

Hon. Ashton B. Carter’s Memorandum on ‘‘Defense Research and Development Rapid Innovation Fund (RIF) Goals and Implementation Guidelines,’’ Submitted by Andre J. Gudger ........................................................ 70 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

Mr. Larsen ........................................................................................................ 79 

Mr. Shuster ....................................................................................................... 79 

Ms. Sutton ......................................................................................................... 81 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

Mr. Larsen ........................................................................................................ 86 

Mr. Shuster ....................................................................................................... 85 
Page

IV 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING—Continued 

Mr. Joe Wilson, a Representative from South Carolina, Committee on 

Armed Services ............................................................................................. 87 
(1) 

THE DEFENSE INDUSTRIAL BASE: THE ROLE OF THE 

DEPARTMENT OF DEFENSE 

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

INDUSTRY, Washington, DC, Tuesday, November 1, 2011. 

The panel met, pursuant to call, at 3:00 p.m. in room 2212, Rayburn House Office Building, Hon. Bill Shuster (chairman of the 

panel) presiding. 

Mr. SHUSTER. Good afternoon. The hearing will come to order. 

I want to thank everybody for being here today. 

I think we are live on C–SPAN. Are we live on C–SPAN? We will 

be broadcast later, so we can watch it tonight. It will put us to 

sleep. 

Again, I thank everybody for being here today. 

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

Mr. SHUSTER. The House Armed Services Committee Panel on 

Business Challenges in the Defense Industry meets today to continue our dialogue regarding the health and future of our Nation’s 

defense industrial base by receiving testimony from witnesses from 

the Department of Defense. 

While the Weapons System Acquisition Reform Act did much to 

increase transparency and foster competition, there is still a great 

deal of room for improvement in the Department of Defense business practices. 

Last Monday, the panel heard from policy experts and from various think tanks that have studied the structure, effectiveness, and 

efficiency of the defense industrial base. Our witnesses last week 

pointed out that our Nation lacks a coherent and complete strategy 

for our Nation’s defense. Without such a strategy, the defense industrial base is left without the guidance and transparency necessary to ensure viability and efficiency. 

This panel is facing some complex issues, and nothing illuminates that more than the RAND study on military research and development policies, which I think I am going to carry around with 

me from here on out. I think it does a very good job of laying out 

the complexity of the issues as it offers some findings and recommendations of the policy of providing the military with new 

weapons and capabilities. The only problem with this RAND study 

is it is from 1958, so we are still talking about the same problems 

50 years later. So that is what this panel wants to take a look at 
2 

and change the way we are for the betterment of our Nation and 

our Department of Defense and for the warfighter, especially. 

As a panel, we traveled to Akron, Ohio, on Friday where we met 

with small and mid-sized businesses working on highly technical 

solutions to deliver capabilities to our warfighter. We met with 

companies making advanced coatings to prevent corrosion, composite armor, advanced aerodynamic control systems, and technologies to enable remote detection and identification of pathogens. 

Just like in 1958, our defense industry today is having a hard 

time getting clear requirements from the DOD [Department of Defense], bridging the gap between development and fielding and surviving overly burdensome, unresponsive program management policies and regulations. Navigating these issues is difficult for large 

defense contractors and near impossible for small businesses. Today’s hearing is an opportunity for us to hear from these critical 

issues from witnesses from the Department of Defense. 

I would like to introduce, first, the Deputy Assistant Secretary 

of Defense for Manufacturing and Industrial Base Policy, Mr. Brett 

Lambert—thank you for being here, Mr. Lambert—and Mr. Anthony Gudger, the Director of the Office of Small Business Programs in the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics. 

Again, welcome. I look forward to hearing your testimony and 

frank discussion. 

But before we receive testimony, I would also like to take a 

minute to thank Congresswoman Betty Sutton and her dedicated 

staff for hosting the panel in Akron. It was an extremely informative visit. 

In addition to the roundtable with industry, we also had a remarkable discussion on the impact of corrosion on DOD’s equipment facilities and got a briefing on the University of Akron’s 

unique program in corrosion research and engineering. On the trip, 

I learned that the Department of Defense spends nearly $23 billion 

a year dealing with corrosion. That is $23 billion out of a defense 

budget that we are not spending on our troops, and it is something 

that I think all members of the panel and the Armed Services Committee need to be aware of. So I want to thank Betty for bringing 

this important issue to our attention. 

Our next field roundtable will be happening on Friday, December 

9th, in Congressman Jon Runyan’s district, the 3rd District of New 

Jersey. These sessions are invaluable to this panel’s work, and I 

hope all our panel members have an opportunity to join us on that 

trip. 

At this time, I turn it over to our ranking member, Mr. Larsen, 

if he has any comments. 

[The prepared statement of Mr. Shuster can be found in the Appendix on page 39.] 

STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE 

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

Mr. LARSEN. Thank you, Mr. Chairman, and I am pleased to be 

joining you and the other panel members here today. 
3 

As we have discussed, this panel aims to discover the challenges 

facing the current defense industry partnership and the capabilities they produce and, based on that RAND report, perhaps solving 

them at some point as well. 

Small businesses are essential to a robust and agile industrial 

base as well as for a strong economy. The U.S. defense base has 

a long history of producing the best military systems in the world, 

and we have to ensure that this continues both for our warfighter 

as well because it does create jobs here in the U.S. 

Key aspects of a strong defense industrial base include assuredness of supply, American jobs, and ensuring the best technology for 

the warfighter. The mission of the manufacturing and industrial 

base policy is to monitor, preserve, and enhance the national security industrial base of the United States. As we know, small businesses play a critical role in the strength of our economy by creating technologies for many folks, including our warfighter. We 

need to ensure that our small businesses are given every opportunity to compete on a level playing field with larger businesses. 

Over the past few months, we have heard that small businesses 

face challenges regarding security clearances, lead times from DOD 

contract solicitation to submission due dates, ITAR [International 

Traffic in Arms Regulations] regulations, defense auditing, and 

other regulatory and procedural issues. 

I am pleased with what we have learned so far from our first 

panel hearing that looked at challenges our small and mediumsized businesses are having creating and maintaining opportunities 

within the Department of Defense. Testimony from that hearing 

was echoed during our district visits and roundtable discussions. In 

addition, comments from local leaders have been extremely helpful. 

So far, this panel has met with business readers in my congressional district in August. We visited Rock Island Arsenal in early 

October in Mr. Schilling’s district. And last week I and other panel 

members met with industry leaders in and around Ms. Sutton’s 

district in Akron, Ohio. 

Connecting today’s hearing with our hearing on October 24th 

where we discussed the role and the future of the defense industrial base with witnesses from think tanks, we will hear today 

what DOD is doing to improve the defense business environment 

with a particular focus on small business. I look forward today to 

hearing today’s testimony and thank you all for being here. 

Thank you again, Mr. Chairman. 

[The prepared statement of Mr. Larsen can be found in the Appendix on page 41.] 

Mr. SHUSTER. Thank you, Mr. Larsen. 

With that, we will start with Mr. Lambert, if you would proceed. 

STATEMENT OF BRETT B. LAMBERT, DEPUTY ASSISTANT SECRETARY OF DEFENSE FOR MANUFACTURING AND INDUSTRIAL BASE POLICY, U.S. DEPARTMENT OF DEFENSE 

Secretary LAMBERT. Chairman Shuster, Congressman Larsen, 

and members of the panel and staff, thank you for the opportunity 

to submit our written testimony on behalf of the Department regarding maintaining a healthy and productive defense industrial 

base. 
4 

I am Brett Lambert, the Deputy Assistant for Defense for Manufacturing and Industrial Base Policy. 

Let me begin by defining what we mean by the term ‘‘defense industrial base,’’ because I think the definition is important. The defense industrial base is comprised of an extremely diverse set of 

companies that both provide products and services directly and indirectly to the national security agencies, including the military. 

References to ‘‘the’’ defense industrial base that imply some monolithic entity are not analytically useful. The defense industrial 

base includes companies of all shapes and sizes resourced from 

around the globe, from some of the world’s largest public companies 

to sole proprietorships to garage start-ups. Some companies deal directly with the Federal government, while the vast majority act as 

suppliers, subcontractors, and service providers in a value chain 

that leads to those prime contractors. 

Companies at any tier, and at any size, may offer critical or 

hard-to-produce products that ultimately lead to the systems used 

by our warfighters. Some products and services sold by companies 

in the defense industrial base are unique to defense applications 

alone, while most have substantial levels of non-defense demand or 

are even sold exclusively on commercial terms such that the supplier may not even know that the products is used in our military 

systems. And, likewise, the military may not know it depends upon 

a primarily commercial component. Finally, while the pace of innovation is extremely rapid in some segments across our base, other 

segments are based on mature technologies where dynamic innovation is less important to the Department. 

In short, there is not a single defense industrial base. There is 

a defense market served by a diverse selection of companies which 

span and often reflect the greater global economy for goods and 

services. 

The U.S. military’s superior operational capabilities are enabled 

by this diverse base, and for decades the U.S. has commanded a 

decisive lead in the quality of the defense-related research and engineering conducted globally and in the military capabilities and 

products that flow from this work. However, these advantages that 

have enabled American preeminence in the defense technology are 

not a birthright, and the key elements of that base are necessary 

to ensure U.S. dominance on future battlefields must be sustained 

and nurtured. The U.S. defense industrial base is critical to equipping our military with superior capabilities, and a strong, technically vibrant, financially successful industry is therefore in the 

national interest. 

As the era of sustained growth in defense budgets comes to an 

end, the Pentagon stewardship responsibility to ensure access to a 

robust industrial base becomes more challenging. The Department 

needs to adapt its industrial base considerations and actions to 

emerging fiscal realities. 

In the past 2 years, we have made significant increases in efforts 

to address the implications of the changes in both budgets and the 

nature of the industry. We understand that America relies on a defense industry that is healthy, robust, and innovative, and the Department appreciates that businesses must be motivated by the opportunity to make reasonable profit. Indeed, leveraging the inher-
5 

ent motivations to allow companies that perform well to increase 

profit levels above a mean is in the Department’s interest. Likewise, individual companies that do not provide the government 

with quality products that meet our requirements on time at a reasonable cost should expect to make reduced profits. In the highbudget environments of the past, many companies have grown to 

expect high margins independent of quality. As budgets shrink, 

this practice must end. 

As the budget environment changes, we do expect some niche 

firms to face difficulty due to decreased demand. In such cases, we 

attempt to identify early warning signs through a variety of means 

to isolate and, if necessary, mitigate these issues, particularly if a 

firm offers truly critical, unique, and necessary capabilities. While 

to date these cases have been isolated, we must nonetheless be prepared for the occasion to tailor our investment policies to preserve 

essential capabilities, and we need sufficient insight to make these 

choices. 

Toward that end, we have undertaken an aggressive effort to 

map and assess the industry sector by sector and tier by tier. I can 

go into more detail during the question and answer on this particular effort. 

Finally, the Department relies on a variety of investment tools 

to directly sustain and improve discrete, critical industrial capabilities. Program offices routinely manage industrial-based issues as 

part of their programs to keep them on track. 

One key mechanism we also have at Office of the Secretary of 

Defense is the manufacturing technology, or ManTech, applied research programs. The Department also preserves critical capabilities through Research and Development investments, life-type purchases of materials and components, and acquisition strategy 

choices that sometimes give roles to multiple companies rather 

than rely on single suppliers. 

Another example of the industrial base investment the Department is working on is in partnership with 18 civil acquisition departments and agencies on initiatives to preserve and create essential domestic capabilities through forums such as the Defense Production Act Committee. 

Our commitment to working with industry, however, does not 

mean the Department should underwrite sunset industries or prop 

up poor business models. It does mean the Department will create 

an environment in which our vital industrial capabilities, a foundation of our strength, can thrive and continue to provide our 

warfighters with the best systems available at a reasonable cost. 

Congress has been actively involved in shaping and supporting 

many of these initiatives on this front, and the support has been 

both welcomed and appreciated. 

Congress has also supported the Department’s engagement with 

industry, affording the Department the flexibility necessary to 

maintain a healthy industrial base; and on behalf of the Department we appreciate this support and look forward to our continued 

partnership to best serve the warfighters and our taxpayers while 

maintaining a financially healthy and technologically superior industrial base. 

Thank you. 
6 

[The prepared statement of Mr. Lambert can be found in the Appendix on page 42.] 

Mr. SHUSTER. Thank you, Mr. Lambert. 

With that, Mr. Gudger. 

STATEMENT OF ANDRE J. GUDGER, DIRECTOR, OFFICE OF 

SMALL BUSINESS PROGRAMS, U.S. DEPARTMENT OF DEFENSE 

Mr. GUDGER. Thank you, Chairman Shuster, Ranking Member 

Larsen, and members of the panel. Thank you for the opportunity 

to speak to you today about the defense industrial base and the 

role that small business plays within the Department of Defense. 

My name is Andre Gudger, and I am the Director in the Department of Defense for Office Small Business Programs, and I report 

to the Under Secretary for Acquisition, Technology, and Logistics. 

The Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics is the principal staff element of the Secretary 

of Defense for all matters to DOD acquisition. Today, I will discuss 

the role of small business programs and some of our initiatives and 

tracking of small business goals. 

