House Armed Services Subcommittee on The Defense Acquisition Reform Panel Hearing

Oct 30, 2009 (Congressional Documents and Publications/ContentWorks via COMTEX) -- SBCOE | Quote | Chart | News | PowerRating -- Good morning Chairman Andrews, Ranking Member Conaway, and Committee Panel Members. I am Linda Oliver, Acting Director of the Office of Small Business Programs of the Department of Defense.

Thank you for inviting me to address the ways in which the Department of Defense (DoD) can improve innovation and competition in acquisition by better utilizing small businesses. The first key word - innovation - is what small businesses do best. The second topic - competition in acquisition - is the primary reason we nurture small business activities in the Department of Defense.

Competition and Small Businesses

The Competition in Contracting Act has become a pillar of Federal Government procurement because competition effectuates sound public policy. Small businesses are the gears that keep competition going. They compete with other small businesses; as a result DoD benefits from better prices and better services. They grow and challenge mid-sized companies; thus DoD benefits because the industrial base is strengthened. Perhaps most importantly, their fresh ideas directly challenge the technology, processes and practices of the large contractors. DoD benefits from having the large prime contractors reminded that DoD is not a captive customer. In short, competition from small businesses helps provide the best services, supplies and equipment to our nation's Warfighters while also providing the best value to the taxpayer. Hence, supporting small business supports competition and is good public policy.

In addition to the indirect support small businesses provide to the public policy that supports competition, most procurements that are set aside for small businesses are, in fact, competed among small businesses. Recently my office conducted a review of contracting records for Fiscal Year (FY) 2008 from the Federal Procurement Data System-Next Generation (FPDS-NG) and looked at the results of competed small business contracting actions. Total eligible contracting dollars for all of DoD in FY 2008 was $329.2B. Of this amount, a total of $61.3B in funds was awarded to small business. This represents 19.86 percent (per SBA final adjustment) of the total eligible dollars. Of these FY 2008 small business contracting awards, over 77 percent were competed in full and open competition and competition among small businesses. This compares favorably to DoD's overall competition rate of 64 percent.

Improving Innovation

Napoleon said that an army travels on its stomach. These days, the biggest appetite of the United States military is for innovation. Since small businesses are commonly recognized as a particularly rich source of innovation, DoD frequently relies on small businesses to power innovative initiatives. Two examples are the Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) Program and the DoD Mentor-Protege Program.

Small Business Innovation Research Program (SBIR) and Small Business Technology Transfer (STTR) Programs

The SBIR/STTR Programs were established to help promote innovation and commercialization from small businesses through Federal research and development budgets. These programs are intended to harness the enthusiasm and innovation inherent in small, high-tech American firms to develop and commercialize critical technologies in order to meet the needs of our American and Allied Warfighters. This sector of our industrial base is a key element of our nation's military and economic strength, and is also often found at the heart of regional economic development or cluster initiatives.

The SBIR Program sets-aside a significant amount of funds for research and development for small businesses in a given year. For example, during Fiscal Year 2008 a total of 12,280 Phase I and 1,672 Phase II proposals were received and evaluated, and 1,826 Phase I and 1,072 Phase II contracts were awarded at an aggregate value of $1.2B dollars. Competition among small firms is used for all Phase I awards, which provides funds to explore an idea that could move to the second developmental phase,. Since an idea needs to pass through a careful competitive wicket, successful subsequent awards are sole-sourced.

Of course there are ways the SBIR/STTR programs can be improved. One measure of success for the SBIR/STTR programs is the degree to which the ideas from the program are incorporated into products - and since we are the Defense Department - we are particularly interested in weapons systems. The acquisition of major systems is governed by DoDI 5000.02, "Operation of the Defense Acquisition System." There are approximately 70 active major defense acquisition programs, and these are managed by major program managers who are typically assigned upon consent of the Service Acquisition Executive. DoDI 5000.02 governs the requirements for achieving a successful milestone review, and major program managers adhere closely to its mandates. Two of the key documents required for these programs are the Technology Demonstration Strategy and the Acquisition Strategy. The SBIR Program is briefly mentioned in the document where it states, "[program managers] shall consider the use of technologies developed under the Small Business Innovation Research (SBIR) Program, and give favorable consideration to successful SBIR technologies." The commercialization success of SBIR/STTR technologies is largely dependent on the impetus from integration and use of SBIR/STTR technologies in DoD programs. Perhaps if there were more discussion about SBIR/STTR in DoD 5000.02, program managers might be more likely to incorporate SBIR/STTR technology into DoD programs.

Another area where the SBIR Program could be improved is in a relatively new pilot program. The Department is working to produce more SBIR commercialization projects in defense industries and other broader marketplaces. The military departments are implementing Commercialization Pilot Programs (CPP) under authority granted by the National Defense Authorization Act of Fiscal Year 2006 to accelerate the transition of SBIR-funded technologies to Phase III, especially into systems being developed, acquired and maintained for the Warfighter. The Army, Navy and Air Force are taking different approaches to this challenge. These efforts to date show promise with initial commercialization rates exceeding those of the broader SBIR Program. The Department may be able to improve overall commercialization success by applying the lessons learned from the CPP throughout the entire SBIR Program, as well as the STTR Program. However, we will need time and good data to determine the value of the approaches and improve upon them where appropriate.

