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i 

72–414 2012

[H.A.S.C. No. 112–93] 

CREATING A 21ST CENTURY DEFENSE 

INDUSTRY 

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 18, 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: 

Friday, November 18, 2011, Creating a 21st Century Defense Industry ........... 1 

APPENDIX: 

Friday, November 18, 2011 ..................................................................................... 33 

Friday, November 18, 2011 

CREATING A 21ST CENTURY DEFENSE INDUSTRY 

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 

Berteau, David J., Senior Vice President and Director of International Security Program, Center for Strategic and International Studies ......................... 5 

Gansler, Hon. Jacques S., Professor and Roger C. Lipitz Chair, and Director, 

Center for Public Policy and Private Enterprise, University of Maryland ..... 4 

APPENDIX 

PREPARED STATEMENTS: 

Berteau, David J. .............................................................................................. 55 

Gansler, Hon. Jacques S. ................................................................................. 40 

Larsen, Hon. Rick ............................................................................................. 39 

Shuster, Hon. Bill ............................................................................................. 37 

DOCUMENTS SUBMITTED FOR THE RECORD: 

Summary from Industry Roundtable at Akron, Ohio .................................... 69 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

[There were no Questions submitted during the hearing.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

[There were no Questions submitted post hearing.] 

(1) 

CREATING A 21ST CENTURY DEFENSE INDUSTRY 

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

INDUSTRY, Washington, DC, Friday, November 18, 2011. 

The panel met, pursuant to call, at 9:04 a.m. in room 2118, Rayburn House Office Building, Hon. Bill Shuster (chairman of the 

panel) presiding. 

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

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

House Armed Services Committee Panel on Business Challenges in 

the Defense Industry meets today to continue our dialogue regarding the health and the future of the Nation’s defense industrial 

base. Today we are hearing from two experts on the defense industrial base, and both these gentlemen have extensive expertise in 

the issues associated with maintaining an effective industrial base. 

Neither are strangers to the committee. 

I would like to welcome both of you back; the Honorable Jack 

Gansler, professor and Roger C. Lipitz Chair, and Director for the 

Center for Public Policy and Private Enterprise at the University 

of Maryland; and Mr. David Berteau, senior vice president and Director of the International Security Program at the Center for Strategic and International Studies. 

Mr. Gansler’s recently released book Democracy’s Arsenal: Creating a Twenty-First-Century Defense Industry, as well as Mr. 

Berteau’s work at the Center for Strategic International Studies on 

the defense industries initiative lend great knowledge and insight 

into these extremely complex issues. 

In our hearings on the issue, we have heard from a variety of 

witnesses in the field and the Department of Defense about the 

current challenges and future projections regarding the United 

States defense industrial base. The conversation thus far has been 

very informative as each and every person we meet with brings a 

unique perspective about how to learn from our past failures and 

establish stability in the industrial base. 

Today we continue that dialogue by focusing on the future. In 

doing so we are asking some very basic questions regarding a complex subject matter. What can we do to adapt the current environment to meet the needs of the 21st-century security strategy? What 

can we learn from other nations who are implementing strategies 
2 

that deal with this critical issue? What changes are necessary in 

our workforce and acquisition policies to meet that vision? 

This panel has the opportunity to highlight the challenges and 

successes of the defense industrial base as we examine challenges 

to doing business with the Department of Defense. Our defense industry today continues to have 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. 

I would like to take a moment to recommend that all members 

of the panel review a recent note—let me get this right so I don’t 

quote the wrong year—to review a recent RAND report, and that 

is not the one from 1958 that I so happily report to people. I said 

to the staff the other day, did they just change the date on it? But 

I think there are some new and insightful findings. Each of the 

Members has a hard copy of the report in their packet of hearing 

materials. 

This report reviews Federal policy regarding small businesses 

and implications for future DOD policies and practices. Not only 

does it provide a primer on basic historic background on Federal 

small business policy, but it also examines trends in DOD contracting practices and small business utilization. I think it will be 

a useful resource for the panel as we continue our work in this 

area. 

As I mentioned in our last hearing on November 1st, the panel 

traveled to Congressman Betty Sutton’s district in Akron, Ohio, in 

October. We met with small and medium-size businesses working 

on highly technical solutions to deliver capabilities to our 

warfighters, and also met with members of the University of Akron 

faculty and leadership to discuss their efforts to advance technology 

to meet DOD needs. The committee staff has prepared a summary 

memorandum of their discussion with the industry and has been 

provided to all the panel members. Without objection, I would like 

this to be entered into the record. Hearing no objection, so ordered. 

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

page 69.] 

Mr. SHUSTER. As I pointed out last time, our next field hearing 

roundtable will be happening on December 9th in Congressman 

Jon Runyan’s district, the Third District of New Jersey. These sessions are invaluable to the panel’s work, and I hope all our panel 

members can join us on this trip. 

At this time I yield to the ranking member Mr. Larsen for any 

remarks. 

[The prepared statement of Mr. Shuster can be found in the Appendix on page 37.] 

STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE 

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

Mr. LARSEN. Mr. Chairman, thanks for filibustering until I can 

get here. 

Mr. SHUSTER. Traffic? 
3 

Mr. LARSEN. No. Spanish and science. 

Mr. SHUSTER. Exams? 

Mr. LARSEN. Middle school Spanish and science. It has been a 

while. I had to do a little review this morning with my 12-year-old. 

But I want to thank you for putting this panel on today, and 

pleased to be joining the panel members here today. 

This panel is charged with looking at the ways DOD can improve 

its business practices not only for the benefit of the DOD budget, 

but for the benefit of local companies who want to provide services 

and goods to the warfighter. Over the past month, through hearings and district visits, we have gained some pretty valuable insight from the industry, and about the industry and about the Department on the challenges our industrial partners face doing business with the Department. 

In due time I am confident this panel will offer some recommendations to the full committee that will improve on some of 

these challenges; however, an important part of this task is understanding how the defense industrial base itself operates, and I hope 

the witnesses today can offer this panel a brief history of the 

events and factors that have shaped the current industrial base 

and what we should do in the future. 

I believe we are all aware of the key role our industrial complexes played with providing capabilities throughout the years in 

support of our national security. The industrial base has risen to 

each challenge from World War II through responding to the events 

of September 11, 2001. I would appreciate hearing from you on how 

our industrial partners must evolve, however, to meet the current 

economic constraints and the 21st-century threats that we face, to 

include global competition. 

Earlier this month the panel heard from Mr. Brett Lambert, the 

Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy. He made the point that references to ‘‘the’’ defense industrial base implies a monolithic entity, a reference that 

is inaccurate. The defense industrial base includes companies of all 

shapes, all sizes, resourced all around the world. I am pleased to 

hear that DOD is currently attempting to map and assess the industrial base sector-by-sector and tier-by-tier with hopes that we 

have a much better understanding than we have today of it. This 

will provide us and the Department a much better picture of what 

currently exists today, and perhaps provide some clarity on how to 

move forward. 

The 2008 Defense Science Board’s Task Force and Defense Industrial Structure for Transmission, chaired by Dr. Gansler, noted 

that ‘‘the nation currently has a consolidated 20th century defense 

industry, not the required and transformed 21st century National 

Security Industrial Base it needs for the future.’’ So I look forward 

to hearing how we might get there. I look forward to hearing from 

Dr. Gansler and Dr. Berteau today on what steps we must take to 

establish a 21st-century national security industrial base. 

And with that, thank you, Mr. Chairman, for an opportunity to 

provide opening comments. 

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

Mr. SHUSTER. Thank you, Mr. Larsen. 
4 

And with that we will proceed with Mr. Gansler if you want to 

start. 

STATEMENT OF HON. JACQUES S. GANSLER, PROFESSOR AND 

ROGER C. LIPITZ CHAIR, AND DIRECTOR, CENTER FOR PUBLIC POLICY AND PRIVATE ENTERPRISE, UNIVERSITY OF 

MARYLAND 

Dr. GANSLER. Thank you, Mr. Chairman and members of the 

subcommittee. 

It seems to me it is very clear that there is a major clash coming 

in the next few years between the security concerns facing the 

United States and the shrinking resources available to address 

them. As Admiral Mullen, then-Chairman of the Joint Chiefs, stated in August of last year, ‘‘The single biggest threat to our national 

security is our debt.’’ 

The only realistic answer to this security affordability problem 

will be to increase efficiency and effectiveness of our defense investments, both in equipment and in manpower. Unfortunately, the recent trends are adverse to this need: Rising equipment costs, rising 

logistics costs, rising personnel costs. 

It is also important to note that trends in the cost of weapons 

are opposite to the trends in the commercial world, where, for example, each generation of computer routinely provides more performance at lower cost, and suppliers traditionally introduce nextgeneration systems on an 18-month cycle, a far cry from our 15- 

to 20-year DOD development cycle. Now, these adverse costs and 

cycle time trends are matched by a growing concern about the U.S. 

losing its competitiveness and its innovation leadership due to the 

decline in its science and engineering workforce and, as the budget 

declines, the very likely reduction, which I am very concerned 

about, in research investments as the dollars shift to near-term 

needs. Obviously, the resulting loss of innovation from these adverse manpower and research trends, will be felt in decreasing future U.S. international economic competitiveness and in the loss of 

national security technological leadership, both of which, I think, 

are catastrophic. 

Today the Nation faces a whole series of threats: Terrorists, pirates, irrational dictators, religious fanatics and so forth. But unfortunately, thanks to worldwide proliferation these people have a 

greater access to increasingly lethal weapons. For example, 100 

countries have ballistic missiles that are increasingly competent. 

And cyberwarfare is becoming a great concern as potential adversaries develop sophisticated tools aimed at crippling not only the 

military and civilian infrastructures, but across the board. 

Clearly today the security environment is very different than in 

the 20th century, as you just heard. So the Nation has to prepare 

for 21st-century security needs even as fewer resources are available to do the job. There are new technologies available, there are 

required new modes of warfare, and there are new industrial structures that have resulted primarily from the horizontal and vertical 

consolidations that mark the defense industry in the years following the Cold War, as well as from the rapid advances that are 

taking place in the high-tech commercial world. And, I would 

argue, critically important has been the globalization of technology, 
5 

industry and labor, and, very important, the requirement for coalition military operations in the future. 