The primary role of the Office of Small Business Programs is to 

advise the Secretary of Defense on all things small business. This 

includes policy, oversight, and meeting statutory and regulatory requirements. The Office of Small Business Programs works hard to 

advocate for small businesses for inclusion in the acquisition process, the creation of awareness, and the dynamic role that small 

businesses play in our Nation’s economy. 

In September, 2011, Secretary Leon Panetta issued a memo to 

the acquisition workforce emphasizing the importance to the entire 

Department of Defense on meeting its small business goals and 

showing the commitment of DOD’s leadership in supporting small 

business. This was unprecedented. There has never been a Secretary of Defense to sign out a memo for small business in the Department’s history, and the Secretary of Defense took it that serious where he signed it while he was on vacation. 

So when I look at the activities that the Department of Defense 

has outlined for the Small Business Program Office, we maintain 

three essential programs that is our base for creating opportunities 

for small business. 

The first one is the Mentor/Prote ́ge ́ Program, where small businesses can receive a one-time developmental assistance from a 

larger company on developing their future capability. The other 

program that we manage is the Small Business Innovation Research and Technology Transfer Program, which is one of the most 

successful small business programs in the country, where this creates an opportunity for companies where we fund them to develop 

technologies, solutions, and services to meet the urgent needs of 

the Department. And, lastly, our Indian Incentive Program where 

we provide opportunity to Indian-based companies. 

When I think about the outreach that we have provided around 

the country, I personally have hosted several roundtables throughout the country looking for new ideas on increasing small business 

participation in our contracting process and making it for companies easier to do business with the Department. 
7 

We have hosted two large-scale outreach events with our Deputy 

Secretary—at the time, he was the Under Secretary for Acquisition, Technology, and Logistics—Dr. Ashton Carter, where we offered matchmaking opportunities in the Department. And we plan 

on continuing this engagement because it was successful for us, 

and we will continue in future years. 

In addition to the outreach with the community, we also have 

opened the door in the Department where we have been engaging 

other stakeholders in the Department of Defense in a more coordinated effort on the opportunities and the value that small business 

brings and looking at including them in the overall center programs in the future of the Department and the direction that we 

are going. 

As I previously mentioned, Secretary Panetta issued a memo to 

the acquisition workforce. The military secretaries also issued a 

memo to their workforces about the importance of small business, 

meeting the goals and inclusion of small businesses in our direction 

as we continue to build capability. 

When I look at the next thing, our regulatory changes, one part 

of the OSBP [Office of Small Business Programs] initiatives was to 

create an opportunity where we recognized access to capital was a 

challenge for most small businesses, so we made a change in the 

DFARS [Defense Federal Acquisition Regulation Supplement] to 

allow for accelerated payments to small business, which was tremendous. We, with this change, were able to pay small business 

one-third earlier, faster than they normally would get paid, on average. We are looking to continue this in fiscal year ’12. This puts 

billions of dollars in small business’s pockets, and this was used to 

hire workers, expand their capabilities, and look for ways to participate in new contracting opportunities more rapidly. 

Next, we commissioned studies. One of the first studies I commissioned was a reduction of barriers for service disabled and veteran businesses so that we could reduce barriers to allow them to 

participate at a much higher level as they continued to develop 

their capability set within the Department of Defense. 

One of the next things we also did was the accountability. We 

have included small business evaluation criteria in senior execs 

who influence acquisition outcomes in the Department of Defense, 

particularly in acquisition, technology, and logistics. And, furthermore, we are looking at additional ways to include assessing ways 

of determining subcontracting achievement for the Department as 

well. 

Finally, I would like to talk about the impact in our current environment. The continuing resolution has a significant impact on us 

because our programs are impacted by the defense budget, and 

with the amount of uncertainty small businesses tend to not invest 

and make key hires for the future. 

In conclusion, I would like to thank the panel for allowing me to 

speak today. As you can see, our programs and initiatives have focused on increasing small business utilization through reducing 

barriers and streamlining the acquisition process. These initiatives 

address several of the issues this committee is seeking to identify 

based on its work plan. 

I look forward to answering any questions you may have. 
8 

[The prepared statement of Mr. Gudger can be found in the Appendix on page 52.] 

Mr. SHUSTER. Thank you very much. 

From your testimony, you are making strides or trying to make 

strides in the right direction, but I think you are going to find out 

after today what we have heard around the country that those 

strides are very, very small and they need to be bigger and we need 

to figure out a way to break through the DOD, especially for these 

small and medium-sized businesses, to do more business, to make 

it easier for them to get their great ideas, products, and services 

to the warfighter and to the Department of Defense. 

I guess the first question I have is your view of doing business 

with DOD. Is it a market system? Is it a traditional market system 

that we use? Is that the way we should view it? Or is it something 

different from that, in your view? 

Secretary LAMBERT. I say that I read through the previous and 

I know most of the previous folks who have been before you, and 

I tend to agree with most of them. It is wrong, and I think it is 

a mischaracterization of the Department’s position that we have 

this laissez-faire, let the market work, where, when possible, we 

prefer to allow the traditional market elements of competition to 

work. That is not—given the nature of some defense elements, nuclear submarines, where there aren’t other products, there are elements of the defense industry where that is not appropriate. In 

those certain sectors, in those specific tiers, there is intervention 

that is necessary and nurturing that is necessary. So, where possible and where commercially products are available, we would prefer to allow the market to work. 

Mr. SHUSTER. All right, which makes some sense. But it seems 

to me when you are selling to DOD, you have one got customer, 

they regulate, they buy they tell you which end is up, which end 

is down, so it becomes very difficult. 

Could you go into some detail? You mentioned about you tailor 

some programs to preserve certain segments. And I agree with you. 

There are certain industries that are sunseted. We don’t necessarily need them anymore. Or there are people out there, organizations, that are doing a poor job, and we can’t save them and 

shouldn’t. Can you talk about some of those programs that you tailor to preserve, some of the segments? 

Secretary LAMBERT. There are a few examples, and I think it 

goes to the heart of what I understand the task force is trying to 

get at. And I think the business panel in particular has a unique 

opportunity to address an area that I think has seen short shrift 

over at least the last decade, which Andre mentioned, which is the 

small and medium-sized businesses. 

At the prime levels, access to capital is not a significant barrier 

to continuing market performance. The lower you go down the 

tiers, it becomes more constrained. Then you have things like the 

CR [Continuing Resolution], the credit crisis, and different ratios 

that are required of these small businesses. So when we look at a 

program, you tend to stop—and I think you had Center for Strategic and Budgetary Assessment [CSBA] here, and they talked 

about their look at the prime level. But there is a lot of the analytic 

stops at the prime level. 
9 

The real fragility we are seeing occurring is at those lower tiers 

where you have a provider or a technology. I will give one example. 

Recently, in the solid rocket motor industry, we have two providers. They do various things. We have two prime providers. But 

both of those primes at a lower level, much lower than just their 

next tier, rely on a single sub-supplier. So propping up the two 

primes, while it might be easier because we have more visibility 

into it, would do little to alleviate the concerns we have at that 

sub-supplier level. 

So when we need to intervene in those areas, we try to adjust 

programs so that we can create sustainable rates of production that 

are in the best interests of the primes but also in the best interests 

of the taxpayer over time. 

Mr. SHUSTER. Don’t we need to do that? I think you suggested 

you need to do it earlier on—not wait until you get into a situation 

or it is critical. And that begs the question of having a defense industrial based policy to determine strategically are there six, are 

there eight, are there ten different segments? That we need to 

make sure we have the core competency there to build those products, the weapons systems that we need. 

Secretary LAMBERT. You are absolutely right. 

I was charged when I came into the office, in essence, to get the 

Department out of the role of firefighter, you know, waiting for a 

building to be on fire before we responded. And there are a number 

of mechanisms, it is not just one, that we use. Program managers 

tend to have a good visibility, but it is a soda straw visibility. 

We do need greater insight, and I think what this administration 

has been pursuing through various initiatives like the S2T2, the 

sector by sector, tier by tier review, is to gain insight before we dictate oversight. 

But you are absolutely right. We need better data at that second 

and third tier level before we can make these decisions. 

Mr. SHUSTER. The program managers, it seems to me—I think 

you said a soda straw—they have got to be able to look out wider, 

and they are pushing to get their program, their project out. I don’t 

if they have much concern about the broader implications. If you 

are looking down a soda straw, they can’t see. So how do we change 

that? 

Secretary LAMBERT. I think it begins with, again, the collection 

and the sharing of data. I know you received testimony about the 

great policy we have for Army berets, and that is correct, but I am 

not sure the Air Force or the Navy ever got that industrial base 

report. 

So some of it starts with the simple sharing of data, which my 

office is charged with doing, the collecting of what those soda 

straws are looking into at the lower tiers down to the elements, if 

you will, of some of these programs, and then try to take those 

tiers and string that thread across the defense enterprise so we 

have a better understanding, where we are beginning to see fragility at that lower base that has cascading implications not just 

across the program but across the services as well. 

Mr. SHUSTER. Does that sharing of information include talking 

to—having the project or program managers talk to the manufacturer? There is a lot of fear out there that if you are talking to the 
10 

producer, if you are a program manager, there is going to be some 

kind of implication. It just seems to me you can’t produce something for a customer unless you are talking to them and trying to 

figure out exactly what they need. 

Secretary LAMBERT. Absolutely, and I will let Andre jump in, because I know for small businesses that is particularly difficult. 

Having spent 20 years in industry, it has always been a surprise 

to me that the defense sector is the only one where as you get closer to negotiating the deal, the less you talk to the person you are 

negotiating with. But that is how the system is set up. 

But we have redoubled our efforts to do outreach to industry. I 

have had 300 and some meetings in two years that are both larger 

meetings but one-on-one meetings. So we have an active dialogue 

from the Secretary on down with industry to listen to those concerns at the CEO [Chief Executive Officer] level. But those, again, 

are at the medium and larger companies. 

I think your shop has really done a tremendous job in these local 

centers, going out locally to reach out to the small businesses. 

Mr. SHUSTER. Mr. Gudger. 

Mr. GUDGER. Correct. We have taken an industrious approach to 

solving the small business industrial based challenges we have. 

Just this morning, our office met, down at Defense Acquisition University, met with the program managers so that we can better 

identify what the program manager is seeing, kind of get in front 

of the requirements that are being developed throughout the Department because they have visibility at the level where things 

begin. 

And something else that we did shortly after I took post in 

March was to really invest in a study, a forecasting study, for the 

small business industrial base looking at where we were in the Department and aligning ourself with the efficiency initiatives that 

were going on, and in particular Dr. Carter’s Better Buying Power, 

saying how can we build a capabilities set with the current small 

business industrial base and have them make the right investments today for the future of our defense capability so that we 

would have the greatest military in the year 2020? 

So one of the leading things that we wanted to do was to say we 

can forecast better. So we can define the requirements, talking to 

the program managers, the program executive offices, kind of centralize those requirements based on standards and make them 

available to the industrial base via the Web or another outreach 

event. Then we can kind of hone in where they are making the key 

investments so that we can get better products in the future. 

Because we know if there is competition, then we are going to 

buy better, we are going to do better for the taxpayers, and then, 

ultimately, we will continue to create capabilities at a much higher 

tier. So we kind of rise up the tide to where we are creating things 

and technologies at a level at which we haven’t created them before. 

So we see this as an opportunity to take a quantum leap in the 

right direction for not just fiscal year ’11 and ’12 but in future 

years. 

Mr. SHUSTER. It sounds like a start. 

How many people are in your department? 
11 

Mr. GUDGER. In our office? We have roughly about 30 or so. 

Mr. SHUSTER. How many in yours? 

Secretary LAMBERT. If you include the ManTech program and the 

Title III offices, which we also manage, and some of the Committee 

on Foreign Investment in the United States activities, it is around 

35—38 now, I believe. 

Mr. SHUSTER. Mr. Larsen. 

Mr. LARSEN. Thank you, Mr. Chairman. 

Mr. Gudger, with regards to the Office of Small Business Programs, one of the concerns that we have been exploring with regards to that particular—not you, but just the particular office— 

is that the office has been more about counting numbers to be sure 

goals are met. And I think the concern that we have about that is 

there is just so much more you can do, and I think your testimony 

reflects that you are doing so much more than that. So I want to 

explore a little bit about that. 

First off, do have you a report or a wrap-up of the roundtables 

you have done? We are doing our own roundtables. I think it would 

be very valuable to get the reports of the roundtables you have 

done so we can compare notes and make sure that whatever we 

produce is reflecting some of the things that you have discovered 

as well through your roundtables. 

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

page 79.] 

Mr. GUDGER. Absolutely. And when I took post, one of the things 

I wanted to do was develop a best practice guide from OSD’s [Office 

of the Secretary of Defense] perspective and make it available to 

all of the components and services and agencies in the Department. 

So I would be more than happy to share our final product of our 

best practices guide, which is an inclusion of all our outreach 

events, all of the roundtables, and saying, hey, we now have a platform where we can share the best ideas and change where we are. 

I agree that if you look backward, a backward view of the office, 

we probably were very centric to socioeconomic and disadvantaged 

programs, more counting the number. Since March, we have taken 

a programmatic approach where we have aligned ourselves with 

the urgent needs of the Department. We have looked at those urgent needs in a way we haven’t before and begun to develop programs to support that. 

