Ladies and gentlemen, it's a great pleasure to be with you this afternoon. I want to take special advantage of the opportunity to speak with representatives of so many small companies in the audience today.
Without question, you are a vital part of the department s mission and a potent source of technological innovation in the U.S. economy.
I ll risk sharing with you an opening statistic at the beginning of this talk, recognizing that George Bernard Shaw once observed, One of the distinguishing marks of an educated person is one who can be emotionally moved by statistics.
The statistic I wish to share with you are the National Science Foundation studies, which consistently show that small companies introduce, on average, 2 1/2 times as many innovations per employee as large companies.
In government, our task is to provide the tools to harness these innovative talents for the benefit of the U.S. economy and America s armed forces.
Both Secretary of Defense Bill Perry and I were in business together -- in a small business I might add -- prior to coming to government. And we both served on boards of several small businesses. We know firsthand the special problems and opportunities associated with small businesses. I know I speak for both Bill and myself when I say that small business firms are very much at the foundation of our overall industrial defense preparedness because the help provide industrial momentum.
Let me underscore this point with a physics analogy. You may recall that the momentum of an object is the product of its mass times its velocity.
Industrial momentum, like physical momentum, is the product of a corporation s mass times its velocity. In this analogy, large companies have considerable resources, or mass, but they also can be limited by their large size and achieve relatively little velocity. On the other hand, small businesses by definition have little mass but provide much innovation, or velocity. To be effective, an industrial enterprise must have both mass and velocity.
The need for mass times velocity is the reason why small businesses will always remain a critical component of this nation s industrial base.
I invite anyone who doubts the contributions of small business to our overall defense readiness posture on a trip down memory lane. During Desert Storm, small businesses responded -- in many cases heroically -- to the challenge of equipping our forces on little or no notice. Items like sand confinement grids, water purification units, clamshell maintenance shelters and tray pack meals were all delivered by small businesses on short notice and tight delivery schedules.
It does not end here. Small businesses meet defense needs at prices that are more competitive than those offered by prime contractors for the same goods and services.
Before I speak to some of the improvements we ve made in the DoD SBIR [Small Business Innovative Research] program to harness small business innovation, let me share with you the rationale for the department s pursuit of a dual-use strategy for acquiring military equipment.
It starts with the evolutionary investment trends in R&D [research and development] over the past 30 years. In aggregate terms, commercial industry surpassed the DoD in R&D spending back in 1965. The disparity between DoD and commercial sector investment in R&D has been growing wider ever since. This difference means that this nation s technological momentum is driven to a greater extent by commercial market forces.
In this environment, the department has no choice but to move from separate industrial sectors for defense and commercial products to an integrated national industrial base. Leveraging commercial technological advances to create military advantage is critical to ensuring that our equipment remains affordable and the most advanced in the world.
Here's where the department's dual-use strategy will play a big role. The DoD's objective is to marry the momentum of a vigorous, productive and competitive commercial industrial infrastructure with the unique technologies and systems integration capabilities provided by our defense contractors.
The department is seeking to leverage off the commercial technology base without having the taxpayer make the entire root investment. In other cases, we are pursuing the dual-produce concept, where the department takes advantage of commercial production facilities to manufacture defense equipment.
I do not expect that we will soon shift to produce our major weapon system platforms on commercial lines. This will be more the exception than the rule. However, there is great potential for exploiting commercial production at the subsystem and critical component level of assembly.
A tighter linkage with commercial markets can shorten the cycle time for weapon system development and reduce the cost of inserting technological improvements into DoD weapon systems. The Department of Defense cannot afford a 15-year acquisition cycle time when the comparable commercial turnover is every three to four years.
The issue is not only cost. The lives of our soldiers, sailors, Marines and airmen may depend upon shortened acquisition cycle times as well. In a global market, everyone, including our potential adversaries, will gain increasing access to the same commercial technology base. The military advantage goes to the nation who has the best cycle time to capture technologies that are commercially available, incorporate them in weapon systems and get them fielded first.
Small business can help the department capture commercial technologies and products. On Dec. 29, 1994, I approved the charter for a process action team that was established to look at a wide range of improvements to the SBIR process, including ways to improve our success in moving SBIR research beyond the Phase II prototype stage.
The team, which was composed of representatives from the military departments, the defense agencies and OSD [Office of Secretary of Defense], came to the conclusion that private sector funding and commercialization are the key to converting SBIR research into affordable, high-performance products which serve the needs of DoD.