So it is necessary to address our growing security affordability 

problem, and one of the major ways of doing that is to look at the 

question of how the DOD does its business, and, I would argue, 

both on the demand side and on the supply side. And these steps 

fall into four main areas. Overall acquisition process includes what 

we buy, that is the requirements process; how we buy it, that is 

the acquisition process; who does the buying, that is the acquisition 

workforce; and who the DOD buys from, which is the defense industrial base issues. And I would emphasize that these four issues 

are highly interrelated, and that all four have to be addressed in 

order to achieve the required changes. 

In my prepared remarks I addressed all four of these areas, and 

I have expanded upon them in the recent book that the Chairman 

just mentioned. I could briefly highlight some of these changes, but 

given my time constraint, I will assume that you have looked at 

the presented material. 

Mr. SHUSTER. During the questioning period we will get you to 

elaborate. 

Dr. GANSLER. Fine. 

So then let me just simply jump to the conclusions, which is basically that two things are required to make a cultural change, and 

that is what we are really talking about here. One is a widespread 

recognition of the need for change, and the other is leadership with 

a vision, a strategy and a set of actions to implement that change. 

And that is up, as far as I can see today, up to Secretary Panetta, 

the White House and the Congress to implement these needed 

changes. There will be resistance, no question about that, and it is 

going to be very challenging. But on the other hand, I believe it can 

be done, and I think it must be done, and I think our future national security depends on it, and our fighting men and women deserve it. 

Thank you. 

[The prepared statement of Dr. Gansler can be found in the Appendix on page 40.] 

Mr. SHUSTER. Thank you. 

Mr. Berteau. 

STATEMENT OF DAVID J. BERTEAU, SENIOR VICE PRESIDENT 

AND DIRECTOR OF INTERNATIONAL SECURITY PROGRAM, 

CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES 

Mr. BERTEAU. Thank you, Mr. Chairman, Congressman Larsen, 

members of the panel. I appreciate the opportunity to be with you 

here today. I particularly appreciated that the hearing is moved to 

this room. There is a certain honor to sit in front and be able to 

read the panel here of Article I, Section 8. I happen to carry in my 

pocket at all times a copy of the Constitution, and I have two 

phrases bookmarked here. One is Article I, Section 8. The other, of 

course, is Article II, Section 2. And much of our lives are spent on 

the interface between the role of the President as Commander in 

Chief and the role of the Congress as outlined in Article I. 

I am also struck, Mr. Chairman, by your opening remarks about 

the difficulties of solving these problems. When you get to this 
6 

point in your career, and you realize you have spent a third of a 

century working on things that are all still just as broke in appearance as they were when you started, it can occasionally be a bit 

discouraging. However, my wife reminds me that if we hadn’t been 

working on them, they would be even worse. And I take some solace in that, if you will. 

I would like to summarize briefly my statement and ask my written statement be included entirely in the record. 

We define the industrial base as not only the hardware companies—this is what we typically look at—but the services companies 

as well. And I have got a lot of data both in my testimony and 

drawn from our report on defense contract trends. I have provided 

a copy of this to the panel. 

The data basically showed three key facts. One is that the Federal Government in general, and the Defense Department in particular, spends as much money on services contracts as they do on 

products contracts. And it is important to keep that in mind. 

The second key data point is that the percentage of the defense 

budget that goes to contracts has essentially doubled in the last 20 

years. If you go back to 1990, roughly 35 percent of defense outlays 

were spent on contracts. In 2008, which is the year it reached its 

peak, it was about 65 percent. It is back down to about 53 percent 

now. And when we have fiscal year 2011 data, which we don’t quite 

yet have, we expect that to decline a little bit more, but it will still 

stay roughly at 50 percent. So we have a reliance on contracts and 

on the base that provides those contracts that is greater than it has 

been historically. I think that is a significant issue, if you will. 

Contract dollars are roughly split between products and services. 

We separate out research and development as a third category. The 

reason is because from the Defense Department’s perspective, R&D 

[research and development] is part of the investment because it is 

connected to procurement, it is connected to products. From the 

Government’s database perspective, they count R&D as a service. 

So actually the single largest service contract in the Federal Government is the F–35 Joint Strike Fighter. Now, from my perspective that is not a service, that is a product, but because it is R&D, 

it gets characterized as a service. But we separate out R&D. 

And my last data point that I would do in my summary here is 

that R&D is at an historic low as a percentage of total contract dollars spent. Now, the database that we use doesn’t include classified 

contracts. We lump those in as well. It is still at an historic low. 

There are three big challenges facing the industry today, from 

our perspective. And I should point out these are mostly my views. 

I use the data from CSIS [Center for Strategic and International 

Studies], but my opinions here are my own. The first is the impact 

of the plan reductions and the budget reductions that are under 

way. The second is the importance to recognize that industry today, 

unlike industry in the past, has to remain competitive in the global 

financial markets. We can no longer rely on just the Federal Government to provide the funding for these companies. They have got 

to be competitive financially. And the third is where innovation 

coming from in the 21st century, because we have a history of relying on defense contractors to come up with innovation. In today’s 

world an awful lot of new technology is coming not from defense, 
7 

not even from the U.S., but from global sources. And recognizing 

and addressing those challenges are a critical factor for this panel 

to address. So I will be glad to go into those as we go into the question period. 

[The prepared statement of Mr. Berteau can be found in the Appendix on page 55.] 

Mr. SHUSTER. Thank you very much. Why don’t you go ahead 

and expound upon that, what you are talking about, the financial 

liability globally, a little bit. 

Mr. BERTEAU. The world in which we grew up in the 1970s, 

1980s, 1990s for defense contractors, the contractors depended on 

the Government for their revenue for the most part, and particularly after the consolidation in the 1990s. It really didn’t matter to 

them all that much whether a contract was awarded on June 30th 

or on June 1st, because they weren’t subject to the swings of quarterly stock financial reports as much as they are today. Companies 

could often finance both through their own savings and through the 

progress payments that the Federal Government made, and so they 

were less reliant on the global financial market. 

Today’s environment, and all you have to do is listen to the quarterly analyst calls that the CEOs [Chief Executive Officers] and the 

CFOs [Chief Financial Officers] of the major defense companies do, 

they are so dependent on their standing at Wall Street in a way 

that they were not historically because they are part of the global 

financial community. 

Now, global financial markets invest their money irrespective of 

national security. All they are looking for is return, and if a better 

return can be obtained somewhere else, that is where they are 

going to go. The net result is that if defense companies are not 

competitive from a margin point of view, from a cash flow return 

on investment point of view, from a revenue point of view, if they 

are not competitive in the global financial market, that means they 

end up paying more for their cash. 

Ultimately an increasing cost to industry results in one of two 

things, either an increased cost to the Government or less capability for that industry to be able to provide to the Government. 

That, I think, is a different situation than has been true in the 

past. And many of the Government’s rules and regulations regarding weighted guidelines for profit, regarding caps on fees, regarding 

how you manage contracts and negotiate contracts, tend to ignore 

the dependence of those companies on the global financial market. 

We haven’t caught up in a regulatory sense with that global reality. 

Mr. SHUSTER. So we need to change the regulatory burdens that 

were put on these companies from the DOD? 

Mr. BERTEAU. I think we at least need to recognize two things. 

And I have actually been encouraged, because both the former 

Under Secretary for Acquisition, Technology, and Logistics, Dr. Ash 

Carter, and the current Acting Under Secretary, Mr. Frank Kendall, have stated publicly the need to recognize that we are not trying to drive corporate profits to zero, that we, in fact, need to recognize their legitimate need to be able to make money in order to 

stay in business. 
8 

I think you reflected on the Defense Science Board study that Dr. 

Gansler led on the Defense Industrial Structures for the 21st Century. I happen to be a member of that task force, and I believe we 

had a witness who testified before us, off the record, of course, who 

mentioned the difficulty of driving costs down for a Government 

contract. You can correct me if I am wrong, but I think his quote 

was something to the effect of, ‘‘it is hard for me to explain cost, 

so it is easier for me to actually award a billion-dollar contract with 

5-percent profit than a half-billion-dollar contract with a 30 percent 

profit, because nobody knows whether a billion dollars or a half billion is the right cost, but everybody knows that 30 percent is excess 

profit.’’ 

Now, this is similar to if I went to buy a car, and I said to the 

dealer, I am happy to pay you twice the amount for this car as long 

as I know you are not making any money off of it. That just doesn’t 

make sense from a public policy point of view. 

Mr. SHUSTER. Right. And, Dr. Gansler, if you want to expand 

upon—well, let me back up a second and let me ask you both this 

question. And you have been at this a long time, and we have got 

this study from the 1950s at the RAND Corporation, and I think 

there is one from the 1970s and the 1980s and 2000. What is the 

key element over in the Department of Defense, or is it here in 

Congress, that has caused this to not be able to be fixed over the 

years? 

Dr. GANSLER. I think it is the emphasis on cost instead of price. 

Mr. SHUSTER. Value. 

Dr. GANSLER. Value that you are getting. Lately there has been 

even more of an emphasis in terms of a technically acceptable low 

bid. That is just totally inconsistent with high-quality technology 

and high-quality services. Instead this is a race to the bottom, how 

cheap can we buy things, instead of how you and I buy when we 

buy things, we worry about performance, and we worry about price. 

The focus today is much more on simply low cost and trying to figure out how to drive down the cost as contrasted to get higher performance at lower cost. 

We have got to focus on the results, not the process. In fact, recently there have been a number of people in the industry talking 

to me about the fact that the Government is focusing more on compliance than they are on results. 

Mr. SHUSTER. And we have heard that over and over again. We 

must treat our contractors like they are criminals. Before we find 

out anything wrong, we assume they are doing something bad. Do 

you have the same view? 

Mr. BERTEAU. Yes, sir. I would like to add one thing to it. I think 

it really is critical to focus on results. If you, for instance, are hiring a plumber to come fix a plumbing problem in your house, you 

don’t actually put out an ad that says, please send me the cheapest 

plumber possible. And, if you found a plumber who actually works 

you tend to go back to that person because you know you are going 

to get value added. But it is because you know how to define the 

outcome that you are looking for at the front end. 

I think we not only have to have that focus on the outcome, but 

that outcome has to be defined in the requirements, not just written into the contract. A lot of these problems stem from insufficient 
9 

attention—particularly in services contracts—insufficient attention 

at the front end to what it is we want to achieve here as opposed 

to just how many hours of time we want to buy from staff. 

Mr. SHUSTER. Dr. Gansler, you used the word ‘‘capabilities.’’ 

What the end product is going to be capable of has to be clearly 

stated in the contract. 