For example, we worked very closely since I have been here with 

space, intel, operational energy, rapid equipped force, which is the 

brigade commanders out in the field. Mr. Lambert brought me into 

that meeting, so our offices are working together in a way we have 

never traditionally worked in the past. 

We now are looking at this as an opportunity that if we can align 

the small business industrial base, or the industrial base in general, with the direction the Department is going in, then the numbers will improve for themselves. And I think we are seeing that. 

Because, in fiscal year 2011 alone, we doubled our small business 

innovation research programs that have gone on to phase three. So 

doubling that in a very short period of time shows a commitment 

from the Department into the small business community on creating the central product and services that we need for the future. 
12 

Mr. LARSEN. Frankly, I don’t mind that one of the purposes of 

the office is to count those numbers, be sure the goals are being 

met. I don’t have a problem with that. The issue we are looking 

into is, again, there is so much more capability in the office. 

Whether you can do that with 30 people or not will be up to you 

to determine, but there is so much more you can do in addition to 

that. 

In your testimony, you said that you made a change earlier this 

year to the regulations and DFARS of implementing accelerated 

payments to nearly a third faster. When was that and what standard are you using that gets you to a third faster on the payments? 

Mr. GUDGER. That is a phenomenal question. 

Mr. LARSEN. I have been here 10 years. No one has ever called 

my questions phenomenal. Thank you very much. 

Mr. GUDGER. We published the final rule on April 27th of this 

year. It was an area to reduce the barriers and move the bureaucracy. 

Mr. LARSEN. We have heard this issue from small businesses. 

Mr. GUDGER. Right. So we solved it with technology, through our 

financial system. We essentially didn’t need the intervention of people. We took our financial system, and any small business who had 

a prime contract in a particular financial system, which was the 

first we updated—we have 14 we are updating over an 18-month 

period. But we targeted the largest one, MOCAS [Mechanization of 

Contract Administration Services], which is where 50 percent 

roughly of our spend comes from for small business. And on July 

1, we implemented—actually mobilized the move where the financial system was updated, and it automatically sent payments out 

to small businesses. It didn’t have to do anything. 

On average, most companies have a net 30 payment day, and we 

were paying them on the average of net 20. So essentially for onethird of the year they will have money in their pocket that normally they wouldn’t have. 

Mr. LARSEN. And so these are small businesses that are primes. 

Mr. GUDGER. Small business prime contractors. 

Mr. LARSEN. So it doesn’t yet apply to small businesses who are 

subs for a prime contractor, a larger contractor, is that right? 

Mr. GUDGER. That is correct. The primes are in charge of paying 

their subcontractors. 

But I meet with large businesses as much as I meet with small 

companies, and I have encouraged them to look at DOD’s lead. We 

are leading something, so look at our lead in this area, and encouraging them to be very prudent as they pay small businesses and 

look to doing that faster and better as well, where appropriate. 

Mr. LARSEN. I notice there are issues that we have heard from 

small businesses that has to do with auditing, not that they don’t 

want to be audited. But a business in my district, five people, being 

audited for work they did a couple of years ago, being audited as 

if they are a company of 30,000 for a contract that is obviously big 

for even them but unique for the Department in terms of work they 

are doing. 

So this issue of auditing as if you are a large prime, instead of 

auditing as if you are just a small business, you are going to hire 

people or take people off the job in order to fulfill the auditing re-
13 

quirements, is that something you have heard throughout your 

roundtables? 

Mr. GUDGER. Oh, absolutely. Certainly we have heard that. And 

we look at this in two ways. 

First, Charlie Williams, who is the Director for the Defense Contract Management Agency who oversees a lot of audits now, we are 

working with his office in a way we haven’t before; and we brought 

this issue up to him. And we are looking at reducing the number 

of small business audits as it currently stands. 

Most of it is driven by contract type. So if it is a cost-reimbursable contract, it requires an audit. I have worked with the Defense 

Procurement and Acquisition Policy Office, and we are encouraging 

contracting officers in the acquisition workforce to be very cognizant of the type of contracts that they award. Award costs, reimbursable contracts, fixed-price contracts, level-of-effort contracts 

where appropriate, and that alone will begin an internal view of reducing the number of audits. 

Then the ones that require audits, we are going to look at the 

ones that are what we consider high risk and move them into priority and see if we can reduce the others. 

So we are looking into it. We are working those issues. So we are 

aware. We are making progress. 

Mr. LARSEN. We want to continue to understand the progress 

being made. 

You mentioned DCMA, the Defense Contract Managment Agency. What about the Defense Contract Audit Agency, DCAA? 

Mr. GUDGER. We are working closely with DCAA. Pat, I know 

him well, and we brought this issue to him as well. They are overloaded. We have a high workload with the number of audits. So Defense Contract Management Agency is helping pick up some of the 

load. So we are working with both of them in the reduction, yes. 

Mr. LARSEN. All right. I may want to look further into that. 

A few more minutes? 

Mr. SHUSTER. Yes. 

Mr. LARSEN. Mr. Lambert, in your testimony, you talked about 

the sector by sector, tier by tier. But it intrigued me, so I looked 

at your written testimony. You have actually given it a name, 

S2T2, which means I guess in defense language you have given it 

a program name, so you are actually focused on it, and it is not 

just some name you are giving it. 

So talk to us about what specifically—how you are approaching 

this sector by sector, tier by tier, what it means to you all and what 

kind of outcomes are you looking at from looking at the industry 

from a sector-by-sector, tier-by-tier approach and the implications 

for the issues at hand that we have? 

Secretary LAMBERT. Absolutely. We realized again a couple of 

years ago when we came in that we had a pretty good understanding at the prime level. So the sectors are the things that you 

would hear about—aircraft, missiles, ships—the classic sectors that 

we do the comptroller’s budget analysis under. We have added to 

that under sectors emerging capabilities, such as unmanned systems and cybersecurity. Then the tiers are actually down to the 

component level. So you would have gyros, actuators, all the way 
14 

down to, really, elements, if you will. And then—so that is the sectors and the tiers is to go down. 

We are pursuing it along four paths. My office is running it. But 

the first was a study or a survey that we commissioned through 

the Department of Commerce, which has the authority to have industry respond. 

We looked at about 25—I saw this was in a previous testimony 

as well—about 25. We picked five programs from each of those sectors that were representative, three programs of record, one R&D 

[Research and Development] program, and one rapid fielding program. We looked at all the contractors and all the subs that were 

involved in those programs. That ended up with about 25,000 contractors. That is how vast that base is. So we are only talking 

about a small number of programs, representative programs. 

We crafted a survey. That survey went out to about 5,000 companies. I have a list of each one in your district, and I can say your 

district is performing and responding quite well. But they are companies you may not even have heard of. Because sometimes we 

hear that they didn’t know they were producing products for the 

Department of Defense. And we are getting those surveys back. 

Mr. LARSEN. If I may, I won’t speak for the rest of the members, 

but I would love the list in my district. 

Secretary LAMBERT. Absolutely. You have seven. 

And we then go along and we looked at all of the previous studies that had been done in the Department and tried to collect 

those. We came up with about 105 industrial-based studies that 

have been done in the last 24 months alone, some larger than others, some repetitive. We tried to get the best information from the 

soda straws that we could find. 

We then went out to independent experts and asked them in 

their specific sector, space and so forth, to identify what they always hear, the problems with certain components or elements of 

that particular industrial base. 

Then we had each service give us a detailee for 6 months—that 

was at the direction of Deputy Secretary Lynn—to work with the 

services to make sure we are reaching out to those program office. 

We are putting all of that information together in a data set that 

will then become the repository for the Department and a basis for 

which to allow not just individual assessments of the health of the 

industrial base, the gross anatomy of the industrial base, but also 

help us as we go through this next chapter of mergers and acquisitions and consolidation so that we understand what it is we are actually approving or having problems with from that very specific 

elements of the lower tiers. 

Mr. LARSEN. Okay. That is it. A great start to the answer. 

I will yield back to the chairman. 

Mr. SHUSTER. And we will probably go back for round two. 

Mr. West. 

Mr. WEST. Thank you, Mr. Chairman, ranking member, and also 

thanks to the panel for being here today. 

A couple of questions to start off with. 

I get very concerned when you look and see a lot of these weapons systems—F–22 [Raptor stealth fighter aircraft], AAAV [Advanced Amphibious Assault Vehicle], Crusader [self-propelled how-
15 

itzer artillery system], FCS [Future Combat Systems]—that all of 

a sudden we get going down the pipeline and then the next thing 

you know we cancel these programs. And, of course, when we are 

talking about budget cuts, we can’t afford to have that too much 

longer. 

So when I look at the national military strategy—and I would 

like to get your take on this—do we have a national military strategy that really does articulate the requirements of the Department 

of Defense to the defense industrial base so that they can develop 

the right type of capabilities and capacities for our military to be 

effective? 

Secretary LAMBERT. Well, I know that again in previous testimony people have talked about other countries and what they do 

in the defense industrial base. We follow those issues pretty closely 

just to actually take what we consider the best from that. I think 

there is no doubt over the last decade in the programs, some of 

which you mentioned but many more that you didn’t, where we 

spent billions and billions of dollars and never produced something. 

At the end of the day, our manufacturing base requirements production. So unless we get into production at a lot of the lower tiers, 

it is not going to help them to continue to spend money on the research and development. We need to get into production. 

In the past, in a permissive budget environment, that covers a 

lot of sins on both industry side I think and the Department side 

as we were trying to field systems as rapidly as possible. And I 

think adequate attention probably was not paid, out of necessity in 

some cases, to the implications that that had on the industrial 

bases, making what I call ‘‘our plans based on an EKG [electrocardiogram] chart.’’ 

You mentioned acronyms. The one that doesn’t come up very 

often in the Pentagon is P&L [Profit and Loss]. So we ask these 

companies to build up rapidly and then draw down rapidly, and it 

is very hard to get a steady state of industrial capabilities there. 

As we have drawn down the last 2 years, my office for the first 

time is engaged in program reviews. As we go through this budget 

cycle now, our office is very engaged with CAPE [Cost Assessment 

and Program Evaluation] and with the Deputy Secretary now on 

looking at industrial base implications as we make some of these 

hard decisions. So I would say it is better than it has been but not 

good enough. 

Mr. WEST. When you look at the procurement cycle or system, 

what type of recommendations or what type of strategies and initiatives is the DOD looking at so we can close some of these long 

procurement cycles? 

Secretary LAMBERT. Well, it is not in my department. Again, 

within AT&L [Acquisition, Technology and Logistics] and the individual services, I know that they are struggling with the fact that 

we build systems that last for 20 or 30 years. And I know Secretary 

Lynn was fond of saying, from concept to the first delivery, the 

iPad® took 18 months, and it took him 24 months to get a budget 

to think about developing the iPad.® So there are those inherent 

difficulties. 

Again, it varies by sectors. With some sectors that are more mature, such as shipbuilding, it is not as large of an issue as it is with 
16 

the IT [Information Technology] world where we need that refresh. 

And I think the Department continues to work and struggle with 

how we field everything that we need and be flexible enough to get 

the systems to the warfighter as quickly as possible. 

Part of that, we saw some capabilities like the MRAP [Mine Resistant Ambush Protected vehicle]. I think is a good example of 

where when the Department—when there is an urgent requirement, and in this case I think when the Secretary became the program manager, we did move much more aggressively and quickly 

to field those systems. And I think we are still learning the lessons 

from the last five years, at least on how to do that better across 

the Department. 

Mr. WEST. What are we doing—I know about the rapid equipping 

force. But are there other strategies and things that we are using 

so that we can go in and pull off those commercial off-the-shelf 

technologies so that we can get a lot of this out to our soldiers, sailors, airmen, marines, and Coast Guardsmen a lot quicker? 

Mr. GUDGER. Absolutely. We are working very closely with the 

Assistant Secretary of Defense for Research and Engineering, and 

one of the key programs under that portfolio is the rapid fielding 

portfolio, where we are looking at development things that will 

take somewhere between 6 months and 2 years, which is a more 

rapid acquisition process in the Department. 

Our office has engaged them in a way, and we are working on 

some particular programs there where we are looking at—where 

they polled the entire defense internal stakeholder base on where 

they are going, where they see the future, what capabilities do they 

want to have in a 6-month or 24-month period. We are making that 

available to small business, and, where appropriate, if we see that 

they are one of our, let’s say, sub-awardees, we are looking at how 

do we then award them the opportunity in a much more streamlined way. And we have had some early success there where they 

had a need, they had a capability. 

We had a company who had received one of our phase two 

awards, and it was more of a making the company available to 

them where they could bend it slightly and then rapidly acquire for 

it. So we are seeing some successes there. 

Mr. WEST. Thank you, Mr. Chairman. I yield back. 

Thank you, gentleman. 

Mr. SHUSTER. Thank you. 

And, with that, Ms. Hanabusa. 

Ms. HANABUSA. Thank you, Mr. Chairman. 

Mr. Gudger, you said something earlier. You said you want to be 

able to forecast better for the military for 2020. This has always 

been the major question, which is what is the military for 2020? 

So when you say you are going to forecast better for the military 

for 2020, what is your vision of the military for 2020? 