Mentor-Protege Pilot Program (MPP)

The Mentor-Protege Pilot Program provides incentives for major Department of Defense contractors to furnish disadvantaged small business concerns with assistance designed to enhance their capabilities to perform as subcontractors and viable suppliers under DoD contracts and other federal government commercial contracts. The incentives received by eligible mentors are either a direct cost reimbursement or credit against subcontracting goals for costs incurred. The use of Federal dollars results in a high degree of accountability from the firms and from the MPP managers.

One measure of success of the program is to compare the size of contracts awarded to firms that have been through the MPP Program with the size of contracts to those that have not. Over the past five fiscal years the average size of contract awards to protege small businesses has exceeded the average contract size awarded to non-protege competitors by 270 percent.

Beginning in 2006 the Mentor-Protege Pilot Program began changing its focus to concentrate on small businesses providing product and services in the science and technology industries. This resulted in higher scrutiny of potential Mentor-Protege agreements and higher dollar value contracts awarded to small businesses in the MPP Program. As a result, while the number of new agreements awarded each year has been reduced, the newer mentor-protege agreements have a more immediate impact on meeting the needs of our Warfighters.

The joint robotics initiative is a case in point. Warfighter driven capability requirements are the key factor in developing the unmanned systems technology focus areas that underpin the selection of proteges for the robotics initiative. Each mentor-protege team is assigned a key technology focus area that exploits the protege's strengths and does not duplicate technology or capabilities but rather complements other mentor-protege efforts. As a result several mentor-protege teams have formed partnerships to package their technologies into an integrated solution.

Barriers to Small Businesses

Uncertainty of Priorities

As you know, Congress has directed Departments and Agencies to give special attention to certain specific subsets of small businesses. These subsets are small businesses owned and operated: by socially and economically disadvantaged people; by women and by veterans who have service connected disabilities. Additionally, there are special provisions for small businesses located in historically underutilized business zones, and the Small Business Administration has a business development program commonly called the 8(a) program (named for the section of the regulation that describes the program).

We value these special categories and we have policies that provide particular consideration of these small businesses. However, each new category can itself be a barrier to achieving other goals set by Congress as the criteria for each of the various categories are not necessarily consistent. Multiple categories/socio-economic programs compete for the same pool of acquisition dollars. Each new category creates complexity for both contracting officers and program managers, decreasing the likelihood that they will be able to complete the actions necessary to award contracts to qualifed small businesses in any of these categories.

Until recently, additional uncertainty existed due to a Government Accountability Office (GAO) opinion, issued as a result of a bid protest, that is in direct conflict with a regulation promulgated by the Small Business Administration (SBA). The GAO opinion would have limited the discretion of contracting officers to award contracts under certain programs for small businesses, including small businesses owned by service-disabled veterans. In August, the Department of Justice issued an opinion on this issue, concluding that the GAO incorrectly interpreted the Small Business Act and reaffirming the validity of the SBA regulation. Congress recently made clear that the Department of Justice, and not the GAO, accurately construed the Small Business Act. The Statement of Managers to the Conference Report on the National Defense Authorization Act for Fiscal Year 2010 (H.R. 2647) "direct[ed] the Secretary of Defense to continue to administer" the small business program at issue "in a manner consistent with the Department of Justice opinion." With the legal uncertainty created by the GAO bid protest decision thus resolved by Congress, DoD hopes and expects that GAO will no longer sustain further bid protests on the basis of GAO's prior and now-repudiated reading of the Small Business Act.

Size of the Small Business Workforce

Identifying opportunities for small business participation in DoD acquisitions is the responsibility of the acquisition team that includes a small business specialist, who advises program managers and contracting officers and assists in developing and formulating the acquisition plan. For example, when a Program Manager for a major defense acquisition program develops his/her acquisition strategy in preparation for a milestone review, a small business specialist is assigned to the acquisition and is responsible for conducting market research, reviewing subcontracting possibilities and proposing strategies that will allow for maximum practicable opportunities for small businesses. The same holds true for all other acquisitions in the Department. The Department currently provides training and support to ensure that the skills, knowledge, and abilities of the small business specialists are sufficient to meet mission needs. We are studying the supply and demand for these individuals and will work to ensure that we have the right strategy for utilization of their skills .

NAICS Code Size Standards

The existing industrial size standards that are used predominantly by the Department of Defense may need to be reviewed. Nearly all of the size standards important to DoD may also need to be updated. The size of our procurements and the businesses within the relevant industries have grown making a review necessary. From my experience, too frequently, the minimum infrastructure required to perform a DoD contract is more than a small business will be able to perform; too frequently, small businesses lose their status as small before they become self sufficient.

The Department and the Small Business Administration are studying the current size standards and ways to make contracting more efficient. We need a clearer picture of the magnitude of the relevant issues and we need to identify possible solutions.

Conclusion

Small businesses enhance competition. Their efforts help DoD get the best value for our taxpayers while obtaining the best products and services for our Warfighters. Small businesses are also a well-spring of innovation and technology advancement. The SBIR/STTR Program and the DoD Mentor-Protege Program are rich in examples of innovative products and services.

Although small business programs make important contributions to our military in support of our Warfighters, some things within the acquisition and procurement arena could be improved. Conflicting exhortations and resultant misunderstandings that involve parity and the setting of priorities among the various subsets of small business categories are harmful; the acquisition community needs clear and consistent direction. Finally, we believe that the existing NAICS code size standards are not serving DoD as well as they might. We are studying the extent of this problem.

Thank you. I would be pleased to answer your questions.

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