They reached this conclusion by observing that a dual-use approach is the key to SBIR success. The experience of Savi Technology, Inc. of Mountain View, Calif., is a good illustrative case of what the team found to support this conclusion.
Savi Technology developed the industry s first radio computer tag, using a combination of DoD SBIR funding and private venture capital. The tag is a miniature radio transceiver with an embedded microprocessor. Its small size allows it to be attached to anything that moves, with the purpose of automatically reporting the item s location.
The tag was recently selected by a joint-service DoD committee as the standard for tracking DoD assets. As a result, Savi received a $71 million contract with the Air Force beginning in April 1994. Commercial sales are increasing with broad application expected in the trucking, rail and shipping industries.
According to the company president: "We built this product to meet the rigorous performance requirements of the private sector, using a design-to-cost focus from the start. As a result, our tag now sells at retail for just $50. The same product built to military standards would have easily cost five times as much. In addition, DoD will benefit as this technology is adopted in the commercial trucking, rail and steamship industries. In the end, DoD will save far more than its original investment.
Another good example of what the team found is the case of II-IV, Inc. of Saxonburg, Pa. II-IV developed a process, under a DoD SBIR contract, which substantially reduced the defects in optical coatings used with high-energy lasers. The technology was so successful that it was commercialized during execution of the SBIR phase II effort and was in full operation by the end of Phase II.
Since 1988, the technology has generated roughly $30 million in revenue from sales, 20 percent to 30 percent of which have been to DoD or defense contractors including Hughes Aircraft, Raytheon, Lockheed-Martin, Texas Instruments and Westinghouse -- and the rest to private sector customers.
According to the company s chairman and CEO [chief executive officer]: If we had not commercialized the technology, only the knowledge of how to decrease the coating defects would have been available to DoD. The military would not have funded its own production line; it doesn t have the money to do that.
"Commercialization improved the technology well beyond Phase II, and as a result, DoD and its major defense contractors can now draw on the world s highest-performing, most cost-effective infrared coating technology for products aimed at applications in critical areas like night vision, missile guidance, airborne reconnaissance and FLIR [forward-looking infrared radar]. Furthermore, ongoing continuous improvements in the technology are supported primarily by the commercial infrared market, since most of our customers are in commercial markets. On Aug. 14, 1995, I began implementing some of the process action team s recommendations by signing a policy memorandum announcing major changes to be incorporated in the 96.1 SBIR solicitation that recently opened on Oct. 2, 1995, and closes on Jan. 5, 1996. I understand this memorandum and the solicitation were mailed to over 30,000 small companies in late September. ...
Among the many changes that will take effect during this solicitation cycle, three major items deserve special note:
- Implementation of an SBIR Fast Track process;
- Reduction of delays in the SBIR proposal processing; and
- Prerelease of solicitation topics and DoD points of contact. I am excited about the new SBIR Fast Track because it focuses the program on a dual-use course. Under the Fast Track, small companies which attract independent third-party investors (i.e., venture capital firms, large companies, etc.) will receive:
- Interim funding to bridge the gap between Phase I and Pphase II efforts;
- The department s highest priority for Phase II funding; and
- An expedited Phase II selection decision and award. This two-year pilot initiative offers small companies a way to obtain uninterrupted SBIR funding between Phases I and II. In many cases, small business cannot afford to pay to keep their research teams intact while they wait up to a year for a Phase II award. The initiative is also expected to help companies leverage their DoD SBIR funds to attract additional funds from third-party investors.
Regarding the second major change in this year s solicitation, each of the seven component SBIR programs within the DoD have developed and are implementing plans to reduce the time interval between SBIR proposal receipt and award to four months in Phase I and six months in Phase II. For projects on the Fast Track, there will be no delay between Phases I and II.
I intend to closely monitor each components performance to these objectives. We in the department must reduce delays in the processing of SBIR proposals to enable small companies to keep their research teams intact and shorten time to market. It directly supports my goal to incorporate leading-edge technologies in our weapon systems as early as possible.
And finally, the third major change in the DoD SBIR program was the departmentwide prerelease of our solicitation topics, along with the names and phone numbers of the topic authors. We did this in late August of this year. The reaction, though preliminary, has been positive. We are hearing from you that talking directly with the topic authors gives you a much stronger sense of what the DoD is looking for.