Dr. GANSLER. And that includes services, not just products. As 

pointed out, since last year 57 percent of what we bought were actually services, more than half of it. All of our rules, regulations, 

training, policies, et cetera, are all based upon buying goods. Buying an engineer is different than buying a tank. You don’t put them 

through a R&D phase and a test and evaluation phase, but you do 

want to count on prior performance and demonstrated experience. 

You wouldn’t get your heart surgeon on the basis of somebody with 

a degree and lowest hourly rate. You would check and see whether 

they have ever done a heart operation before and how well they did 

it, what the results were. 

But we are shifting the other way, and that is partly because of 

the budget driving the sensitivity to cost, but it is wrong in terms 

of let us get high performance at lower cost. That really makes a 

lot of sense, and that is the way the commercial world operates. 

Mr. SHUSTER. Before I yield to the ranking member, if, Mr. 

Berteau, you would share the headline you had, you shared with 

me. 

Mr. BERTEAU. Mr. Chairman, I believe I put it back in my briefcase, but it is a headline from a three-star general in the Army 

Training and Doctrine Command, and his guidance on acquisition 

was ‘‘Don’t do anything stupid.’’ 

Mr. SHUSTER. That is the headline. 

Mr. BERTEAU. It is a pretty good guidance, I think; a starting 

point for acquisition and contracting. 

Mr. WEST. I was in the Army for 23 years. It is good guidance. 

Mr. BERTEAU. It is good guidance. It is sometimes hard to follow, 

but it is good to repeat it over and over again. 

Mr. SHUSTER. With that, I yield to the ranking member. 

Mr. LARSEN. Thank you. 

With all these analogies about jobs, I want to point out something. If I need a heart surgeon, I probably need a heart surgeon 

once, right? I am not going to put him on—her on contract for my 

life, literally for my life once, but for the life of my life. I only need 

that person once. 

A plumber on the other hand, yeah, if the plumber does a good 

job, I may go back to her several times. But the question is at what 

point, then, do I decide I need to go out and look around a little 

bit more; I mean, not to get used to this plumber too much, because 

maybe things are changing out there, and maybe I can get better 

service from someone else, and I can throw some competition into 

this. 

That is the challenge that we are facing. Even though the dollars 

are being squeezed, what I hear you saying is that is going to benefit the larger contractors who already know the system, are in the 

system, and it is going to be a tougher time getting in some of the 

smaller and midsize companies that we are hearing from into the 
10 

opportunities that exist with contracting, whether they are goods 

or services for the DOD. Can you talk a little bit about that? 

Mr. BERTEAU. Mr. Larsen, I think you are absolutely right. I 

mean, the thing that keeps that plumber performing is, in fact, 

both the threat and the reality that there is competition out there, 

and that there is competent competition that is cost-competitive 

and performance-competitive. Even in companies, commercial companies, that have long-term relationships with their suppliers, 

which is kind of what you would think the Government would want 

to get to, there is always that potential that we can pull the contract from you, we can find another supplier, we can qualify that 

other supplier, and we can competitively bid with that. And that 

threat has to always be out there, and I think it is incumbent on 

the Government to have it in place. 

DR. GANSLER. I would argue somewhat in the sense that there 

is a new suggested policy that says every 3 years we should recompete, period. I would argue just the opposite, that we should recompete, as you suggest, when the contractor doesn’t get higher performance at a lower cost in that 3-year period. If they do, they deserve to be rewarded with a follow-on. If they continue to get higher performance at a lower cost over and over and over, that is wonderful, that is exactly what we want. 

The threat of competition is a very good threat. The forced competition is actually a disincentive to do better and better. And we 

have to be very careful about doing competition smartly, not just 

for the sake of competition. A scorecard isn’t the right answer. We 

want to reward people for good performance, and that means higher performance at lower cost. And we should reward them for doing 

that. We have to understand that incentivizes for industry is what 

should drive this whole operation. 

Mr. LARSEN. How do we ensure that the incentives for industry 

drive the operation and that we are allowing new actors the opportunity, new players the opportunity to participate in that competition? 

Dr. GANSLER. Well, one of the easiest ways, one of the most effective ways that we have had for many years now is the Small Business Innovation Research program. That forces you to go to the 

small companies, which is great, and that has demonstrated very 

effective use of those dollars. And that I would encourage to be continued, even at the expense of the fact that the budget shrinking, 

because that is one way—I have talked to lots of small business 

firms that have been very successful and grown to be big firms as 

a result of starting out with the SBIR [Small Business Innovation 

Research] program. So there are techniques we have for the small 

business. 

Another thing I would argue is that the small business mostly 

fits into the lower tiers, and so requiring it as a prime contract only 

on the scorecard, I think, disadvantages the small businesses in 

many ways. I think that is a shift that could be taken as well. 

Mr. LARSEN. Does DOD manage the industrial base in a coherent 

way, or is it service by service, agency by agency, day by day? 

Mr. BERTEAU. As we have been out and looked at a number of 

specific programs, that is weapon systems or categories of programs, shifts, satellites, et cetera, what we have found is that an 
11 

awful lot of the industrial base, the management or even awareness—because the first element of management is actually having 

data that knows what is going on.The first level is left up to the 

prime contractors to know who their subcontractors are and what 

their subcontractors’ vulnerabilities are. Most prime contractors 

have pretty good insight into the ones that are part of their contract, but not necessarily the broader industrial base. 

Then at the program level, at the program manager level, for the 

satellites or the ships, there is less awareness, but a broader 

awareness inside the Defense Department. 

But when you get to the enterprise level across all of DOD—that 

is where it falls short. There is very little integrated data, and 

there is no process for incorporating that data in real time in actual decisions so that when you are making a cut decision, for instance, you know what industries are going to be impacted by it. 

In part, Mr. Lambert, as he testified before this panel, is expecting that his sector-by-sector, tier-by-tier analysis will provide some 

of that information. There are two problems with it, though. One 

is it won’t be comprehensive because it is not every sector across 

the board. They selected seven. The second is it won’t be timely. 

It will essentially be 2 years out of date by the time they have got 

it all rolled up. And so it won’t be particularly useful, because the 

decisions that we are making are not backwards decisions, they are 

forward decisions for fiscal year 2013 and 2014. So there is a lag 

there that they need to address. 

Dr. GANSLER. I would suggest the one thing that has been misinterpreted, not by you, but often even by the press, and that is the 

concept of managing the industrial base. This is not picking winners and losers. It is not picking company A instead of company B 

or company C. What it is trying to say is what kind of a structure 

do we want for that industry? We want it to be competitive, we 

want it to be innovative, and we want it to be profitable. I mean, 

that is almost a dirty word for a lot of people in the Government 

sometimes, and that is wrong because that gives them the money 

to reinvest in research and in capital investment. 

So I think having the structure and looking at do we have 

enough—enough being at least two or three firms in any given sector—for competition? I mean, the jet engine business has two, but 

that is enough for serious, good competition, as the great engine 

war showed. 

And so we don’t have to pick winners and losers in managing the 

industry. What we do have to do is worry about the structure of 

the industry. It is profitability, it is innovation, it is competitiveness. That is where I would focus. And make sure people understand when you say ‘‘manage the industry’’ what we are talking 

about. 

Mr. LARSEN. Mr. Chairman, I will save for a second round. 

Thank you. I yield back. 

Mr. SHUSTER. Mr. Runyan. 

Mr. RUNYAN. Thank you, Mr. Chairman. 

Gentlemen, thank you for being here. 

Dr. Gansler, how does our U.S. industrial defense industry policy 

compare to our international powers around the world? Obviously 
12 

you probably think we are a little behind the ball, as your testimony says, but how does it look? 

Dr. GANSLER. Well, I think one of the major and most important 

aspects of our industrial policy is that our speeches say we want 

to have the commercial world, dual use, and we have barriers to 

doing that. By contrast, in terms of around the world, for many 

years now the Japanese have had an explicit statement of dual use. 

I go through Japanese aircraft plants, and I see the same machine 

tools being used on commercial and military. The Russians have a 

policy now of dual use, and they can implement it. And recently, 

the Chinese have come out with a statement of the importance of 

dual-use industrial operations. This is not just taking a piece of 

commercial equipment, but it is having the factories integrated. 

I might point out that, for example, Boeing used to build the 

commercial and military transports in the same plant, but as a result of cost accounting standards, they were forced to separate the 

commercial and military. In that case it was the allocation of independent research and development against the commercial. So it 

was penalizing the commercial even though they were achieving 

enormous overhead absorption for the military. 

There are huge benefits of dual use; the idea that you get technology transfer, you get sensitivity to cost, you get higher volume 

for overhead absorption and all these benefits. But we have barriers to dual use today. And countries like China, Russia, Japan, 

others, who have an industrial policy that actually follows those 

speeches can actually implement that dual use. 

We have recently even gone further, and now we are asking for 

proprietary data to recompete things after 3 years. Well, no commercial firm is going to give you their drawings. When you buy a 

car, you don’t get the drawings in the glove compartment. Why 

would you want to do that sort of thing? 

It is another barrier being introduced along with export controls. 

Most commercial firms want a world market; they don’t want just 

the domestic market. A good example of that would be in the infrared business. We used to own the night. Because of our export controls, we no longer own the night now in the sense that the French 

are well ahead of us now in night vision devices because of our export controls. 

We need to review our policies relative to buying commercial and 

having integrated dual-use plants in order to be able to achieve 

world-class competitiveness, because right now with the high-tech 

commercial, there is a big benefit to the DOD of being able to integrate plants and to buy commercial technology in the information 

area and a lot of other areas. 

Mr. RUNYAN. Now, does security policy and intellectual property 

play into that and the price of it also? 

Dr. GANSLER. Absolutely. You have to be aware of the security 

sensitivity, and you have to be aware of the intellectual property 

sensitivity. I mean, one of the big issues right now is cyber security 

because of the fact that everybody now is into the information age. 

Clearly we have to start worrying about protecting not just DOD 

stuff, but commercial stuff; I mean, the power grid and things like 

that. So there has got to be a greater sensitivity to cyber security, 
13 

and we do want to make sure that everybody protects intellectual 

property and highly classified, sensitive stuff. 

Mr. RUNYAN. But is it to a point where we are just talking about 

globalization of the workforce? Are we afraid that we don’t know 

what that tipping point is where security might actually cost us 

more, and actually prosecution and follow-up of all that intellectual 

property being stolen, that that might be a hurdle? 

Dr. GANSLER. See, I would argue just the opposite; that our barriers today to using foreign students, foreign scholars, foreign technology, and working with foreigners is actually a barrier to us. 