Mr. GUDGER. Well, I am not at liberty to have a vision. I definitely support Secretary Panetta’s vision, and it is broad. It is a 

broad stroke. And Deputy Secretary Carter. It is to have the most 

powerful military on the face of the Earth in that year. And my remark was if we forecast better now and give our industrial base a 

chance to create the capabilities that to date don’t exist for tomor-
17 

row, then in that year we will have a much more powerful military 

and national security posture. 

The study that we commissioned was to look at forecasting better. How can we take what the program managers and the program 

executive offices throughout the Department, all these requirements, what they see their needs would be in the future and bring 

them together in a way that not just small businesses but all businesses can understand them, it is clear where we may be going, it 

is made available to them sooner. 

So the study was to look at best practices, look at ways of sharing information and data so that if, for lack of a better term, if the 

Navy had a requirement that the Army was also developing, maybe 

we could look at working together, closer, in a streamlined way to 

produce the desired outcome. 

Ms. HANABUSA. Mr. Gudger, that is part of the problem. You 

want to work together, and you want to come up with a better program, and we are talking like now maybe 9 more years into the 

future. And unless there is somebody that has that vision, a clear 

vision, what is the time for a small business person, from the time 

you have an understanding of what it is that we are going to need 

to the point where you put that out or you help them get an understanding of that, and what exactly do you do for small business so 

they can then meet that demand in 2020? 

We have heard testimony that some of our big projects take 15 

years to get there. In a prior hearing, I think the organization— 

CSIS [Center for Strategic and International Studies] had a gentleman come before us who I thought said it really well. He said, 

policy is really set by acquisition. How we acquire determines our 

policy versus our policy determining how we acquire. Because if we 

continue to buy certain kinds of fighter jets or certain kinds of 

equipment or continue to build a certain way with a 15-year lead 

time, that is going to determine that military in the year 2020 or 

into the future. 

So how do you intend to help small business when that has really been, for lack of a better description, that has been the way our 

modus operandi has been? 

Mr. GUDGER. I agree that 10- or 15-year programs are unacceptable, and I know Dr. Carter has a big focus on that not being acceptable. What we are doing for small business in this area we are 

doing a host of things, but one in particular thing I can mention 

is like our rapid innovation fund, where we have taken Department 

urgent needs and made them available to small businesses and 

looking to rapidly acquire for them. I think that this is a great example, illustration, of the level of attention that the leadership in 

the Department is paying to small business, understanding and 

recognizing the dynamic role they play and working with our office 

in a way and engaging—— 

Ms. HANABUSA. Mr. Gudger, I don’t want to interrupt you, but 

let me tell you something. 

One of the things that I hear you saying is, because we don’t 

have a clear focus, it almost seems like—well, 15 years is about 

how long it takes us to build a fighter. So what you are almost relegating small business to do is a certain kind of work that you 

think is going to have an immediate demand and immediate work. 
18 

So you don’t see small business really participating in the long 

term for the bigger projects. Is that what I am hearing you say? 

Mr. GUDGER. No. My number one goal is to make available expeditiously any opportunity that is a maximum practical opportunity 

for a small business, and that is exactly what we are doing. Traditionally, small businesses have not built tankers or ships or fighter 

jets. 

Ms. HANABUSA. But they do subcontract. 

Mr. GUDGER. But they do subcontract. 

Ms. HANABUSA. They are part of the process. They have challenges as a result of that, right? 

Mr. GUDGER. Absolutely. 

Ms. HANABUSA. So are you looking at that as part of what you 

are looking at? 

Mr. GUDGER. Oh, absolutely. 

Ms. HANABUSA. Then you have got to look at 15 years potentially 

in the process and how you are going to insert the small business 

into that? 

Mr. GUDGER. Absolutely. 

Ms. HANABUSA. So you are looking at that? 

Mr. GUDGER. Absolutely. 

Ms. HANABUSA. So when we get your roundtable report, we will 

see that in that report? 

Mr. GUDGER. Yes. Anything that addresses any portion of the industrial base on short- or long-term programs, we are looking at 

ways to address those. 

Ms. HANABUSA. Thank you, Mr. Chairman. 

Mr. SHUSTER. We are going to have a second round if anybody 

has interest in it. 

With that, Mr. Runyan. 

Mr. RUNYAN. Thank you, Mr. Chairman; and, gentlemen, thank 

you for being here. 

Mr. Gudger, you mentioned in your opening statement about the 

memo from Secretary Panetta setting some benchmarks or what 

have you. Are they much different from standing operating procedure from before, or is he just trying to plant that seed again in 

everyone’s mind? 

Mr. GUDGER. I think it goes a step beyond the standard operating procedure for the one simple fact that it never happened before, so there is no real benchmark against it. 

But, in addition to that, at the time, Under Secretary Carter, 

sent out a memo with actionable items that was addressed to all 

of the acquisition, technology, and logistics workforce, and also he 

provided a copy to encourage the military secretaries to also adopt 

very similar things. Those actionable items are materializing. In 

fact, one of the actionable items was to put in small business criteria and performance evaluation of seniors that affect the outcome 

of acquisition, and that is happening. 

So we are looking at the actual items that went out. So it went 

beyond just a memo. It looked at key things that we must accomplish in order to reach this end state, whether it is one year out 

or 15 years out. These actionable items are to address the short 

term and long term, and there has been significant progress there. 
19 

When we look at our tracking numbers, we look at our total percentages for small businesses and prime contracting opportunities, 

and we look at fiscal year ’10, because ’11 is still settling. But when 

we look at ’10, we actually—dollar-wise, looking at the goals that 

we had, we actually met the total dollars that should have gone to 

small business. I think that is a testament to, one, what we are 

doing and, two, what the future may hold as we continue to push 

forward and increase our prime contracting numbers. 

Mr. RUNYAN. Well, in your view of that percentage, though, can 

it grow drastically more? 

Mr. GUDGER. I would like to say it is encouraging good behavior. 

Drastically more, I am uncertain of drastically more. 

Mr. RUNYAN. In reaching a lot of these—I am sure the list is 

long, and I won’t ask you to go through a lot of them, but just off 

the top of your head a few of them—and are there any roadblocks, 

regulations, that you have noticed so far that have kept you from 

proceeding with any of them? 

Mr. GUDGER. No, I don’t see any huge roadblocks. In fact, one of 

the actual items was a biweekly meeting with our office—or with 

me—with all of the acquisition executives for services and components. I invite them in, which includes the head of contracts, and 

we together develop strategies and we share these best practices 

with them on what we are doing in the Department to meet our 

goals. 

One of the action items, as a best practice we had a threshold 

of small business directors and specialists sitting on peer reviews, 

which is their review of the acquisition process. So our best practice was that our office put out to reduce that number, and we said 

on all previous users of over $500 million or more—so the large acquisitions where small business need to be included in—we look 

and see if a portion of it can be set aside for small business. And 

if it is not possible, we then have started to put in language where 

we are requiring the prime contractors to meet a certain subcontract number for small businesses. 

So that is inclusive of any opportunity, planned acquisition of 

$500 million or more. So that is a successful story. We actively engaged with them. We have been successful in breaking pieces out 

for small businesses to participate in, and we certainly have been 

very successful in ensuring that small business has a required minimum contracting goal inside of the larger planned acquisitions. 

Mr. RUNYAN. I know specifically myself I have had three different service-disabled veterans in my district reach out to me that 

are having issues getting DOD contracts themselves. I am sure a 

few of them will be part of the panel that we are having December 

9th back in the district. Having that discussion with them, the 

DOD itself has this 3-percent mandate, and a lot of times it is not 

being fulfilled. That is the reason why we are here. 

With that, Chairman, I yield back. 

Mr. SHUSTER. Thank you. 

Go ahead, if you want. 

Mr. GUDGER. I would like to respond to that. 

The service-disabled veteran community is—although I have to 

say that I care about all the programs equally, that is one that is 

near and dear to my heart. In fact, that was the first study I com-
20 

missioned when I got in this position, was the study on reducing 

the barriers for service-disabled, veteran-owned businesses. 

And there is a silver lining in our cloud at DOD. Yes, I was disappointed when I took this position that we had not met that goal. 

But in fiscal year 2011 we have already—since I have taken post, 

we have already increased our service-disabled veteran-owned contracting by $500 million since March of this year, and we are going 

to continue to do better. The numbers have been going year over 

year, but that is the single largest jump we have had in the last 

three years, and we have a continued focus on that particular community. 

I have performed a lot of my outreach events have been with the 

service-disabled veteran-owned community, and I am the co-lead on 

the veterans task force for employment for entrepreneurs, entrepreneurship subgroup. And, in fact, I have reached out to the servicedisabled veteran-owned community. A few groups, a name like 

VET–Force, I brought them in and made them members of my subgroup so that we could get the best ideas and the best ideas would 

be heard and to show them that not only are we going to talk about 

doing better, we are going to do better, and it is going to be an inclusive environment inclusive of their ideas. 

Mr. SHUSTER. Would you identify some of the biggest barriers? 

You said you did a study—— 

Mr. GUDGER. Well, the study is actually still ongoing. 

But, yes, some of the biggest barriers is the current industrial 

base for where the urgent needs and the things that the Department buys actually having certified service-disabled veteran-owned 

businesses with a capability to perform those functions. When we 

look at the industrial base, it is the smallest group. And so when 

we look at how much money we spend and how we spend it, there 

is simply not enough companies there to participate across the 

board in all the things we do. Yes, they do certain industries well. 

But we are working with them. That is the reason why we are 

forecasting better, making our urgent needs more available by way 

of our Web site, and kind of helping them set the tone and direction for the things that they need to develop, whether it is a product or service. 

Mr. SHUSTER. Thank you. 

Ms. Sutton. 

Ms. SUTTON. Thank you, Mr. Chairman. 

Mr. Lambert, on page 6 of your testimony you make a couple of 

statements I would just like to get clarification on. You say companies exist to make money and without the potential no one would 

be competing to win defense contracts. 

That is understandable. Everyone gets that. 

And then at the end of the next paragraph you say, in the highbudget environments of the past, many companies have grown to 

expect high margins independent of the quality of their performance. 

When I read that sentence, it is concerning to me. How did that 

happen in the first instance? Could you just expand on that for me? 

Secretary LAMBERT. Sure. 

I think, as I said before, not just in this cycle but in the four previous cycles we have seen in defense budgets when we went and 
21 

looked at the past lessons, a permissive budget environment does 

cover a lot of sins. And that is a permissive budget environment, 

it is important to remember, because of the requirements of conducting two ongoing operations that we faced. 

But I think it would be hard to argue with the fact that when 

we had programs in trouble or we are bleeding, we tended to cauterize that wound with money. Because we needed the program. 

We needed to get it fielded because it was important to the 

warfighter. And in that process I think a lot of—or some discipline 

went out of the system. That was the entire point of Dr. Carter’s 

Better Buying Power Initiative and the Efficiencies Initiative, was 

to return that balance. 

So when we look at the financial ratios of the leading primes and 

some of the other defense companies, they grew quite substantially 

over this period of time, understandably again, and there wasn’t 

much differentiation. I think what we are trying to restore now is 

a balance of rewarding with better profitability those companies 

which perform well, while making it clear to those who don’t that 

the expected profitability that they may have had in past years will 

not continue. 

Ms. SUTTON. Okay. And if I could just get a little more information and help in quantifying what you talk about on page 7, and 

I know there have been questions about this. The effort that you 

are undertaking to map and assess the industrial base sector by 

sector, tier by tier. Can you quantify how much—how far along you 

are, given the massive amounts that you have to deal with? 

Secretary LAMBERT. Yes. It is a massive amount, and that is why 

it is important that as we do this it is not a study, it is a continued 

effort to collect data that will continue to be refreshed probably 

with deep dives every quarter in different sectors. 

But of the roughly 5,500 surveys—we will start with that—that 

were sent out, more than half have been returned and we are going 

through. There were 17 in your district, and we are going through 

those. 

We work with the companies to fill them out. We are happy to 

share with anyone who cares what the survey looks like. It is quite 

comprehensive. 

Some of the initial results are affecting some of the budget decisions or at least showing early signs of fragility. We have been 

tasked to get some early product up to the Secretary’s office by the 

end of November, and so we are working toward that goal. 

The independent studies we have done have all been concluded, 

and we are integrating those. The studies that my staff have done 

have all been concluded, and now we are continuing to work with 

the services to collect the information they have, and some of the 

services have been great in responding. 

Ms. SUTTON. And I would like to avail myself of accessing some 

of that. 

Secretary LAMBERT. Absolutely. 

Ms. SUTTON. And could I just ask you—and, actually, I would 

like both of you to think about this—are issues of guarding proprietary information and intellectual property hindering the development of our industrial policy? And, if so, what are those issues and 

how are you dealing with them? Just a small question. 
22 

Secretary LAMBERT. Is it specifically related to data rights or intellectual—or who owns the data from the contractors of the government? 

Ms. SUTTON. I think it is your choice. I think it is all of those 

things. 

Secretary LAMBERT. It is a complicated question. And certainly 

we have it with some of the independent research and development 

that companies themselves pursue and that we reimburse, the 

question of who owns that data. 