The Air Force has issued SBIR prereleases for the past several solicitations, and the Air Force topic authors believe the prereleases:
- Result in more relevant and higher quality proposals;
- Saved DoD labs a significant amount of time evaluating misguided proposals; and
- Saved potential bidders the time and cost of preparing misguided proposals. Opening the lines of communication between small businesses and their DoD customers appears to be a win-win situation for everyone.
Our improvements to the SBIR process are part of a larger departmentwide acquisition reform effort. It is motivated by recognition that reduced acquisition cycle times and successful implementation of a dual-use strategy are built upon a solid foundation of acquisition reform. We are working hard towards removing the statutory and regulatory barriers associated with using commercial practices -- and the payoff is big for both large and small businesses.
Last year s Coopers and Lybrand assessment indicated that the DoD regulatory cost premium is about 18 percent of a contractor's value added costs. For small businesses, the government s way of doing business is, many times, an insurmountable entry barrier to doing business with the government.
Nearly half of all the regulatory and oversight costs cited by [the] Coopers and Lybrand study are concentrated in 10 key cost drivers. MIL-Q-9858A, an "inspect in" quality assurance specification, and the Truth in Negotiations Act lead the list.
We also learned that eight of the 10 top drivers are not directly imposed by legislation.
We are moving out on a broad range of initiatives to attack these DoD-imposed regulatory costs and take advantage of the 1994 Federal Acquisition Streamlining Act. Even as we implement the 1994 FASA reforms, the Congress is considering new acquisition reform legislation for passage in 1995 -- it stands a pretty good chance of enactment.
In another effort to streamline our processes and lower entry barriers, we convened an electronic contracting-electronic data interchange process action team. The department implemented many of the team s recommendations and instituted mechanisms that permit soliciting and approving procurement actions electronically.
I am pleased to announce that the Air Force was able to take advantage of this new mechanism earlier this year when it released its first-ever electronic RFP [request for proposal] for the Extended Expendable Launch Vehicle Program.
The Department of Defense is also engaged in radical reform of the way it specifies the use specifications and standards. I think it s safe to say that we are witnessing the most dramatic changes to the Defense Standardization Program since it was established in 1952.
We have found, and much of industry has echoed, that our traditional network of military specifications and standards imposes barriers to reducing costs, increasing access to the commercial industrial base, and allowing the rapid insertion of new technologies into our weapon systems. To help eliminate these barriers, we are pursuing two paths.
First, the Department of Defense is committed to using commercial standards developed by consensus standards organizations, such as the American Society for Testing and Materials and the Society of Automotive Engineers.
While it has long been the department s policy to use such commercial standards, we have significantly increased the number of adopted private sector standards -- nearly 1,200 within the last 12 months. This is the single largest annual increase ever. We now have adopted over 7,000 such standards -- amounting to nearly one-fifth of all the specifications and standards adopted by the department.
Our second major reform path pertains to the use of performance-based specifications -- rather than build-to specifications. Performance specifications will focus on what is expected and not how to accomplish the task.
This shift is due, in part, to recognition that performance based standards promote competition, drive down prices, and enhance quality, reliability and supportability. On the other hand, build-to standards freeze technology and hamper innovation because they invariably are rigid and require specific solutions to technical requirements.
While our move towards performance specifications is still young, we have already seen some very impressive results, particularly in the area of electronics where the technology tends to move forward at a fast pace. For example, when the Air Force recently replaced a detailed build-to specification with a performance specification for load control circuit card assemblies on the LANTIRN [Low Altitude Navigation and Targeting Infrared System for Night] program, the price dropped from $14,000 to $6,000 while the projected mean-time-between-failure more than doubled from 30,000 hours to 62,000 hours.
To summarize briefly, the department is committed to harness small business innovation, to a dual-use strategy for leveraging the entire national industrial base and to streamlining our acquisition processes.
The changes we have implemented in the DoD SBIR program are designed to encourage you to move out aggressively in 1996. It will not end here. The Department of Defense will continue to be proactive in pursuing innovative practices to ensure that our high-velocity small businesses are an integral part of a dual-use industrial base.
Thank you, and I hope the remainder of your conference is informative, fruitful and productive.
Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant to the Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission. Defense Issues is available on the Internet via the World Wide Web at http://www.defenselink.mil/speeches/index.html