In fact, let me give you some examples. Enrico Fermi was not a 

U.S. citizen when he built a nuclear bomb here in the United 

States. Most of the people who founded Silicon Valley were not 

U.S. citizens. We allow them, by the way, to be in the Army; 3 percent of the Army are non-U.S. citizens. But we don’t allow them in 

defense plants. If I go now to a university where a significant majority of the graduate engineering and science students are nonU.S. citizens, I think we need to take advantage of that because we 

are a nation of immigrants. 

And you can do security checks on their family and that sort of 

thing, but for us to say they must be U.S. citizens to be able to take 

advantage of their advanced technology and to work on research 

programs, I mean, Ronald Reagan, not an ultra-liberal, he put out 

a policy, NSDD–189, that said all fundamental research should be 

free and open and publishable, anybody can work on it, they don’t 

have to be U.S. citizens. But now lots of times the DOD, DOE [Department of Energy], others put into their research contracts the 

requirement it must be done by U.S. citizens. That doesn’t make 

sense to me when so large a share of the really outstanding science 

and engineering students, and graduate students particularly, are 

non-U.S. 

Mr. RUNYAN. Thank you for that. 

I also agree with incentive-based contracting. In my past life if 

you didn’t perform, you were gone. It keeps a lot of people honest. 

It keeps you very focused and motivated. 

I yield back. 

Mr. SHUSTER. Ms. Sutton. 

Ms. SUTTON. Thank you, Mr. Chairman. 

I really appreciate the discussion about sort of value-driven decisionmaking. Earlier this week we did a seminar, which I helped 

sponsor, related to value-driven engineering, and we should apply 

this in many, many realms of Government. 

So one of the questions I have, Dr. Gansler, it is intriguing to me 

that you talk about the potential cost savings by increasing the use 

of diplomacy and other soft forms of power. Could you expand on 

that a little bit more and try to quantify what potentially we could 

accomplish by doing that? 

Dr. GANSLER. You know, an obvious example would be China 

helping us with North Korea, or Russia helping us with Afghanistan, or other issues that we have where we could collectively apply 

pressure. Similarly, if we were able to work more effectively with 

even our allies so that we would have joint programs with our, say, 

NATO [North Atlantic Treaty Organization] allies. 
14 

When you think about the fact that 100 nations have ballistic 

missiles, and we want to worry about missile defense based on the 

fact that in the future we will be in a coalition—you can’t sort of 

say, well, there is a bunch of missiles coming in at us, and you pick 

up the phone and say, Hans, you take the first, and, Pierre, you 

take the second one; I will take the third one. It has to be integrated and automatic. 

We can save a lot of money if we did it that way as well, because 

we would have joint development, which they would pay for part 

of it, like we did in the Joint Strike Fighter. Remember, a couple 

of counties put up $1 billion each? So we can save money by the 

economies of scale, volume production, and by integrated systems. 

By assuming and exercising and practicing with our coalition allies, 

we will actually save a considerable amount of money and be much 

more effective as a force, which goes to the total value point. It is 

not just for saving money, it is for force effectiveness. 

Ms. SUTTON. Are there papers out there? Is there someplace 

where I can find more information about the quantification of that 

so that we can see the value of these alliances? Is there someplace 

where it is actually quantified? 

Mr. BERTEAU. We have done a couple of pretty thorough literature searches on the issue, particularly of economic development, and I don’t know that we have found a good set of answers 

there, but I will be glad to take that question and go back and look. 

If I could add one more thing to what Dr. Gansler said. There 

needs to be a recognition of that potential value of contribution 

from allies, et cetera, at the requirements phase, and what that 

sometimes means is that the military has got to give up a little bit 

of what they want in order to get the contribution from those who 

can add value to it. So the trade-off is we might not get 100 percent 

of what we want, we may only get 95 percent, but we end up saving 10 percent of the cost, and so the trade-off is one that is cost 

effective. I can’t quantify that, though, but you can find places 

where it did not happen. 

Dr. GANSLER. I might point out that every U.S. weapon system 

today has foreign parts in them, and they are there because they 

are better, not because they are cheaper. 

Ms. SUTTON. Let me ask you this: How can DOD and industry 

best anticipate our future threats; how should we be doing that? 

What are we preparing for, and how do we figure out what to prepare for? 

Dr. GANSLER. I would argue that one of the biggest characteristics of future threats is uncertainty, and therefore what we need 

is responsiveness, and we don’t have that today. We have no ability 

to respond rapidly to changes in threats. You may remember in the 

first Persian Gulf when we needed to get more Patriot missiles. 

The line was available, lots of excess capacity in the line, but they 

didn’t have parts because they hadn’t prepared for the need for 

surge in that case. 

The ability to shift from one type of scenario to another type rapidly, the ability to work with our coalition allies rapidly certainly 

is required. I think it is the uncertainty that—the spectrum is too 

large. I mean, we wouldn’t have thought about pirates a few years 

ago that we are going to worry about and on up to nuclear war. 
15 

When you think about that full spectrum, it is impossible to be able 

to individually prepare for every one of those because of affordability. We don’t have enough money to do that. So we have to be 

able to shift from one to the other, and that means flexibility, and 

it means practicing shifting rapidly. 

Ms. SUTTON. Would you say that the capacity to manufacture is 

also an important element that we need to maintain? 

Dr. GANSLER. Manufacture and redesign. It is not just building 

the same thing. Whenever a new threat shows up—look at what 

happened with the roadside bombs. We hadn’t expected that, so we 

weren’t prepared. We hadn’t designed our systems for it. It took a 

couple of years to just even recognize it was a new requirement 

going to the requirement side. And then finally, we get into the 

budget cycle, and that takes 3 years, and then finally you get the 

design process through, and then finally you go into production. 

That is not a fast response. 

Ms. SUTTON. Thank you. 

Mr. SHUSTER. We will probably have an opportunity for another 

round. 

Mr. West. 

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

Gentlemen, thank you for being here today. 

And as I have said, I was told don’t do anything stupid quite a 

few times in my military career. 

Vice Chief of Staff of the Army General Chiarelli implemented a 

portfolio review process as far as their acquisition of new weapons 

systems. Have you all had an opportunity to sit down and talk to 

him or review that process that he has, and did you find that that 

was something being used in any other of our Services? 

Mr. BERTEAU. We had some talks with them as they laid out how 

they were going to approach it. I have not seen the results of that 

analysis yet. But one thing that I think is worth noting is they recognize, when you look at portfolios, you have to have a way of 

measuring capability across more than one weapon system. You 

can measure that capability pretty well; the hard part is determining how much is enough. How do you validate the boundary, 

if you will, of sufficiency? It is very hard to validate that except 

against something that sort of looks like a threat. 

So you can’t just have capability in the abstract, it has got to be 

capability in a portfolio against some measure of requirement 

Dr. GANSLER. I would also argue that what that is is a capability, 

not a platform, and there is a big difference there. Some people 

tend to think of it as, well, do I have to upgrade my tank, or do 

I have to upgrade my airplane as contrasted to what I really need 

for the potential threats in the 21st century, which are very different things. 

The type of equipment that we are going to need in the asymmetric world of the future, you know, capability against 

cyberwarfare; capability against war among the people; the different intelligence capability; the benefits of unmanned systems, 

air, land and sea systems, and so forth, these are very different 

than sort of the linear projections from the past. We have to think 

about it in that form as well. 
16 

Mr. WEST. You bring up a great point because the Army that I 

was commissioned into in 1982 and the threats that we saw then 

were totally different than the threats that I saw in 2005, when I 

went to Afghanistan. So that leads me to what I think is a major 

thing that we need to look at. 

When you read our National Security Strategy, when you read 

our National Military Strategy, I do not think that it really provides the ability or the focus to the defense industrial base to understand this new 21st-century battlefield, these new threats, and, 

therefore, the new type of weapon systems and tools that are needed on the battlefield. Do you all concur or disagree? 

Dr. GANSLER. I tend to agree. We do have an institution that has 

a lot of institutional inertia, and it doesn’t necessarily think about 

what might be different. And that is understandable. I mean, disruptive technologies have a lot of resistance to them. 

I will give you an example. When I was Under Secretary, 2 years 

in a row the Air Force zeroed the unmanned airplane, the Global 

Hawk. I had to force them to buy an unmanned airplane, but that 

is why it was resistant. I mean, it was really countercultural, and 

that is what disruption is. It is very difficult to ask a user for something new. They will tend to think is that is something better than 

what they now have? But these new environments coming from the 

research push of new technologies, disruptive technologies, are 

where we have to be thinking, and new kinds of warfare, you know, 

new threats that people are presenting. 

It is hard to have an institution that is geared around certain 

structure to shift to a new one. We need to emphasize that. I mean, 

if you recognize why DARPA [Defense Advanced Research Projects 

Agency] was established, it was because the Russians put up a satellite, and none of the Services have been worrying about satellites. 

So we created an organization that would look at things that 

weren’t being done by the Services. And that is what we have to 

start thinking towards and maybe figuring out ways to have a 

DARPA in each Service or something. 

Mr. BERTEAU. Congressman West, I would add you are right to 

focus on those documents, the National Security Strategy, National 

Defense Strategy, National Military Strategy, the report of the 

2010 QDR [Quadrennial Defense Review]. There is a lot of good in 

there, but it doesn’t have the precision to allow you to prioritize 

and make trade-offs, particularly as the budget is coming down. 

Congresswoman Sutton asked about the information for industry 

that would come out of those. It is not in there. If you look back, 

last summer the Defense Department submitted to this Congress 

a report on China military capability out to 2030 and beyond. We 

have more precision in what we say China is going to have in 2030 

than we have about what we are going to have in 2030. That is 

not quite balanced. 

Mr. WEST. Thank you very much, gentlemen. 

I yield back. 

Mr. SHUSTER. Thank you. 

That satellite question is once again a failure of the Intelligence 

Community to be able to predict accurately what occurred over and 

over again from the last 60 years. They haven’t been quite right 

on predicting what the future holds. 
17 

Dr. GANSLER. There was a lot of resistance in the Intelligence 

Community to the establishment of IARPA [Intelligence Advanced 

Research Projects Activity] for the same reason. 

Mr. SHUSTER. Right. Well, that was an earmark by—my understanding—Congressman Hunter and Congressman Lewis forced the 

Air Force and forced the military to go develop and buy those [Unmanned Aerial Vehicles]. So thank goodness for that, and thank 

goodness for earmarks. 

Ms. Hanabusa. 