I think, again, over time, lines have been blurred. There is a 

group working on that inside of AT&L—I have been in the meetings. I am not part of the official group—about how do we better 

define who owns what property at what stage. And the goal of that 

is really pretty straightforward. If the government owns the data 

and the rights to a component of a major system, we then have the 

opportunity at a future time to compete that component, to bring 

in new competitors, to introduce competition. 

And this is what is important the Department understand and 

for everyone to understand about competition. It doesn’t have to be 

symmetrical competition. It can be asymmetrical competition at a 

later stage or a different component or a different product. 

We have an example that we brought of a product that we funded through the Title III program that changed the way we are 

building ammunition, but it has also helped the medical community. That is something we are inserting into a program after the 

fact. So then data rights do become an issue. Because we want to 

make sure if the taxpayer paid for this equipment, if it paid for the 

production, and if we are paying for the maintenance of it, we own 

the data. So that if the company decides to go in a different direction down the road and decides not to service the Department or 

if we want to introduce competition at a later stage, we reserve 

that right. 

Mr. GUDGER. Oh, I agree with Mr. Lambert. I am a part of the 

meetings, although I am not one of the owners. 

The Department is certainly moving in the direction that we are 

building on standards, and these standards will allow us to, no 

matter if we want to introduce competition and buy better and look 

to become more efficient in the future, it will allow us to create and 

produce the competition. 

For a small business industrial base, it is somewhat a challenge 

for a lot of small businesses who are very concerned with intellectual property and protecting intellectual property. And that is one 

of the areas in our office that we are now looking at. It is a new 

thing for us in our office to take on intellectual property rights and 

ensuring that intellectual property is protected as it relates to 

small business. We haven’t seen any major issue or any issue since 

I have taken position, but we understand that it could be a potential challenge in the future. 

Ms. SUTTON. Mr. Chairman, if I could just say, because we have 

heard this issue come up in the context of small business, so I 

would really love to understand more of what you are doing. You 

said this is new. So if you could expand on that at a later time I 

would appreciate it. 
23 

Mr. GUDGER. Oh, absolutely. We are meeting with industry now 

to understand all the issues they have and what is bothering them 

so we can craft a response and a way of helping assist them in this 

area. So I would be more than happy to come back and make the 

data available to you. 

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

page 81.] 

Ms. SUTTON. Thank you. 

Mr. SHUSTER. Mr. Lambert, am I to understand that, being the 

industrial base person, you are not participating in the discussions? 

Secretary LAMBERT. No, we participate. There is a group that 

was formed to follow up on the Better Buying Power Initiative, 

which is called a senior integration group, that Dr. Carter convened a year and a half ago. It was meeting weekly on Saturdays 

for many, many months as we went through this process, and we 

continue to be part of that. 

There are subgroups as part of that leadership team, 15 or 20 

people, and then there are subgroups who solely have different responsibilities. I am not on the subgroup that is doing the data 

rights or the intellectual property, but they report back to this senior integration group. 

Mr. SHUSTER. So you are participating? 

Secretary LAMBERT. That is right. 

Mr. SHUSTER. I think, as Ms. Sutton said, that is a recurring 

theme we hear. Some people have even said that—I don’t know if 

we had anybody before us—that said we are not going to do business. Because if we have to give up our intellectual property rights, 

we will take it elsewhere. 

Secretary LAMBERT. Absolutely. It is part of our issues that we 

deal with on commercialization. 

I would also say that one of the areas where we are completely 

aligned with industry and we both need to do need to do a better 

job is in the protection of our own intellectual property from theft 

and from some of the cyber issues we have been seeing. We can 

quibble with who owns the intellectual property for a widget, but 

we can all agree that we don’t want that intellectual property going 

to third parties who don’t have a claim to it legally. 

Mr. SHUSTER. And with that, Mr. Schilling, you are recognized 

for questions. 

Mr. SCHILLING. Thank you, Chairman. 

Thank you, gentlemen, for being here today. I am actually kind 

of impressed because we have got folks that are doing some studies 

and, rather than throwing them into a file cabinet, they are reaching around and doing some things about it. 

You know, we are to the point as a Nation with the budgets 

going on is that—and with the threats that are out there—we have 

to be doing something. It is not we should. It is that we need to 

and we have to. 

I got the opportunity to speak at the U.S. Chamber yesterday, 

and I took questions at the end. The first question was a veteran, 

and he brought up exactly what we were talking about here. And 

you answered most of it, and I think it is great that you are taking 

that head-on. 

But, also, the women-owned small businesses, also. 
24 

And then one of the things is I was kind of curious as to why 

maybe they missed those goals. And then we know you are doing 

something differently about it now, which is great, but then is 

there anything that we can do legislatively to help you guys to 

push that forward? 

Mr. GUDGER. One of the things that would help us tremendously—in fact, the Chamber recognized us for outstanding performance with women-owned business not too long ago, actually, 

about a month ago. So we are happy that we have made tremendous strides there and that they have recognized for us for those 

strides. 

What we can do in the future is to really focus on the reauthorization of our key programs—Mentor/Prote ́ge ́, SBIR [Small Business Innovation Research], and our STTR, Small Business Technology Transfer program. That is where a lot of opportunity not for 

just women but service-disabled, but there is a lot of opportunity 

there for them. And with that if we could focus on the reauthorization on programs I think that we can continue to foster an environment where we are maturing and growing, some of the micro businesses become small and the small to grow and be successful. It 

is a success story when they grow outside of the size standard. I 

think that is one of the key things that we could focus on in fiscal 

year 2012. 

Mr. SCHILLING. Very good. 

When we talk to the small businesses one of the things that they 

have, of course, is a problem with capital. What is the Department 

of Defense doing for the small guy visibility to—you know, the 

lower-tier folks—to help them get out there in front and highlight 

their business since they don’t have the money to do the marketing? What might be needed? I guess either one of you might be 

able to answer that one. 

Secretary LAMBERT. Go ahead. 

Mr. GUDGER. We kind of initiated about three or four things that 

we are doing. 

One is there is a memo that went out from the Under Secretary 

encouraging the contract and acquisition workforce to host outreach events in fiscal year 2012. Continue them on. We started 

them in fiscal year 2011, and they were successful, so to continue 

it on. Because that is a way of meeting businesses that we traditionally don’t have or we don’t have a supplier. That is a way to 

get to new vendors and increase our industrial base, which is key. 

Some of the other things that we are doing to assist with that 

is to look at businesses that have been successful and making our 

mentor program available to the successful businesses where they 

can work with either new entrants or current businesses who are 

doing business with the Department of Defense and want to do 

more business with the Department. We see that as a successful 

way of doing a cross-transfer of capability and skills. So we are encouraging them to team together so that they can offer a unique 

capability in a way that they haven’t done before. So that is a huge 

encouragement, and we are seeing that starting to happen. 

In fact, one of the smaller Department of Army contracts, we 

kind of combined the two, and then those two companies came together, and they ended up winning a much larger effort because of 
25 

that encouragement of why don’t you guys look at putting your capabilities together and do something unique for the Department, 

offer us a great capability at a reduced cost. So we are happy to 

see that kind of thing happening. 

Mr. SCHILLING. Very good. 

And then, Mr. Lambert, so we kind of get the competition part 

of this out of the way, but how many do I have in the 17th District? 

Secretary LAMBERT. Oh, let me see. I think you had nine. 

Mr. SCHILLING. Oh, we are going to have to get to work. 

Secretary LAMBERT. Yeah. I will get your list here. 

Mr. SCHILLING. Okay. But the DOD—how do they determine 

when there are strategic gaps and shortfalls in the defense industrial base? 

Secretary LAMBERT. Well, that is an issue; and historically it has 

been when something has gone wrong. And that typically occurs 

whenever there is a break in production and subcomponents, the 

capability to manufacture atrophies, or the people go out of business. So it is not just the plant, but it is the physical—it is the design teams and the other elements that are so vital to our industrial base. 

And, in the past, if a program office doesn’t manage, and there 

are varying degrees of success at that level, then we end up—it 

costing more, sometimes delaying entire programs that can then result in the spiral of death that everyone is familiar with. 

What we are trying to change with the S2T2 database is to create this repository where we can go in early and we can uphold 

those threads. So if you had an Army program, as the case was in 

the solid rockets, that was maybe changing their behavior in accordance with the direction given to them by the program manager 

and the service itself but it was going to have a cascading effect 

across the other services or the other departments, then we need, 

as OSD, to come in and try to align that, and that has the benefit 

of creating stable production. 

I mean, one of the issues I think that Congressman West raised 

earlier, I am not sure if we are as bad at planning for our industry 

as some would allude to. I think we give fairly good visibility compared to other industrial sectors as to where we are going. Where 

we fall down is in the execution, the starts and the stops, the nontransparency and the ‘‘EKG charts’’ of production numbers. 

If we can give industry transparency through communications 

and make that our desires and our plans and back it up with execution clear to industry and to the financial community, we find 

that the markets tend to work and companies tend to get the investments they need. It is when we don’t do that that we see these 

instabilities, particularly at the second- and third-tier levels. 

Mr. SCHILLING. Thank you, gentlemen. 

Mr. SHUSTER. Thank you. 

We are going to go for a second round of questions and start with 

Mr. Larsen. 

Mr. LARSEN. Thank you. 

First, I want to make a point—a broader point about the panel, 

at least in my view, because it wasn’t clear in my opening statement. As we get into a budget-constrained environment it is extremely important that these small and medium-sized businesses 
26 

still have an opportunity to participate in contracting. Because they 

are still going to be there and be able to provide innovation, services, products to the warfighter through the Pentagon. So it is extremely important that we, at least in my view, we stay focused on 

that. 

The second point I want to make is about IP [intellectual property]. We heard views from folks in my district where they actually 

developed proprietary information as part of a contract for one of 

the services, but in order to compete for that they had to hand that 

over to the service in order for the service to write the requirements so they can go out and compete in a broader community, 

thereby legally transferring this protected intellectual property to 

the rest of the market. So there is nothing nefarious about it except 

that the rules work against the company who developed the intellectual property, and that ends up, obviously, being to the detriment of the company itself. 

So those two points and then there is a question. 

Mr. Gudger, on SBIR and the tech transfer, can you answer the 

‘‘so what’’ question? That is, what impacts are there when we do 

a 30- or 60- or 90-day reauthorization to SBIR and tech transfer 

versus a 1-year, a 2-year, a 3-year authorization? 

Mr. GUDGER. Long-term authorization is always better for small 

business because it allows them to make the investment and feel 

more comfortable making the investment. Small companies have a 

much more difficult time with the start, stop and go, and then the 

uncertainty. So they are very reluctant to making the investment 

in developing technologies or—because the program may not be 

around to continue to fund them. 

And then the second thing that bothers or hampers small business in a way that is much different than a larger base is the lack 

of direction when that happens. When programs are short-term reauthorized, small businesses are not quite sure if this is a sign that 

a program is going to go away, whether the technology will be of 

interest to the Department, if it is reauthorized longer term will 

the Department go in a different direction. These things hamper 

them from making the investment that we would like to see them 

make to create the capability we want. And many small businesses 

say, if the government doesn’t believe long term in the program or 

the product, then it is very difficult for me to. And so that is a challenge. 

Mr. LARSEN. All right. 

I have something for Mr. Lambert here. But just one new area 

for the Department, relatively new area, is the emphasis on renewable energy and the role renewable energy can play in our national 

security. And I know hearing from folks, again where I come from, 

it is a great direction to go. There maybe is not as much transparency because it is sort of still feeling out how our small businesses can help out the Department in that effort. So I will just 

keep that in mind—if you can just keep that in mind. 

Mr. Lambert, I understand that you have an example of a small 

business innovation that you have brought. Can you talk about 

that and perhaps play a little show and tell? 

Secretary LAMBERT. Sure. There are a couple. Actually, I came 

over yesterday to see them. They are not as small as they used to 
27 

be. But the Department invested through our Title III authorities 

a company down in North Carolina. 

Mr. LARSEN. The Defense Production Act. 

Secretary LAMBERT. The Defense Production Act, correct. We 

were actually looking for silicon carbide for some weapon systems, 

but it had the tertiary benefit of enabling commercial technology. 

And, in fact, the LED [light-emitting diode] lights in the Rayburn 

cafeteria are derived from this—were purchased from this company 

who are now producing them for commercial purposes. You can buy 

them at Home Depot. 

But that was an example of where we need innovative technology 

that—because it was everyone’s problem; therefore, it was nobody’s 

problem. But once you could get the Department engaged and with 

our buying power—we did Wedge 5 at the Pentagon with these 

lights, and now you are using them in the cafeteria, and they are 

quite nice, as I found out. 

Now, the other company is a small firm. I will leave these with 

you. I don’t think I can take them out again. 

Mr. LARSEN. I am surprised you got them in. 

Secretary LAMBERT. It wasn’t easy, apparently, just so you know. 

This is a polymer. The net effect of this, this has a lot of commercial medical applications, but nobody was investing in it. A small 

company down in Mississippi did this polymer insert into a .50 caliber round. 

The practical effect of this—and think about it—if you are a marine humping these things at 10,000 feet, they are 30 percent less 

weight, they have actually increased accuracy. We have injected, 

molded, and made them drop inso that they are now—if you think 

about the cascading effects that that small base has—we can load 

more of them on a pallet. It requires less fuel to transport them. 