Ms. HANABUSA. Thank you. Thank you, Mr. Chairman. 

I think General Dempsey said when he appeared before us that 

the only thing we know is that we have been 100 percent correct 

in not being able to predict anything. 

On that note, Dr. Gansler, I started to read your book, Democracy’s Arsenal, and one of the things that struck me was why the 

choice in the title of ‘‘Democracy’s Arsenal’’ versus ‘‘America’s Arsenal for the 21st Century’’, or something along those lines? In your 

testimony just recently about the concept of the joint development 

and the fact that our allies—or we would have to begin to look at 

development in terms of coalitions working together, was that part 

of your thoughts in talking about the arsenal of the future just 

being democracy’s arsenal; that we would be required to pull together our allies as opposed to just being United States-centric in 

our views? 

Dr. GANSLER. That is a very good point. In fact, as you know, in 

the book I try to emphasize the importance of global. I was just 

doing a play on words about Eisenhower’s statement about the reference to the arsenal of democracy, which was the industrial base. 

But the emphasis actually, if you want to use the title, is the 

subtitle, Creating a Twenty-First-Century Defense Industry, not 

simply preserving a 20th century industry. That is the important 

difference that we are talking about here. And I think that emphasis of shifting to the 21st century is the focus. Part of that does 

have to do with the commercial world and the global world, and to 

the extent we can shift to recognizing the global benefits, democracy or not, that is really the focus of what I was trying to get at. 

Ms. HANABUSA. One of the portions of your book that I was intrigued by, and this is something that we have been looking at, is 

that we do not have or we are losing that industrial base, that industrial base that, like you said, General Eisenhower said, made 

the difference in winning the war. Yet we know that China, for example, is building ships a lot quicker and potentially better than 

we are because we are losing that knowledge in this process, but 

at the same time China is the rising threat in the Pacific. 

So how do you see us getting to a point of a global situation of 

joint development, or is it one basically that we have to focus on 

with our allies and relaxing things like ITAR [International Traffic 

in Arms Regulations], for example, and being able to do that kind 

of joint development and dual use and everything in a more efficient way? 

Dr. GANSLER. Well, that was partly the question that Ms. Sutton 

raised relative to soft power, to the extent that I think we should 

try to stop treating China as a threat and treat them as a partner 

in achieving peace and stability in the world. And to the extent we 
18 

do that, we will be far better off in getting that help, if you will, 

with, say, North Korea or other places where they could be of assistance to us. In terms of dealing with our allies, stop thinking as 

much about building walls around America, but thinking in terms 

of what is the most effective solution for the world. 

To the extent that I think ITAR and other barriers that we have 

can be addressed, we need to really focus on that. And in many 

ways that is that soft power issue, working with our allies instead 

of trying to each separately compete. 

Ms. HANABUSA. Mr. Berteau, I think on October 24th, one of your 

colleagues, Mr. Chao from CSIS, appeared before us, and in that 

testimony I was asking him the question about, you know, we don’t 

know what the future is. Even to 2020, we don’t have any idea 

what that military is going to look like. How can we then start to 

plan, because we are talking about the budgets every time that are 

before us? One of the coined phrases that I came up with after that 

was that we are setting policy by acquisition. In other words, we 

are making acquisition decisions now, and that are going to affect 

us 15, 20 years from now, and that seems to be the policy of our 

vision of the military in the future. 

Do you agree with that? 

Mr. BERTEAU. That is absolutely a clear view of what goes on. 

I happened to be with Secretary Cheney after the launch of Operation Desert Storm in 1991 to move Saddam Hussein and the Iraqi 

Army out of Kuwait. He placed two phone calls after the initiation 

of those activities. One was to former Secretary of Defense Cap 

Weinberger, the other was to former Secretary of Defense Harold 

Brown, so both a Republican and a Democrat. And what he said 

was the capability we are use using today is thanks to the decisions you made 10 and 15 years ago. And I think that same thing 

is true for today. 

The hard part is not recognizing that looking backwards. The 

hard part is recognizing going forwards what the 15-year implications of the decisions we are making today. And inside the Department of Defense, the past is far more powerful than the future, and 

it is always trying to kill the future. 

Congressman West commented about the very different Army of 

today than in 1982. That Army of today is shaped by the people 

whose mentality was created 15 and 20 years ago, and the past is 

resonant in them. I think it is incumbent upon you all to be thinking through the filter of what is going to be important 15 or 20 

years from now; how do we work backwards from that and use that 

as a way of shaping today’s decisions. 

Ms. HANABUSA. Thank you very much. 

Thank you, Mr. Chair. 

Mr. SHUSTER. Mr. Schilling is recognized. 

Mr. SCHILLING. Thank you, Chairman, and thank you, gentleman, for showing up. We are getting a lot of good things out of 

this today. 

What I would like to just ask, I just really got three or four questions if I have time for them. So how do you define industrial preparedness, and then how can Congress help promote it? 

Dr. GANSLER. Well, the point that came up much earlier, which 

is preparing to be able to do something that was unexpected as 
19 

contrasted to something that was really expected, is the difference 

that I think we lack today. This is the difficulty of predicting the 

future. I guess Yogi Berra’s is the most popular statement about 

that one: ‘‘Forecasting is so difficult, especially about the future.’’ 

It does seem that we need the flexibility and responsiveness, and 

we lack that. Even in the budget process, you know, there is no 

money set aside. The only reason we were able to do some responsiveness in the last decade has been because of the supplementals. 

That is sort of a slush fund. If we didn’t have that, we would not 

be able to rapidly respond to changes that are required. 

So we need to think about how one could do something rapidly, 

including getting the money for it, and also to be prepared in terms 

of the procurement practices and the policies. In some cases it requires us just taking action rather than going through the formal 

process that we do, which tends to take 3 to 5 years before you get 

the procurement and the budget and everything else all lined up 

to do something that requires a fast response. 

That is the preparedness area that I think we have to spend 

most of our attention on and which we don’t have today. The process is not responsive today. 

Mr. SCHILLING. That is a very good point. Who knows what is 

coming at us, and if we can respond quickly enough. 

I would like to ask you, sir, do you believe that the future of defense, the industrial base basically, would be stronger if it is allowed to partner more freely with the military organic base? 

Dr. GANSLER. I would argue that the word ‘‘partnering’’ is a subset of competition. If you think of it as a sole-source partnering, I 

would say we will not be more efficient. If you think of it as a form 

of the competition—I think back to one competition where we ran— 

the DOD ran a competition for maintenance, and it was won by a 

public sector, actually Warner Robins in that case, but they gave 

60 percent of it to the private sector in order to win. That makes 

sense. I mean, there are some very competent, qualified and capital-provided-for public-sector operations. 

When we compete public against private, what we find is that on 

average, no matter who wins, the savings are over 30 percent, and 

the performance goes up, but Congress has passed laws against 

doing that. You don’t allow that anymore, the A–76 competitions. 

Now, my view would be you should allow the A–76 competitions 

and allow partnering on those so when the public sector bids, they 

can have a private-sector subcontractor or vice versa. Take full advantages of the capabilities in both the public and private, but do 

it in a competitive environment, not a sole-source environment. 

That is the difference. You have eliminated that competition. 

I find it hard to believe that when you can show the data overwhelmingly favor the idea of competition in the public-private sector—and I should emphasize only for non-inherently governmental 

functions. The Government obviously should be doing governmental 

functions. But a lot of things, like wrench turning; read the Constitution, it doesn’t mention wrench turning in the Constitution as 

an inherently governmental function. Therefore, that should be allowed to be competitive. And to the extent that it is competitive, 

the public sector will often win some of those, and they will win 
20 

them often in a partnership. That is fine. I have no problem with 

that at all. 

But on the other hand, the inverse of it is mandating that it be 

done in the public sector. That is sole source. That is monopoly. 

That doesn’t usually get low cost and high performance. 

Mr. SCHILLING. Very good. 

Mr. BERTEAU. Could I add two short things to that and then let 

you get the rest of your questions? One is I think we have a definition of core requirements, true in the maintenance business, implied in engineering and R&D as well. I think it is actually a very 

good time to revisit that question, because I think the view of 

‘‘core’’ is again a view of the past from a mobilized conventional 

war perspective, and I think there is a 21st-century way of thinking about what core capability do we need to have inside the Department of Defense. I would urge that the panel and the committee take a look at that question. 

The second is investment in future capability. Partnering is fine, 

but I don’t think it makes sense for the Government to facilitize 

capability that is already present and resident in the supplier base 

where you have a global supply chain already in place. So that is 

an area where you could save money and focus your investment on 

the places where that core is really needed, and I think it is a good 

time to take another look at that. 

Mr. SCHILLING. Very good. Thank you, gentlemen. 

Mr. SHUSTER. If you have any further questions, we are going to 

do a second round, and we will start with you, if you want to finish 

up, if you have another question. 

That last question, can you give us a concrete example on that 

last question about what you are talking about? 

Mr. BERTEAU. Probably my best concrete example would be the 

new K–46 Air Force tanker, which is based upon a commercial derivative airframe that has a global supply chain already in place. 

This would have been true, by the way, regardless of who won that 

competition. Both competitors had an existing commercial airframe 

with a global supply chain in place. 

I don’t think it makes sense to spend, say, $4 billion facilitizing 

depots to do commercial airframe repair work. The Air Force ought 

to focus on the military-unique capabilities that it ought to have 

the capability to perform in house. That is one where I think it 

would merit a hard look. 

Mr. SHUSTER. Thank you. 

Mr. SCHILLING. Actually, they answered my last question already. 

Mr. SHUSTER. Sorry about that. Thank you. 

With that, we will go to a second round. If we want to start with 

Mr. Runyan, I will finish up last. Do you have any further questions? 

Mr. RUNYAN. Just kind of to make a point, we have been sitting 

here talking about whether it is core capability force strength 

versus our ability to respond to what is happening today. What is 

more important? I know there is a value to both of them, but, I 

mean, moving forward? 

Mr. BERTEAU. This is kind of the historical dilemma of national 

security. I think that, in general, the military has tended to want 
21 

to pay more attention to protecting their long-term investments, 

again based upon their current view of what those long-term investments ought to be. 

It was instructive to watch the dilemma that Secretary Gates 

had when he came into the Department of Defense and recognize 

he is the first Secretary we have ever had who spanned two Presidents and two parties. It took him 2 years to get the military to 

focus on actually winning the wars that we are fighting today. 