Therefore, there are fewer convoys. Therefore, there are fewer casualties. All of this because of a simple—relatively simple, the company would say—idea that the Department of Defense funded 

through our Title III authorities. 

That now has implications. They are doing these injected moldings with the polymers. They are looking at medical applications. 

These are the kinds of things that if the Department—just like 

in our ManTech programs where we get a ten for one return on investment. When you talk about forward leaning and thinking about 

what we need to do next, not just as a Department but as a Nation 

in terms of manufacturing, these are the kinds of real applications 

that I think the Department can be proud to point to and say there 

is a guy somewhere over in Afghanistan that has lightened his load 

because of this polymer, and probably 10 years from now there is 

somebody going to be on an operating table that is going to survive 

because of these polymers. 

Mr. LARSEN. Thanks. I will have to defer to the chairman, Mr. 

Gudger. 

Mr. SHUSTER. Go ahead. 

Mr. LARSEN. Oh, I am sorry. You brought in something. 

Mr. SHUSTER. I want to make sure that the polymer has a medical benefit, not that round? 

Secretary LAMBERT. Right. That is correct. 

Mr. LARSEN. Opposite of the medical benefit. 
28 

Secretary LAMBERT. Right. 

Mr. GUDGER. Just to show you how well we coordinate together, 

I couldn’t let Brett play show-and-tell without me so I brought the 

body armor that a small business made to stop that .50 caliber 

round. In fact, this was made by a company called MQ. Then it was 

made and an urgent requirement in the field in Afghanistan and 

Iraq for the need for body armor and to sustain multiple blasts 

from IEDs [Improvised Explosive Devices] and other munition. A 

small company made this, and they are a subcontractor. They don’t 

do this as a prime—they provide the armor that fits into other 

polymers that are bent and made for other pieces of the body. But 

this is a great and phenomenal thing that small business is doing 

as an example of our SBIR success story. 

Mr. LARSEN. Okay. 

Mr. SHUSTER. Is that ceramic? 

Mr. GUDGER. No. It is made from bonding carbon and silicone. 

Mr. SHUSTER. Ms. Hanabusa. 

Ms. HANABUSA. Thank you, Mr. Chairman. 

So, Mr. Lambert, how many do I have in my district? 

Secretary LAMBERT. You have it looks like one. 

Ms. HANABUSA. Oh, I have one? 

Secretary LAMBERT. But that is the one we found. So if you can 

tell us more. 

Ms. HANABUSA. I have Hawaii. That is right. They keep reminding me that. 

Mr. Gudger, the question that I have asked at all of these meetings has been about SBIR and small business; and I notice that 

you interface with Small Business Administration. And I think you 

can see like on page 9 of your report. So what I am trying to understand is, because Mr. Larsen has told me very clearly about the jurisdictions between the SBA [Small Business Administration] and 

DOD, so I want to understand from your perspective what and how 

you work together. Because you are asking for reauthorizations and 

so forth, and, you know, that may not be our issue. So can you tell 

me first what your role is with relation to the SBA and, also, in 

terms of SBIR, whether when the grants are being reviewed what 

your role is in that process, if any, and was that body armor a 

phase two SBIR? 

Mr. GUDGER. It went phase two and went on to phase three. It 

became a program that was—— 

Ms. HANABUSA. Aren’t you impressed that I would even know 

that? 

Mr. GUDGER. Yeah. 

Ms. HANABUSA. Anyway, can you answer those questions, please? 

Mr. GUDGER. Yes. Our role with SBA, SBA has a statutory requirement for overall small business, and they also are the administrator of the overall small business innovation research program. 

However, our program is standalone, and it is based on the reauthorization from Congress. And, typically, it takes both House and 

Senate to reauthorize a program from my seat. Now, when we do 

receive SBIR applications, we get thousands of them every year, 

tens of thousands of them every year, and we reward a few thousand every year, depending on the need. So, on average, 4,000 that 
29 

we reward; and, on average, we receive about 14,000 applications. 

We are very instrumental in that process. 

The Office of Small Business program has a program manager 

that oversees the program for the Office of Secretary of Defense 

and works jointly with the Research and Engineering Directorate 

Assistant Secretary along with the service SBIR program managers 

to ensure successful administration of the program and that the urgent needs of the Department are fulfilled. 

Ms. HANABUSA. So when you say you award, your Department or 

your office awards, I think you are an office—— 

Mr. GUDGER. Yes. 

Ms. HANABUSA. Are you awarding SBIR grants? 

Mr. GUDGER. Yes. We award phase one and phase two grants out 

of our office. 

Ms. HANABUSA. And what role does the SBA play if you are 

awarding the SBIR grants? 

Mr. GUDGER. They play no role in our awards. 

Ms. HANABUSA. So SBIR, as I understand it, about 50 something 

percent of their money is actually defense because it is a percentage of the budget, right? So do you get to control over the whole 

50-something percent of the money that SBIR has? 

Mr. GUDGER. No. The SBIR program is a percentage of the total 

DOD budget. And it is a small percentage, about a percent and a 

half now, I believe, which represents just about $1.5 billion. And 

our office oversees the broad agency announcements that go out 

five times a year, and we collect information, and we arrange with 

our other component agencies on selecting successful awardees that 

meet the requirements outlined in the broad agency announcement. 

Ms. HANABUSA. So you actually award all of the SBIR. Because 

my understand is SBIR’s total funding is from basically all contracts, all budgets. But you do control the SBIR component that is 

funded through the DOD budget—percentage of the DOD budget? 

Mr. GUDGER. Yes. I am responsible for the industrial base, and 

we work very closely with the services in successfully awarding 

these. 

Ms. HANABUSA. So the Mentor–Prote ́ge ́’ program which we heard 

about, what is the funding source for that? 

Mr. GUDGER. That is also a congressional reauthorization. And it 

is a relatively small amount compared to other programs in defense 

where it is between $20 million and $25 million annually. But it 

is a significant job creator in the Department. It is phenomenal for 

a small business to also gain capability in developing infrastructure 

for their company so they can move on to be successful suppliers 

to the Department. 

Ms. HANABUSA. But isn’t the assumption that somehow they are 

going to move forward with the mentor, which is usually a larger 

defense contractor, so they kind of get gobbled up in a way? 

Mr. GUDGER. You know, the consolidation of the industrial base 

is a challenge everywhere. That is very true. But we look at that 

as a success story. We don’t penalize them for growth. In fact, if 

they gain a capability in the Department, as long as they continue 

to stay in front of it, I think there is no reason why we wouldn’t 

continue to work with them in some fashion. 
30 

Ms. HANABUSA. Thank you. 

Thank you, Mr. Chair. 

Mr. SHUSTER. Thank you. 

Mr. Gudger, you don’t do phase three, correct? 

Mr. GUDGER. Correct. 

Mr. SHUSTER. That has to be supported by the acquisition by one 

of the services, is that correct? 

Mr. GUDGER. Well, phase three are not just solely the services. 

It could be the component agencies as well. But phase three becomes a much larger program. We look to help them develop in 

phase one feasibility. 

Mr. SHUSTER. And do you drop off then after phase two? You 

have no say in the matter in phase three because—and I am sure 

there are some things if you talk about—I don’t know how the 

UAVs [Unmanned Aerial Vehicles]—I know the UAVs were earmarked. If they had gone through the SBIR process I am pretty 

sure the Air Force would have said, no, we are not going to do it; 

there are no pilots on that thing. 

So are you involved in phase three at all? Do they consult with 

you? Do you have the ability to say, this is pretty good stuff; we 

have got to figure out some way how to move this. Or are you done 

after phase two? 

Mr. GUDGER. That is somewhat of a complicated answer, because 

it depends on the technology and the need of the Department. But 

we certainly kind of go through the entire portfolio of OSD and 

look at successful phase two and match them up with program 

managers who may want to buy that technology or services who 

may have that need. They pick up and award the contract directly 

to them. But we make information available to them through our 

database, and we continue to track them and track the success in 

future years, yes, we do. 

Mr. SHUSTER. Because there may be products that cost up front 

is big and you get one of the services to say no. But if you guys 

are looking at it and saying, look, but over the next 20 years we 

could save millions or billions of dollars, it would make some sense 

to keep pushing that. 

So, with that, Ms. Sutton. 

Ms. SUTTON. No more questions. 

Mr. SHUSTER. Okay. 

And the final questions I have, we get a sense out there when 

we are talking in our field hearings with these smaller businesses, 

and even I think with the big, the tier one primes, there is a sense 

of hostility between DOD and contractors. And some of it comes 

about because the media picks up on a $500 hammer or a couplethousand-dollar toilet seat, which I think those are both space 

shuttle problems. But, you know, still, the media pounds on it. 

And, as I recall, the space shuttle toilet seat, if you go back 

there, is they only made like five of them, and they were out of a 

very specific—so it cost a lot of money to make them. You couldn’t 

just go down to the Home Depot and get one. 

So the media does some of that. But I think the Department of 

Defense has some culpability in creating this tension when we have 

got to figure out a way to get more together, whether we are talking about the communications that we talked a little bit about here 
31 

earlier, the audits and the communications, you know, not being 

able to talk. As you mentioned, the closer you get to the contract 

you got to stop talking to your customer, which is crazy. 

Can you solve this hostility problem? I think it is a huge hurdle 

that we have to overcome. I don’t know if we can legislate to stop 

it, if we have got to break the culture somewhere at DOD to stop 

it. 

Secretary LAMBERT. It is very much a culture, and I was surprised, frankly, when I came in. I think what we have tried to do 

over the last few years is, within the leadership, explain very clearly that, despite spending about a billion and a half dollars a day, 

we don’t make anything, and without our industry partners we 

can’t field an army. 

And Dr. Carter started by having an open door policy, Secretary 

Lynn did, and Secretary Gates. I conducted over, as I said, 300 

meetings either individually or with groups and associations like 

NDIA [National Defense Industrial Association] for the second and 

third tiers, AIA [Aerospace Industries Association] for the larger 

ones, and then with individual companies. 

It really is trying to get that message out there that we need to 

better communicate, to be more transparent. And we send memos 

out to that effect, but the practical—pushing that down is a real 

challenge within the Department and one that I have to give a lot 

of credit to both Dr. Carter and Frank Kendall. 

It doesn’t get any press. But they spend as much time going internally to the buying commands preaching that message of cooperation and working with industry to get best value for the taxpayer and warfighter than they do going to the companies themselves. I have seen a tremendous change in just the last 18 months 

as you work down that process. But it is very much an internal 

process we are working through. 

Mr. SHUSTER. Mr. Gudger, do you have any? 

Mr. GUDGER. Oh, absolutely. Being a former business owner I 

walked in with a certain bias to the Department and understanding the challenges that we faced. I thought I would do something that would help alleviate that challenge for small business. 

I understood that how you engage a culture and modernize a culture without baking small business industrial base into the process 

early. So we are making tremendous strides there. 

In fact, I look at doing that through training. So our office created a small business training course that program managers must 

take now in order to receive their program management certification so they understand the small business base, they understand how to look for innovative technologies, they look at bringing 

them in the process during certain milestone reviews. 

We created a tool called MaxPrac, which is the other part. It is 

the cornerstone to alleviating small business issues that say, hey, 

I just want a fair chance. So MaxPrac is the maximum practical 

opportunity tool that we developed and we share with other agencies throughout the government. I think we shared it with about 

17 other agencies where it is a market-research-driven tool where 

we can find opportunities where we are currently engaged in a 

small company. 
32 

Let’s say it is in the Army, for example, and the Navy is not engaged in that company and may be paying more for that resource 

or it is going to a large company. We now have a tool where we 

can identify and compare to other services or agencies in a Department or against other agencies in the government so that, one, we 

can buy better and reduce costs and, two, promote competition or 

promote the ability for opportunities to be competed in the future 

amongst small businesses. We are taking an analytical approach to 

this. 

And then on the other side—that is the prime contracting side. 

On the subcontracting side, looking at long-term, we have looked 

at in the acquisition process influencing what we call weighted factors, which is, all things being equal in a plan acquisition, that the 

prime contractor for that, whether large or small, if they have met 

small business criteria that they outlined in previous contracts, all 

things being equal, small business has consideration for who will 

get that award in the source selection. Once you are awarded, then 

your fee—we affect a fee construct if you don’t continue to meet 

those goals. 

So it is to provide an incentive, one, on providing market research from a prime contracting opportunity; and then, two, looking at it from a subcontracting opportunity over the long term ensuring that we give consideration of small business for subcontract 

opportunities where primes have done well; and then, if they don’t 

do well, we can have some accountability through fee construct. 

Mr. SHUSTER. And MaxPrac, how is that initiated? Who initiates 

that? 

Mr. GUDGER. It is administered by our office. All of our small 

business directors and specialists throughout the Department of 

Defense have a copy. We have trained all of our head of contracts, 

and we are working downstream to all of our contracting officers. 

We have 27,000 in our acquisition workforce. And we started this 

initiative—this analytical approach this year, probably in May of 

this year, where I launched it at our annual conference in New Orleans. And it is starting to help us produce significant, strides in 

accomplishing our goals. 