He had to personally intervene to get MRAP [Mine Resistant 

Ambush Protected] vehicle procurement on the table. He had to 

personally intervene to increase the Air Force’s development and 

deployment and use of unmanned aerial vehicles across the board. 

It took the personal, strong, repeated intervention of the Secretary 

using his full title and authority to make that happen. So the inertia of the institution mitigates against it. 

That said, their vision of what that future is, that they are trying 

to protect the investment in, is so muddied and so unclear, and 

General Dempsey is absolutely right, it is unblemished by predicted success here. 

So there needs to be a third way, and that third way needs to 

say we need a clear articulation of what the future is we are aiming at, but it needs to be flexible enough that we are okay standing 

up tomorrow and saying, okay, we are smarter now than we were 

yesterday, so we are going to make a little bit of an adjustment. 

That is not present in the institution at all. It is kind of a lousy 

answer to your question, but it is the only way I can see to go forward. 

Mr. RUNYAN. I think also what we have raised here and also in 

past hearings we have had, when you have that intervention, the 

process of whether it is a contract or anything to execute that and 

get it out there is one of the major obstacles, because even if the 

response is there to execute it, it may have changed by the time 

you get it to the field. 

Dr. GANSLER. You also need to worry, it seems to me, about the 

exercises that you run. One way of trying to be prepared for unexpected things is to put them into the exercise. The problem, of 

course, is that that messes up the exercise. When they would want 

to prepare for Navy operations, the mines might mess it up. Or if 

you want to prepare for an Air Force operation, electronic warfare 

might mess it up, or cyberwar attacks and so forth. 

What we need to do is be creative in the exercises in order to see 

how we would respond to command and control decisions and to 

other use of current equipment in unexpected new ways. There are 

two different approaches here for solving the unexpected, one of 

which is to get some new equipment for that unexpected area or 

some new service. But the fastest way is using the current stuff in 

a new way, and we ought to introduce that into the exercises, I 

think. 

Mr. RUNYAN. Thank you both. 

Chairman, I yield back. 

Mr. SHUSTER. I do mention the MRAP and up-armored 

‘‘Humvees’’ [HMMWV, High Mobility Multipurpose Wheeled Vehicles]. It was a big surprise to the military, but talking to the Special Forces community in Somalia, they learned the lesson. They 
22 

had an up-armored [Humvee] from some country, South Africa or 

somewhere, that they utilized, and when they came back, one of 

the lessons learned was if we are going to go in an urban environment, we need an up-armored vehicle. That fell on deaf ears until 

we started seeing people being killed. 

Dr. GANSLER. That is a good example of the multinational design. 

The underneath part of that is a South African design, the shock 

absorbers are a German design, the armor is an Israeli design, and 

some of the electronics are Asian. We take full advantage of that, 

including having the Secretary of Defense as the program manager 

to get it fast. 

Mr. SHUSTER. Right. 

Ms. Hanabusa. 

Ms. HANABUSA. Thank you, Mr. Chairman. 

In that same meeting that General Dempsey said what he said, 

Leon Panetta also said how that we prepare for the future is we’ve 

just got to be damn flexible. The problem is what are you being 

flexible for? 

I represent Hawaii, and I met with one general there, and I said, 

here is the Pacific, the theater of the century. What is the threat 

going to look like? And he proceeded to say, well, counterinsurgency here, counterterrorism here, maybe follow-up force here. And 

I said, you are naming everything that we have had from the past 

to now. But, I said, the fortunate part is that people like—I will 

speak for myself—people like me, who don’t understand necessarily 

all the nuances, are the ones that are going to make the decisions 

on what gets funded. 

So the reality is we have to be flexible, we have been terrible in 

predicting, we are setting policy by acquisition, and we should work 

for a democracy’s arsenal that should be a joint development. 

But the real issue is kind of like, okay, let’s put that all together, 

and how do we do that? I think we need to understand what people 

foresee as the future. Unless we know what the future is, and no 

one knows, I understand that, what is the best guess that you have 

as to what we need to look like or what we need to prepare for? 

Because, as you said earlier, it is the budget that is going to determine that, or the lack of the flexibility within the budget that is 

going to cause our potential—not necessarily our demise, but at 

least set us back for 5, 6, 7 years. 

So does anyone want to take a stab at that? So when I cast my 

vote I can think, oh, Dr. Gansler said this, or Mr. Berteau said 

that, and maybe I will go with that. 

Dr. GANSLER. The one thing you didn’t list in your list of characteristics you would like to have is low cost. In order to have the 

flexibility that you need, it has to be affordable also. And especially 

with the budgets shrinking, affordability becomes a very important 

characteristic. 

One thing we don’t do in our requirements process most of the 

time is to have cost as part of the requirement. Now, that is a military requirement, because quantity is determined by unit cost, and 

if we can get the flexibility that comes from having distributed sensors, distributed shooters, netcentric operations with low cost nodes 

in that system, we can actually afford to have the flexibility to handle all these unexpected things. 
23 

Well, the way to do that would be to make cost part of the requirement. We have done that, at least in one or two programs, 

successfully, like JDAM [Joint Direct Attack Munition]. I have a 

handwritten note from the Secretary of the Air Force—Chief of 

Staff of the Air Force, I am sorry—saying he has only three requirements for that precision guided missile; that it should hit the 

target, it should work, and it should cost under $40,000 each. 

Today it hits the target, it works, and costs $16,000 each. Now we 

can afford to get enough of them, and if we need more of them, to 

buy them, we can afford to do that. 

But in other programs we have lost that flexibility. I mean, the 

Joint Strike Fighter was going to be a $35 million airplane. We 

kept that in the name, it is now the F–35, but it now costs over 

$100 million. We have lost the emphasis, and that is understandable. In the last 10 years we have been living in a rich man’s 

world. Cost wasn’t important. Now cost has to be the driver, and 

affordability for all of those constraints that you placed on it I 

think are right. That is just one more item, but it is going to be 

a critical one. 

Ms. HANABUSA. But some of that will be taken care of if you have 

economies of scale to offset it, because what we tend to do is hold 

it close to our vest, and therefore we can’t kind of sell it on the 

open market. 

Mr. Berteau. 

Mr. BERTEAU. I would like to expand on that, and that is that 

the part of cost that is most ignored is lifecycle cost, the total cost 

of the program. The Defense Department resists putting a number 

on this and giving that number to you because they say it is uncertain. Well, it is all uncertain. Give me your best guess, give me a 

range, give me the probabilities associated with that range. That 

is a tool that you can use on every vote on every issue and for each 

program. 

It is even true for services contracts as well as for hardware. 

Force them to do that, because the Defense Department has an infinite negative value of money. A dollar today will not be spent to 

save $100 down the road, because that dollar today is worth more 

than that $100 down the road. The only way that you can offset 

that is from the Congress. 

Ms. HANABUSA. Thank you. Thank you very much. 

Dr. GANSLER. That is actually a design characteristic, the 

lifecycle cost. So Dave is right. Build it in by designing it to be 

maintainable, for example. 

Ms. HANABUSA. I know Ms. Sutton will probably talk to you 

about corrosion, which, broadly defined, is anything unintended 

that deteriorates. But thank you very much. 

Mr. SHUSTER. Thank you. 

Ms. Sutton. 

Ms. SUTTON. Well, I did just say to him that is what corrosion 

mitigation and prevention is all about. 

Ms. HANABUSA. I didn’t hear you, but I knew you were going to 

say it. 

Ms. SUTTON. But it is, and it is a good example of how we can 

enhance value for the taxpayers. We are losing $400 billion a year 
24 

in our economy to the cost of corrosion, some 32- or 36-, I can’t remember—billion—— 

Ms. HANABUSA. Twenty-two billion. 

Ms. SUTTON. Twenty-two. See, I have got these guys on message. 

I am so glad. And, of course, we are doing work to try and build 

in prevention and mitigation up front, which just makes sense. So 

it is a commonsense thing. 

Okay. So we had a discussion about the value of working together with allies in many capacities. Now, I come from Ohio, a 

place with an extraordinarily strong manufacturing base, built in 

no small part through defense work. You know, I am the daughter 

of a boilermaker who worked in a factory that made boilers for 

our—you can guess who that is. So there is nothing more important to me. 

Obviously our defense is important, but also jobs are really important. So let’s talk about the other side of that coin and the interest that we have in, as we develop our industrial base policy, the 

commitment we should have to jobs and putting our people to 

work, because I know it is a bit complicated and a trade-off. 

So could you both comment on that? 

Dr. GANSLER. Well, one of the things that I think is really important is to recognize that technology, industry and labor are now 

globalized, and that means that foreign investment in the U.S. creates jobs and creates exports, in fact, in many cases greater than 

U.S.-owned but foreign-located here in the U.S. 

For example, the sixth largest defense company domestically located is BAE. The headquarters happens to be in London, but the 

workers are in the U.S. And they do an enormous amount of export 

as well, and that creates jobs. So the equity coming in and the exports going out from these foreign-owned companies is a benefit to 

the U.S. in terms of jobs and taxes. 

Ms. SUTTON. I know that it can work that way, but it doesn’t always work that way. Again, here is the problem of the complexity 

of these policies. 

Would you like to comment, Mr. Berteau? 

Mr. BERTEAU. There is a lot that we suspect, but don’t know 

here. We are pretty sure that there is probably some contribution 

made by defense manufacturing to sustain or enhance the competitiveness of the U.S. manufacturing in the global economy, but we 

don’t have very good places where we know how to spend our dollars so it sustains that. Let me give you two examples. 

In the shipbuilding business we have evolved now to where U.S. 

shipbuilders fall into one of three categories basically. They are either building warships for the U.S., and we still build by far the 

best warships on the planet. They are also the most expensive. I 

am not quite sure where the trade-off is there. 

The second is Jones Act trade, where we are required to have 

U.S. hulls in order to do intercity transfer. 

And the third is where we are actually globally competitive, and 

that tends to be in businesses like oil services, small vessels, small 

high-speed vessels, et cetera, where we actually have a globally 

competitive manufacturing base that is as good or better than anybody else and is cheaper and competitive. 
25 

There is no relationship between where the Navy has spent its 

money on those major warships and where those small high-speed 

vessels and oil services businesses are globally competitive. That is 

not by design that there is no relationship; it has just evolved that 

way. There are opportunities to see where that can happen. 

Now, let me give you the other example. The other example, commercial communications satellites, right? The U.S. Defense Department is absolutely dependent on commercial communications satellites for all of its communications. Ninety-five percent of bandwidth downloads in Afghanistan are over a commercial market 

floating overhead. It just happens to be the capacity there. We need 

to pick our next war spot carefully and make sure there are enough 

satellites over it. 