Mr. SHUSTER. So your contracting officers initiate that? That is 

not—a private-sector company doesn’t come in and say, hey, I can 

provide the same product to the different service? 

Mr. GUDGER. It is a two-pronged approach. We meet with businesses all the time where we can buy better. And then when it is 

time to conduct market research, which is part of our acquisition 

process, that is when we use the tools. So, one, we can get it from 

industry in outreach events; and, two, we have a tool that helps us 

look at a mountain of data and make sense out of it pretty quickly. 

Mr. SHUSTER. Mr. Lambert, you also said that you are rewarding 

companies for better quality. That is contrary to everything I hear. 

It is—you know, my goodness, it is heresy by giving somebody a 

bonus for doing a great job in the government. 

Secretary LAMBERT. Well, again, it goes to trying to place incentives in a direction that truly incentivizes instead of punishing. 

And it is true that in the world that we are coming from I think 

quite often it was—the question was how to reduce profitability, 
33 

not how to increase it as a motivating tool. I think Dr. Carter and 

Mr. Kendall have been clear upon that. 

To your point, Congressman, it is not so much the profitability 

of the primes. The worse thing that would happen is, if we hurt 

the profitability at the prime level, that surely is going to cascade 

down to the subs, just as it did in the auto industry, and that is 

the last thing we want to be encouraging. So it is a very short-term 

solution to a long-term problem, and we just can’t allow program 

offices and departments to run programs and operations that way. 

We won’t have a base if we do that approach. 

Mr. SHUSTER. And my final question is, how many companies in 

my district on your list? 

Mr. GUDGER. In your district—your district is strange. 

Mr. SHUSTER. I have been told that before. 

Secretary LAMBERT. Because you have a lot of different things. 

But there is one that was on the survey. But I know of several others that are close by that have a lot of people that live in the district. 

Mr. SHUSTER. Well, you know, they say that a Member of Congress is a reflection of his district, so I have been said I have been 

strange before, too. 

Secretary LAMBERT. Well, it is an important one, if that is helpful. 

Mr. SHUSTER. Thank you. I really appreciate you being here 

today. 

You know, you have said a lot of positive things, and I don’t 

doubt that you are making strides. And, Mr. Gudger, you have 

been there for several months. But what we are hearing out there 

when we go out in the business community is a different story. So, 

hopefully, with your efforts and what we are trying to do here we 

can push that out. 

Because I think the defense industrial base is so critical. I don’t 

believe that it is a traditional market system like we have in other 

things, and we have got to make sure we are making the right 

strategic decisions so that, down the road, the next enemy, the next 

war we fight, we have all the right stuff on the shelf to be able to 

provide for our warfighters. 

So, again, I really appreciate you coming in today; and we look 

forward to continue talking with you as we move down the road. 

And you are going to provide us with, as Mr. Larsen requested, 

your roundtable feedback so we can see if it matches up. So we 

would appreciate that greatly. 

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

page 79.] 

So, again, thank you all very much for being here. Thank the 

members for being here and the audience for being here. 

The hearing is adjourned. 

[Whereupon, at 4:40 p.m., the panel was adjourned.] 

A P P E N D I X 

NOVEMBER 1, 2011 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

NOVEMBER 1, 2011 

(39) 

Statement of Hon. Bill Shuster 

Chairman, House Panel on Business Challenges within the 

Defense Industry 

Hearing on 

The Defense Industrial Base: 

The Role of the Department of Defense 

November 1, 2011 

The House Armed Services Committee Panel on Business Challenges in the Defense Industry meets today to continue our dialogue regarding the health and future of our Nation’s Defense Industrial Base by receiving testimony from witnesses from the Department of Defense. While the Weapons Systems Acquisition Reform Act did much to increase transparency and foster competition, 

there is still a great deal of room for improvement in the Department of Defense’s business practices. 

Last Monday, the panel heard from policy experts and from various think tanks that have studied the structure, effectiveness, and 

efficiency of the Defense Industrial Base. Our witnesses last week 

pointed out our Nation lacks a coherent and complete strategy for 

our Nation’s defense. Without such a strategy, the Defense Industrial Base is left without the guidance and transparency necessary 

to ensure viability and efficiency. 

This panel is facing some complex issues and nothing illuminates 

this more that this RAND Report on Military Research and Development Policy. I think it does a very good job at laying out the 

complexity of the issues as it offers some findings and recommendations on policy for providing the military with new weapons and capabilities. The only problem is that it was written in 

1958 and not much has changed. 

As a panel, we traveled to Akron, Ohio, on Friday where we met 

with small and mid-size businesses working on highly technical solutions to deliver capabilities to our warfighter. We met with companies making advanced coatings to prevent corrosion, composite 

armor, advanced aerodynamic control systems, and technologies to 

enable remote detection and identification of pathogens. 

Just like in 1958, our defense industry today is having a hard 

time getting clear requirements from the DOD, bridging the gap 

between development and fielding, and surviving overly burdensome, unresponsive program management policies and regulations. 

Navigating these issues is difficult for large defense contractors 

and near impossible for small businesses. 

Today’s hearing gives us an opportunity to hear about these critical issues from witnesses from the Department of Defense. 
40 

I’d like to introduce: 

• Deputy Assistant Secretary of Defense for Manufacturing 

and Industrial Base Policy, Mr. Brett Lambert, and 

• Mr. Andre J. Gudger, Director of the Office of Small Business Programs in the Office of the Under Secretary of Defense for Acquisition, Technology & Logistics. 

Welcome gentlemen, I look forward to a frank and informative 

discussion. 

Before we receive testimony, I would also like to take a minute 

to thank Congresswoman Betty Sutton and her dedicated staff for 

hosting the panel in Akron. It was an extremely informative visit. 

In addition to the roundtable with industry, we also had a remarkable discussion on the impact of corrosion on DOD’s equipment and 

facilities and got a briefing on the University of Akron’s unique 

program in corrosion research and engineering. 

On the trip, I learned that DOD spends nearly $23 billion per 

year dealing with corrosion. That’s $23 billion out of our defense 

budget that we’re not spending on our troops and it’s something 

that I think all the members of this panel, and the Armed Services 

Committee, need to be aware of. 

Betty, thank you for bringing this important issue to our attention. 

Our next field roundtable will be happening on Friday, December 

9th to Congressman Runyan’s district—the 3rd district of New Jersey. These sessions are invaluable to this panel’s work and I hope 

all of our panel members can join us on the trip. 
41 

Statement of Hon. Rick Larsen 

Ranking Member, House Panel on Business Challenges 

within the Defense Industry 

Hearing on 

The Defense Industrial Base: 

The Role of the Department of Defense 

November 1, 2011 

Mr. Chairman, I’m pleased to be joining you and the other panel 

members here today. 

As we have discussed, this Panel aims to discover the challenges 

facing the current government-defense industry partnership and 

the capabilities they produce. 

Small businesses are essential to a robust and agile industrial 

base as well as for a strong economy. The U.S. defense base has 

a long history of producing the best military systems in the world. 

We must ensure that this continues—both for our warfighter and 

because it creates jobs here in America. 

Key aspects of a strong defense-industrial base include assuredness of supply, American jobs, and ensuring the best technology for 

the warfighter. The mission of the Manufacturing and Industrial 

Base Policy is to monitor, preserve, and enhance the national security industrial base of the United States. (Note: Mr. Lambert, one 

of the witnesses, heads this office.) As we know small businesses 

play a critical role in the strength of our economy by creating technologies for our warfighter. We need to ensure they are given every 

opportunity to compete on a level playing field with large business. 

Over the last few months, we have heard that small businesses 

face challenges regarding security clearances, lead times from DOD 

contract solicitation to submission due dates, ITAR, defense auditing and other regulatory and procedural issues. 

I am pleased with what we’ve learned so far from our first Panel 

hearing that looked at challenges our small and medium-sized 

businesses are having creating and maintaining opportunities with 

the Department of Defense. Testimony from the hearing was 

echoed during our district visits and roundtable discussions. In addition, comments from local leaders have been extremely helpful. 

So far, this panel has met with business readers in my congressional district in August. We visited Rock Island Arsenal in early 

October in Mr. Schilling’s district. And last week I and other panel 

members met with industry leaders in and around Ms. Sutton’s 

district in Akron, Ohio. 

Connecting today’s hearing with our hearing on October 24th 

where we discussed the role and future of the defense industrial 

base with witnesses from think tanks, we will hear what DOD is 

doing to improve the defense business environment with a particular focus on small business. I look forward to hearing today’s 

testimony and thank you all for being here. 

Thank you again, Mr. Chairman. 
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DOCUMENTS SUBMITTED FOR THE RECORD 

NOVEMBER 1, 2011 

(67) 
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WITNESS RESPONSES TO QUESTIONS ASKED DURING 

THE HEARING 

NOVEMBER 1, 2011 

(79) 

RESPONSE TO QUESTION SUBMITTED BY MR. SHUSTER 

Mr. LAMBERT. Please see the document ‘‘DOD Best Practices and FY12 Strategy’’ 

on page 67. [See page 33.] 

RESPONSE TO QUESTION SUBMITTED BY MR. LARSEN 

Mr. GUDGER. Issues and Concerns Identified at the Roundtable: 

Insourcing 

➢ A challenge to small business in this climate is insourcing. Government 

needs to identify those functions that are, in fact, ‘‘inherently governmental’’ in nature. 

➢ The fear is that decisions are made in an arbitrary nature without regard 

for facts. Would like to see a mechanism for small business to address the 

loss of personnel to insourcing. Initiative—The pendulum is already swinging the other way. 

➢ Government initially used insourcing to build workforce—specifically its acquisition workforce. Many agencies took at face value. 

SBA and DOD Relationship 

➢ The relationship between SBA and DOD is not fully communicated or understood by the small business community. 

Congress and White House Action 

➢ A serious concern about the deadlock between parties in Congress. 

➢ It affects small businesses, especially from investors when the economy is 

seen as in an unstable time. 

➢ Across the country small businesses are advocating for bipartisan collaboration and action. 

Clean Energy 

➢ More information about clean energy initiatives and avenues for eco-friendly businesses to expand in the industry. 

➢ If there are resources available for clean energy, how are they best offered? 

Government Contract Bidding 

➢ A general gap in knowledge about and how to bid on government contracts 

as a small business. 

➢ Contracting world seems to be fixated on price and fail to include other important factors such as quality. 

➢ More information requested about government contracting opportunities. 

Mentor/Prote ́ge ́ and SBIR Programs 

➢ More information and awareness building about the benefits of the Mentor/ 

Prote ́ge ́ program. 

➢ Need long term re-authorization of Mentor/Prote ́ge ́ and SBIR programs 

➢ Large businesses are often hesitant toward the program because they do 

not have enough of an interest in the MPJV. 

➢ There should SBA programs should be more streamlined and more awareness needs to be promoted. 

➢ Foreign companies that are prime contractors in the USA need to be educated/informed on the Mentor/Prote ́ge ́ program. 

American Jobs Act 

➢ The American Jobs Act and the related legislation directly affect many 

small businesses. 

➢ There is a widespread gap in knowledge about the bill and further action 

the Obama Administration has taken since the Act failed in Congress. 

Youth Entrepreneurship Initiatives 

➢ Small businesses are concerned about the youth of America. 
80 

➢ Roundtable participants who want to hire remark that graduates or young 

workers are looking for jobs, rather than pursuing entrepreneurship paths 

that would ultimately lead to greater innovation for the whole country. 

➢ There is similarly a lack of skilled manual labor. 

➢ There is a need for the promotion of trade school as a viable career opportunity compared to the standard general four-year education. 

➢ A major concern is how the Administration plans on dealing with this issue 

of youth motivation and education reform. 

Payment withholding 

➢ Simply because prime contractors have not received payment themselves, 

hurting the subcontractors. 

Red Tape 

➢ Too much red tape, it is really hard to deal with the DOD and is an extremely lengthy decision process. 

➢ Paper work requirements present significant burden to small businesses 

(example: program requirements and Veteran certification). 

➢ It takes too long to award projects. 

➢ Certifications are critical, but the process is grueling and too long, with too 

much paperwork. Any way to streamline it? 

➢ There is also a concern about the high barriers to entry for small businesses such as capital, taxes, and funding. 

➢ There is a call for the administration to help make a better environment 

for risk taking, especially for startups. 

➢ The microenterprise RS Code should be explained more. If people knew on 

the front end exactly how much revenue they would be taxed on and what 

credits and rebates they would be eligible for it would offer more stability. 

Capital Limitations 

➢ Banking regulations requiring collateralization with cash instead of assets 

which makes things very difficult. 

➢ Revision of bonding policies and coding is urgently needed. 

➢ The government needs to provide support to protect IP rights and capital 

formation. 

NAICS codes revisions. 

➢ NAICS code thresholds are too low. 

➢ By the time small businesses have established staffing processes and infrastructure to properly manage/prime an effort, they have outgrown small 

business size standard. 

Veteran Employment 

➢ Veteran employment concerns. 

➢ Incentives and training programs for both the veteran and the company 

hiring veterans. 

Infrastructure and Transportation 

➢ Transportation Infrastructure investment has been a concern brought up in 

every roundtable across the country. 

Auditing Reform 

➢ Too many audits on small businesses. 

➢ They have sufficient inaccuracies and on top of the inaccuracies the audits 

are causing many delays and impeding progress. 

Long-Term Solutions rather than immediate fixes 

➢ Need long-term solutions that encourage businesses to make investments in 

people. 

➢ Long-term tax breaks, broader approach to regulations for tax breaks. 

➢ A business will make investments if it knows it’s getting the return. 

Policy Suggestions 

➢ Explain the Rapid Innovation Fund better, and how it works. 

➢ Revisions are desperately needed for the acquisitions process; it really 

needs to be streamlined. 

➢ There should be local business representatives during government contracting bids. 

➢ There also needs to be very clear and concise requirements and timelines 

for the bids. 

➢ Recommend bringing in people with real-life experience to teach small business skills more efficiently about contract bidding. 
81 

➢ Small business training grants. The relationship between the contractor 

and the mentor is failing. The HU incubator wants to be the clearinghouse 

to help build the relationship between small businesses and mentors. 

➢ Use technology to update union programs so that DoL training and apprenticeship programs perform better and do not last too long. 

➢ There is a need for federally backed loans for trade schools. If there are already such loans, they should be on a higher scale with lower rates. 

➢ There is a lack of proper trade skill training in the workforce that the act 

should invest in improving with the ultimate goal of workforce development. 

➢ We need to get the word out to promote institutions (businesses and community colleges) to hire and train the unemployed. 

➢ Community colleges should partner with the Federal government to provide 

for job training. 

[See page 11.] 

RESPONSE TO QUESTION SUBMITTED BY MS. SUTTON 

Mr. GUDGER. The Office of Small Business Programs (OSBP) understands the importance of intellectual property issues faced by small businesses. OSBP continues 

to be proactive in understanding these concerns and in developing policy and programs that foster environments for small business to continue to innovate. Through 

industry roundtables, we have been able to get a real sense as to what some of the 

intellectual property issues that small businesses face. We are working closer with 

the U.S. Patent and Trademark Office (USPTO) and are analyzing our SBIR and 

Mentor/Prote ́ge ́ programs to ensure that our policies and procedures are aligned 

with the direction of the USPTO. As a result of the USPTO now participates in our 

outreach events, including our 2011 Small Business Innovation and Research conference and our upcoming Mentor/Prote ́ge ́ conference in March 2012. [See page 22.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING 

NOVEMBER 1, 2011 

(85) 

QUESTIONS SUBMITTED BY MR. SHUSTER 

Mr. SHUSTER. It has been reported to the Committee that remarks, made by Department of Defense officials a few weeks ago at the Association of the United 

States Army conference, indicated there would be a requirement, prior to any future/further insourcing, that Senior Acquisition Executives certify that there would 

not be an adverse impact or harm to the industrial base. Can the Department verify 

if such a requirement exists, is being implemented, or is being considered and what 

the rationale/justification may be? If so, please explain how that reconciles with sections 129a and 2463 of title 10 and whether it was coordinated with the Office of 

the Under Secretary of Defense for Personnel and Readiness, who is responsible for 

insourcing oversight and policy in the Department? 

Mr. LAMBERT. While the Department greatly values the contributions made by 

private sector firms as a part of the Department’s Total Force of military, civilians, 

and contract support, no such certification requirement exists. We recognize that the 

private sector and the industrial base are, and will continue to be, a vital source 

of expertise, innovation, and support to the Department. 

At the same time, the Department is committed to more appropriately balance its 

workforce and meet our statutory obligations to annually review contracted services, 

identifying those that are more appropriate for government performance and should 

be insourced. This includes services that are: 

• inherently governmental or closely associated with inherently governmental 

in nature; 

• may otherwise be exempted from private sector performance (to mitigate risk, 

ensure continuity of operations, build internal capability, meet and maintain 

readiness requirements, etc); 

• require special consideration for government performance under the provisions of 10 USC 2463; or 

• can be more cost effectively delivered by the government consistent with a 

cost analysis and in support of section 129a. 

Mr. SHUSTER. 10 USC 2330a requires that the Department submit an inventory 

of contracts for services annually that is based on direct labor hours and associated 

costs collected from contractors. The Department consistently has resisted implementing this requirement as required by statute. While we appreciate the Department’s ‘‘Better Buying Power’’ efforts to control costs by moving increasingly to firm 

fixed price contracts, absent a compliant inventory, this policy poses significant 

risks. Gauging reliance on contracted services by dollars alone is not an accurate 

measure of workload, as contractors can use the ‘‘trade-space’’ afforded in their pricing structures on firm fixed price contracts to do additional duties, particularly 

when there is a civilian workforce cap in place. What is the Department doing to 

implement the requirements of 2330a, and in particular to link that, as required by 

10 USC 235, to the budget to preclude year of execution increases in contracting? 

Mr. LAMBERT. Without an accurate accounting of the direct labor hours expended 

on services, as required by law, how can the Department prevent work that was 

being done by civilians or military, since we have both a civilian cap and declining 

end-strengths, from being absorbed by contractors within that trade-space? Essentially, the dollars spent aren’t increasing, but the level of service is since the Department has no true accounting of contractor equivalents executed compared to the 

budgeted levels. 

In order to take decisive and deliberate steps towards meeting the requirements 

of 10 USC 235 and 2330a, the Department submitted a consolidated plan on November 22, 2011 to the Congressional defense committees. The plan identifies both 

short- and long-term actions the Department will undertake to improve the inventory of contracts for services, so that we have an accurate accounting of the direct 

labor hours expended on services. As an enclosure to the plan, the Department provided a copy of the draft guidance that will be issued to the secretaries of the military departments and the directors of the defense agencies and field activities. That 

guidance will include the prescribed methodologies for collecting direct labor hours 

from contractors. The Department is continuing efforts to strengthen the relation-
86 

ship between the Inventory for Contract Services and the budget justification materials. The FY 2013 budget guidance to the DOD Components requires the budget 

estimates to be informed by the FY 2010 Inventory for Contract Services. The FY 

2013 budget guidance also requires that all components report funding for contracted services (utilizing object class information) and contractor full-time equivalents for all appropriations at the budget-line-item level of detail. 

QUESTIONS SUBMITTED BY MR. LARSEN 

Mr. LARSEN. Could you briefly describe the legal and procedural definitions of a 

small business as it relates to your responsibilities? 

Mr. GUDGER. The Department of Defense relies on the size standards established 

by the Small Business Administration (SBA) for its definitions of small business. 

The SBA establishes size standards for all for-profit economic activities as they are 

described under the North American Industry Classification System (NAICS) Identifying Industry Codes. Size standards based on annual receipts are determined by 

the concern’s three most recently completed fiscal years. Size standards based on 

number of employees are determined by the concern’s 12 most recently completed 

calendar months (not its calendar year). Some SBA programs, such as the Small 

Business Innovation Research, Small Business Investment Companies, and Surety 

Bond Guarantee, have unique size standards designed to accommodate their specialized needs. You may find a more comprehensive explanation of size standards by 

going to www.sba.gov and selecting ‘‘Size Standards.’’ 

The Office of Small Business Programs’ responsibilities are defined by the Small 

Business Act and are explained on our web page at www.acq.osd.mil/OSBP/. We 

strive to fulfill our mission statement through creating opportunities and maximizing the contributions of small businesses. 

Mr. LARSEN. In your oral and written testimony you discussed several challenges 

small businesses face with securing work with the Department of Defense. You also 

mentioned various statutory and regulatory programs you oversee that assist small 

businesses with overcoming some of those challenges. During recent field hearings 

held by the Defense Business Panel, many of our medium-sized companies shared 

their experiences of similar challenges with capturing or maintaining work with the 

DOD. Are there any programs/procedures within the Department that track the 

challenges faced by our medium-size industrial partners? Are there any programs, 

procedures, or goals that assist those businesses that fall outside of your small business lane, but are not large contractors, with performing work for the Department? 

Mr. GUDGER. The Office of Small Business Programs (OSBP) recognizes small 

businesses based on the Small Business Association’s (SBA) size standards as set 

in the SBA’s Small Business Size Regulations. The SBA defines business entities 

as ‘‘small’’ or ‘‘other than small.’’ The SBA does have programs like the Small Business Innovation Research, Small Business Investment Companies and Surety Bond 

Guarantee that have unique size standards to assist different businesses’ needs. 

Programs such as Small Business Technology Transfer, the Rapid Innovation Fund, 

and programs in the Office of Manufacturing and Industrial Base Policy such as the 

ManTech and the Title III program also provide opportunities to medium size enterprises to perform work for the Department. Additionally, OSBP works closely with 

SBA to ensure that growing companies have a smooth transition to becoming medium or large companies. An example of this includes recommending to SBA that 

it grant waivers to companies that are graduating from the 8(a) program and could 

lose contracts under which they have exceptional past performance and should remain on the contract. DOD also encourages teaming and for medium size firms to 

participate as mentors in the Mentor/Prote ́ge ́ program. 

Mr. LARSEN. During your testimony, you briefly mentioned the Rapid Innovation 

Fund. Please explain the role of your office in implementing the Fund. Describe how 

the Department’s implementation of the Fund meets the goals and intent established by Congress in both statutory and report language. 

Mr. GUDGER. The Department implementation and the role of the Department of 

Defense Office of Small Business Programs and the Rapid Innovation Fund are outlined in USD AT&L Memorandum dated 12 August 2011. The USD AT&L Memorandum can be found at: http://www.acq.osd.mil/chieftechnologist/publications/docs/ 

USA003854–11_Signed.pdf. (The memorandum can be found on page 70.) 

The Department goals are in accordance with section 1073 of the National Defense Authorization Act for FY2011 and the 2011 Defense Appropriation Act which 

reflect the emphasis on rapid, responsive acquisition and engagement of small innovative businesses in solving defense problems. 
87 

QUESTIONS SUBMITTED BY MR. WILSON 

Mr. WILSON. You may be aware of campaigns led by foreign NGOs to boycott U.S. 

companies involved in the manufacture pursuant to contracts with the U.S. Department of Defense of weapons systems that they don’t think the United States should 

have. Specifically, landmines that are compliant with the Ottawa accords and cluster munitions that are compliant with the U.S. policy on unexploded ordnance. 

Do you believe these boycotts are exclusively driven by NGOs, or are some foreign 

governments also complicit in them? If so, which ones? 

Mr. LAMBERT. To the Department’s knowledge, the campaign is driven by NGOs 

and not by foreign governments. That said, a handful of States party to the CCM 

(Belgium, Ireland, Luxembourg, and New Zealand) have chosen to criminalize investment in the production of cluster munitions. The Department is not aware of 

any foreign governments currently boycotting U.S. defense contractors for producing 

cluster munitions for the U.S. Government. 

Mr. WILSON. Are you concerned that these kinds of boycotts may dissuade some 

U.S. companies from continuing to supply these weapons to the Department of Defense? 

Mr. LAMBERT. While we have not seen specific evidence to indicate that U.S. firms 

have been dissuaded from supplying the Department of Defense, we remain concerned about the current and future impact of boycotts on the industrial base, particularly in regards to the pressure on banks and insurance companies to stop servicing DOD suppliers if they continue producing certain products. 

Mr. WILSON. What specific steps have you or other officials of the U.S. Government taken, if any, to resist these boycotts and support U.S. defense contractors 

that have been targeted by them? 

Mr. LAMBERT. If notified of such a boycott, it is my understanding that the Department of State would be willing to raise the issue with the appropriate foreign 

officials. With respect to particular steps taken in responses to action by specific foreign governments, I defer to the Secretary of State. 

Mr. WILSON. Have you, or to your knowledge, other officials of the U.S. Government expressed your concern about these boycotts to any foreign governments? If 

not, why not? 

Mr. LAMBERT. If notified of such a boycott, it is my understanding that the Department of State would be willing to raise the issue with the appropriate foreign 

officials. With respect to particular steps taken in responses to action by specific foreign governments, I defer to the Secretary of State. 

Mr. WILSON. Does your office track these boycotts and the potential impact on the 

United States industrial base, and if not, why not? 

Mr. LAMBERT. When we become aware of a boycott, we work to identify potential 

impacts to the U.S. industrial base. 

Mr. WILSON. Do you believe the United States Government in general, and the 

Department of Defense in particular, should continue to do business with foreign 

banks and other foreign businesses that are engaged in boycotts of U.S. defense contractors? 

Mr. LAMBERT. The influence of activists and foreign governments on the U.S. defense industrial base is a complex issue. Protecting the U.S. defense industrial base 

and national security interests will require the DOD to collaborate effectively with 

other Executive Branch agencies and Congress. Before taking action, such as ceasing business with a particularly entity, we must ensure we thoroughly understand 

potential risks and communicate those risks to our industrial base. We will work 

closely with the industry sector and foreign nations to preserve domestic industrial 

capabilities. 

Mr. WILSON. Does the Department of Defense have sufficient authorities to address foreign boycotts of the U.S. industrial base? 

Mr. LAMBERT. The influence of activists and foreign governments on the U.S. defense industrial base is a complex dynamic. Protecting the U.S. defense industrial 

base and national security interests will require DOD to collaborate effectively with 

other Executive Branch agencies and the Congress. We must do more to understand 

and communicate the risks to the industrial base and work closely with other nations to preserve domestic industrial capabilities. 

Æ