But we have no responsibility for making sure those satellites 

are up there. We assume they are there because there is a global 

commercial market that provides it. One of those satellite operators 

said to me, woe unto you, DOD, if Princess Diana and Michael 

Jackson happened on the same weekend, because you don’t have 

enough money to buy time anymore. 

Ms. SUTTON. Thank you. 

Mr. SHUSTER. Mr. Larsen, do you have further questions? 

Mr. LARSEN. Dr. Gansler, how should the Department weigh efficiencies achieved through contract consolidation against the potential that such consolidation can eliminate small business opportunities? 

Dr. GANSLER. Let’s see, there are two things in that question. 

One relates to small business alone, and the other relates to competition per se. 

One of the things that I think—the second half of that is easiest, 

is why don’t we compete things when we know the benefits of competition; for example, on the second engine for the Joint Strike 

Fighter. Hopefully you have all read The Great Engine War [The 

Air Force and the Great Engine War], and you are familiar with the 

fact that by having the two engine suppliers in the U.S. both build 

them—— 

Mr. LARSEN. It wasn’t enough that we lived it, that we had to 

read it, too? 

Dr. GANSLER. The reality is you want to make sure you got the 

benefits of it, you know, the fact that both of them got higher performance at lower cost and higher reliability as that program went 

along because they competed for share of the business. Now we 

have the largest program in history, and we are not doing it. It 

makes you wonder. It affects employment as well as it affects everything else. But most importantly, it affects how many we can 

buy with higher performance and higher reliability, so why 

wouldn’t we do it. 

Now to go to the second half of your question about the small 

business effects of competition. It seems to me that if you think 

about where the small business has its biggest impact on the large 

programs, it is at the lower tiers, and therefore, trying to encourage small business participation in the large programs is a big benefit for the small business, and it is a big benefit for the primes 

who can manage those small businesses. 
26 

Now, what we do find too often, unfortunately, is that the small 

business is just a front for the subcontractor activities, and that is 

asking them to manage the larger contracts below them. I don’t 

think that is a necessary benefit to us. 

So I think we do want to think more about the small business 

at the lower tiers as part of the contractual discussions and making 

that maybe part of the incentive for awards, but doing it carefully, 

not just as a scorecard basis again, but making sure we are getting 

small businesses that do a good job. So past performance for them 

counts just like past performance for the large ones. 

Mr. LARSEN. Let me give you a specific example, not of this issue, 

but a specific example of a company that is in my district that 

came up at our roundtable we had in August. 

This particular company does a service for one of the Services, 

and they were asked to basically develop the requirements, develop 

the how-to, the manual, just develop everything. And then in order 

to compete for the job, they had to hand over everything. Then the 

Service went and competed that job so that all the competitors for 

this particular small business, locally owned, had to compete for 

the work that they did for this particular Service, and the competitors got to see all the work and then compete for it as well. 

Is there a way to protect that intellectual property in the contracting process? 

Dr. GANSLER. Yes. Actually, one of the things that has been happening that really bothers me is the trend to not having the unsolicited proposal being awarded because it doesn’t count as a competition. But when someone comes in with a really good idea, why 

wouldn’t you fund it? 

We used to do that, and it made a lot of sense, and the small 

businesses were usually the ones that came in with these good 

ideas. And they would just simply say, here is a great idea; would 

you just pay for the development of it? And then you can later have 

a competition for not the design, don’t give out the drawings, but 

for the function. You can have functional competitions, and they 

make a lot of sense. 

But I would encourage the idea that when a small business has 

a good idea, they get it funded on a sole-source basis. There is no 

risk to that. It is small money, and usually that is the way to get 

disruptive ideas in. 

Mr. LARSEN. Mr. Berteau, any thoughts? 

Mr. BERTEAU. I think there are three challenges that have to be 

tackled before you can fix the problem that that company faced 

there. 

One is that the Defense Department just fundamentally doesn’t 

have enough good data about particularly the second- and thirdtier suppliers, and that is where those guys started from, if you 

will. They may have gotten up to that point—in part because the 

Government no longer pays for that information. And because the 

Government doesn’t pay for it, and most of the contractors only operate on a cost-reimbursable basis, they don’t collect that information either. So the data is just simply not there. 

And that is in both directions; that is, small businesses that have 

large businesses as their subcontractors, and large businesses that 

have small businesses as their subcontractors. So you don’t really 
27 

have a good picture of the true universe, and that makes it very 

hard to make any policy judgments or policy decisions. 

The second is the difficulty that any individual procuring contracting officer has making a decision that recognizes the reality 

that you described there, a reality that says, this actually isn’t fair. 

This doesn’t make sense. They have got to have such an amount 

of justification and documentation that warrants a decision that 

looks like a violation of the rules, but really isn’t, because the rules 

are written to permit that, to permit judgment. 

This gets back to the question of the acquisition workforce, which 

I think was alluded to earlier both in statements from you all and 

in Dr. Gansler’s testimony. We don’t have the experience base in 

our defense acquisition workforce today. And if there is only one 

thing that this panel does, you have got to reinforce the need and 

the efforts to rebuild the capability of that workforce, because we 

rely on their judgments in making those contracting decisions. And 

you don’t get that experience except through the passage of time, 

and you can’t work 10 times as hard for 1 year and come out with 

10 years’ worth of experience, although we tried that. 

And I don’t think you have—in your case, I think if you peel back 

the layer, you will see that there is an inadequate amount of information, and so they err on the side of, well, let’s just protect ourselves. There is an inadequate experience level in the workforce, so 

they err on the side of let’s just follow the checklist. And there is 

an inadequate willingness on the part of the leadership to let them 

take them take a risk and say, you know what, we deserve to pursue it is the right way here. I don’t think you have any of those 

present there, and you got to tackle all three of those. 

Mr. LARSEN. Thank you. 

Mr. SHUSTER. Let me follow up on that. 

So we are lacking that. Why are we lacking it? There has been 

folks leaving that part of the defense, or we don’t know? 

Dr. GANSLER. You passed the law about the 25 percent reduction 

is one of the reasons—Congress did. This was Duncan Hunter. 

What happened was in the period—in the post-Cold War period, 

the dollars shrunk, and the DOD properly cut back, and then you 

passed a law, another 25 percent. So we had a huge reduction. 

Then when the budget went way up, the DOD undervalued the 

value of this acquisition workforce. 

For example, the Army had five general officers with contracting 

background. When I did that commission for Secretary Gates, they 

had zero in 2008. Defense Contract Management Agency had four 

general officers. They went to zero. They went from 25,000 people 

to 10,000 people. 

Now what I am seeing is each of the agencies are starting to 

bring in interns, in fact, over 1,000 interns, and only 3 highly 

qualified experts, so-called, that you allow. And they are the people 

with industry experience, and they would bring a lot more than the 

1,000 interns. A thousand interns will be great in 15 years, but in 

terms of the near-term acquisition problem, we are not filling that 

gap as much as we ought to do, I think. 

Mr. BERTEAU. I think the record should show that for about the 

last 3 years, maybe 4 years, the Defense Department—because I 

think it actually preceded the current administration—the Defense 
28 

Department has put a considerable amount of energy into hiring 

and training and retaining the beginnings of that workforce. But 

it is going to take years to build it back up. 

Mr. SHUSTER. Is there any way that we can go to the private sector and get them to help in this—in outsourcing the acquisition 

people to come in? 

Dr. GANSLER. As long as you avoid the conflict-of-interest issues. 

First of all, they shouldn’t do work that is inherently governmental. 

You have to be very careful of that. Secondly, they should not be 

writing the requirements and then bidding on it. 

Mr. SHUSTER. Right. UPS [United Parcel Service]—they do business with the Government, but they are not bidding. But I am sure 

they are out there. I know they go out there and they acquire 

trucks and tires and all kinds of complicated systems. Is that in the 

realm of possibility, in your minds? 

Dr. GANSLER. Well, that is what the highly qualified experts are. 

You hire someone from one of those companies to actually do the 

inherently governmental work and assist them with contractors to 

do analysis or data gathering or things like that, but not decisionmaking. That is inherently governmental. 

Mr. SHUSTER. When I think about that, I use UPS because I read 

in one of your testimonies of a logistic system, and there is a huge 

$200 billion in it. 

Dr. GANSLER. It is not world class by any means in terms of reliability, in terms of responsiveness, in terms of cost, in terms of 

labor and so forth. That is an area we need to modernize. 

Mr. SHUSTER. FedEx or UPS could come in and turn it into what 

they do. 

Dr. GANSLER. Or bring some of their senior people as highly 

qualified experts and then contract with them to do some of that 

work. But I would do it in a competitive fashion even, public-private competition. 

Mr. BERTEAU. But we need to keep in mind there that UPS is 

the distribution system, but they don’t actually set the requirements. In other words, Walmart may rely on UPS and FedEx to 

make sure they get everything, but only the demand that comes 

out of Walmart is what sets the requirement. So it is really a marriage of UPS and Walmart, if you will. 

Dr. GANSLER. Those companies today like UPS and FedEx, they 

don’t think of themselves as transportation companies. They think 

of themselves as information companies. They do total asset tracking. We don’t have total asset visibility in our system. That is 

shocking. We should have that. 

Mr. SHUSTER. Right. 

And could you comment on the impact of the failure to have a 

long-term reauthorization of the SBIR program? 

Dr. GANSLER. It is shameful. That is my honest assessment. I 

mean, that program has been demonstrated to be successful. Why 

wouldn’t you extend it? 

Mr. BERTEAU. I completely agree. I probably wouldn’t use the adjective ‘‘shameful,’’ but my thesaurus runs dry right now. 

Mr. SHUSTER. Also a question, we have learned through these 

hearings and these roundtables, of a situation as Mr. Larsen pointed out, intellectual property rights are having to be given up to 
29 

compete. But also when the auditing comes in, and you have got 

a company—and we heard in his district also—a company of five 

people, and when they come in, it is like they are dealing with Boeing. I mean, you have got five people. 

In your view and your experience, and I don’t know how much 

experience you have with that part of the process, but how do we 

make it so that—there is almost a need to have a two-tiered approach. The big contractors are going to have a much more robust 

group coming in from the Department of Defense to audit them 

versus these small companies that virtually they are shutting 

down. They have to tell people to stop working and start doing 

compliance. 

So is there anything in your view that could change that, an idea 

to put forward? 

Dr. GANSLER. Again, I think it is focusing on price, not cost. I 

talked to one semiconductor manufacturer who was a world-class 

commercial supplier. I said, why aren’t you supplying to the Defense Department also? He said, because you care about accounting 

for every dollar against each part, and we care about reducing the 

price of our parts. And it is a very big difference in attitude. We 

should care about being competitive in terms of performance and 

cost; not just cheap, but performance and cost. 

Mr. BERTEAU. Mr. Shuster, we have actually taken an extensive 

look at the question of Defense Contract Audit Agency and its 

interaction both with industry and with contract administration. 

We haven’t yet produced the results of that assessment, but I expect that we will have something coming out perhaps even before 

your 6-month window is closed, and I will be glad to share that 

with you when that is done. 

Mr. SHUSTER. That will be great. 

Let me put an idea out there. There are industries in this country that self-regulate. The financial industry has FINRA [Financial 

Industry Regulatory Authority]. The CPAs [Certified Public Accountants] in this country and the bar for the most part, they regulate themselves. 

Is there a potential to have a self-funded mechanism by defense 

contractors, especially the small and medium-sized ones, to go in 

and almost self-regulate themselves? Obviously with oversight of— 

you know, with FINRA, the SEC [U.S. Securities and Exchange 

Commission] is always looking over their shoulder. But is that 

something that has any merit to look at, or is that something that 

is completely out of the realm? 

Dr. GANSLER. I think you do need oversight, but not more oversight than competence. You know, the problem that we have—I 

found in Iraq and Afghanistan we had more auditors than we had 

people writing contracts, and yet we had a large number of contractors, a larger number than military people over there. 

I do think that the best regulation is the market. Through competition you are going to get—if you focus on performance and cost, 

not just cheap, that using the market as your regulator through 

competition, you will get higher performance at lower cost without 

having to audit it. 

Mr. SHUSTER. With that being said, do you also believe, as a 

number of people have testified, and I don’t know if you have read 
30 

it or wrote it in your studies, but this is not a free market—our 

defense industry base is not a traditional free market? 

Dr. GANSLER. No. But you can create a market. It is not a free 

and open—in fact, there is an argument and a lot of data to show 

that free and open is less effective than effective competition, even 

limited competition to those who are qualified. Now, that does 

eliminate a lot of the small businesses, so you have to figure out 

some way to get them into it as well. You don’t want to just have 

people who have done it before. But, on the other hand, for the 

larger programs or the fast response, prior experience matters as 

well. 

Mr. BERTEAU. Across the Government and in the Defense Department, we have a surprisingly high percentage of contracts that 

are listed as competitive, but only have one bidder. Now, that merits some further investigation, in my opinion. Something like 20 

percent of contracts are competitive contracts with only one bidder. 

Now, either that means there really is only one legitimate bidder, 

and we are only putting up the illusion of competition so that we 

that don’t have to write a justification for a sole-source contract, or 

we are not doing a good enough job of making sure that we are soliciting input from legitimate competitors. 

Mr. SHUSTER. What about the idea that I said about the self-regulation, setting it up, like a FINRA with the SEC overseeing it, 

and letting the Defense Auditing Agency take care of the Boeings 

and the Lockheeds, but have this organization that understands 

small business, but yet has strict regulatory—the rules are in place 

and the oversight is there? 

Dr. GANSLER. The industry has been proposing to do more of selfregulation ever since the Packard Commission. That was one of the 

things that they proposed at that time to us. And I think certainly 

self-control, if you remove some of the current regulation, but adding more external regulation and then expecting the cost of that, 

you know, it is going to be forgotten or ignored. Because I remember years ago when a detailed study was done by Coopers & 

Lybrand comparing the same item being built in a defense plant 

and in a commercial plant, and then the difference was an added 

17 percent. Today it is even greater because of regulation. 

Mr. BERTEAU. Mr. Chairman, I don’t think I would support selfregulation in the sense that you described there, but I think there 

are a couple elements of that idea that merit very serious attention. One is one that we have tried in the past and abandoned for 

a variety of reasons, historical, GAO [Government Accountability 

Office] has written about this, and that is that what contract auditors would do is certify the system, and then the results of the system would essentially be accepted as valid, so that instead of 

verifying and validating and auditing every single data element, 

you certify the process and the results of that process. That is an 

element of what would be essential to self-regulation, and I think 

that is an element that merits attention, if you will. 

The second is, in fact, the idea that not every potential problem 

is of equal value and importance. Actually if we have a limited 

number of resources and a limited number of contract auditors, and 

we do, we ought to focus their attention on the things where the 

risk is the highest and the pay-off is the greatest. 
31 

Contract auditors measure their success by the numbers of costs 

that are questioned and the amount of those questioned costs that 

are sustained. What they really ought to measure their success by 

is the timeliness and value of the ultimate delivery of the results 

of those contracts. They are independent and separate from that. 

And in that sense, that is where the market issue has to come back 

into play. 

Mr. SHUSTER. Thank you. 

Does anybody have any further questions? 

Thank you both very much. This was a very enlightening and an 

excellent hearing. I appreciate your insights and look forward to 

seeing the results of that study you are doing on the Defense Auditing Agency. That is what it is focused on. You anticipate in the 

next month or two? 

Mr. BERTEAU. Our ability to predict the future is actually no better than DOD. 

Mr. SHUSTER. Is that because you have been working with them 

for so long, you have caught that cold? 

Mr. BERTEAU. We do reflect the reality that we operate in, I am 

sorry to say. 

No, I don’t have a specific timetable, but knowing the interests 

of this panel, I will go back and take a look at that and let you 

know. 

Mr. SHUSTER. As I said earlier to you, you know, and I think you 

confirmed this, we are chartered for 6 months, but as one of you 

said, at the end of 6 months, you might just be starting to ask the 

right questions, which I fully believe that this is going to be a multiple-year project to be able to really drill down in, get the right 

answers, and come forward with significant policy directives to 

change the culture over across the river. 

So, again, thank you all very, very much for being here. I just 

remind the Members December the 9th in New Jersey. We can 

take the train up. It should be pretty easy, and everybody can fly 

out of Philadelphia. And also take a look at that January 8th to 

the 13th. I would like to get confirmations or denials right after we 

get back from Thanksgiving. 

So, again, I thank everybody for being here. I thank you for 

spending this time with us. Thanks. 

[Whereupon, at 10:40 a.m., the panel was adjourned.] 

A P P E N D I X 

NOVEMBER 18, 2011 

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Statement of Hon. Bill Shuster 

Chairman, House Panel on Business Challenges within the 

Defense Industry 

Hearing on 

Creating a 21st Century Defense Industry 

November 18, 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. Today we are hearing from two experts on the defense industrial base, and both these gentlemen have extensive expertise in the issues associated with maintaining an effective industrial base: 

• The Honorable Jacques S. Gansler, professor and Roger C. 

Lipitz Chair, and Director for the Center for Public Policy 

and Private Enterprise at the University of Maryland; and 

• Mr. David J. Berteau, senior vice president and Director of 

the International Security Program at the Center for Strategic and International Studies. 

Dr. Gansler’s recently released book, Democracy’s Arsenal: Creating a Twenty-First-Century Defense Industry, as well as Mr. 

Berteau’s work at the Center for Strategic and International Studies on the defense industries initiative lend great knowledge and 

insight into these extremely complex issues. 

In our hearings on this issue, we have heard from a variety of 

witnesses in the field and in the Department of Defense about the 

current challenges and future projections regarding the United 

States defense industrial base. The conversation thus far has been 

very informative as each and every person we meet with brings a 

unique perspective about how to learn from our past failures and 

establish stability in the industrial base. Today we continue that 

dialogue by focusing on the future and in doing so we are asking 

some very basic questions regarding this very complex subject matter: 

• What can we do to adapt the current environment to meet 

the needs of a 21st-century security strategy? 

• What can we learn from other nations who are implementing 

strategies to deal with this critical issue? 

• What changes are necessary in our workforce and acquisition 

policies to meet this vision? 

This panel has the opportunity to highlight the challenges and 

successes of the defense industrial base as we examine challenges 
38 

to doing business with the Department of Defense. Our defense industry today continues to have 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. I’d like to take a moment 

to recommend that all the Members of the panel review a recent 

RAND report on Small Business and Defense Acquisitions. Each of 

the Members has a hard copy of the report in their packet of hearing materials. This report reviews federal policy regarding small 

businesses and the implications for future DOD policies and practices. Not only does it provide a primer on basic historical background on Federal small business policy, but it also examines 

trends in DOD contracting practices and small business utilization. 

I think it will be a useful reference for the panel as we continue 

our work in this area. 
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Statement of Hon. Rick Larsen 

Ranking Member, House Panel on Business Challenges 

within the Defense Industry 

Hearing on 

Creating a 21st Century Defense Industry 

November 18, 2011 

This panel is charged with looking at ways DOD can improve its 

business practices, not only for the benefit of the DOD budget, but 

also for the benefit of local companies who want to provide services 

and goods. Over the past month, through hearings and district visits, we’ve gained valuable insight from industry and the Department on the challenges our industrial partners face with doing 

business with the Department of Defense. 

In due time, I’m confident that this panel will offer a few recommendations to the full committee that would improve on some 

of those challenges; however, an important part of this task is understanding how the current defense industrial base operates. I 

hope the witnesses offer the panel a brief history of the events and 

factors that have shaped the current industrial base. 

I believe we are all aware of the key role our industrial complex 

has played with providing capabilities throughout the years in support of our national security. They have risen to each challenge 

from World War II to responding to 9/11. I would appreciate hearing from you on how our industrial partners must evolve to meet 

the current economic constraints and 21st-century threats, to include global competition. 

Earlier this month, the panel heard from Brett Lambert, the 

Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy. Mr. Lambert made the point that references 

to ‘‘the’’ defense industrial base that imply a monolithic entity are 

inaccurate. The defense industrial base includes companies of all 

shapes and sizes resourced all around the world. This will provide 

us and the Department a much better picture of what currently exists today, and perhaps provide some clarity on how to move forward. 

The 2008 Defense Science Board’s Task Force on Defense Industrial Structure for Transformation chaired by Dr. Gansler noted 

that ‘‘the nation currently has a consolidated 20th century defense 

industry, not the required and transformed 21st century National 

Security Industrial Base it needs for the future.’’ I look forward to 

hearing from Dr. Gansler and Dr. Berteau today on what steps 

must be taken to establish a 21st-century defense industrial base. 
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