[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
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HEARING ON DEPARTMENT OF DEFENSE'S CONTRACT BUNDLING POLICY
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THURSDAY, NOVEMBER 4, 1999
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building, Hon. Jim Talent [chair of
the Committee] Presiding.
Chairman Talent. Good morning. Today the Committee focuses
its attention once again on the issue of contract bundling.
This is the second hearing we have held on this issue this year
and it is part of a series of hearings the Committee intends to
hold on the issue in the near future.
The Small Business Administration recently promulgated an
interim rule pursuant to the Reauthorization Act of 1997. I am
sure the Committee will want to look at those in some detail.
In addition, I am working with members of the Committee from
both sides of the aisle and with the gentleman from Hawaii, Mr.
Abercrombie, a member of the House Armed Services Committee, on
procurement reform legislation over which the Committee will
have jurisdiction.
So there is no shortage of work to be done with respect to
contract bundling. Contract bundling is one of the most
important issues facing small business today. In fiscal year
1998, the Federal Government spent approximately $181 billion
on procurement contracts.
Small business received just $33 billion or 18.3 percent of
that total in prime contracts, substantially short of the
overall prime participation goal of 22 percent. By far the
single largest contractor within the Federal Government is the
Department of Defense, which in fiscal 1998 accounted for $109
billion or 60 percent of the $181 billion total.
Clearly, the Defense Department's contract bundling
policies have a direct and substantial impact on small
business. Given the importance of the Department's contract
bundling efforts, I am particularly concerned with what I see
as an accelerating trend towards what can only be called
``mega-bundles'' within the defense procurement community.
We will hear testimony later today concerning contract
bundles within the Defense Department that are so enormous in
scope and size that they raise serious questions as to whether
even a company the size of General Motors could successfully
compete, let alone a small business.
Here to try to disabuse me of them is the Honorable David
R. Oliver, Principal Deputy Under Secretary of Defense for
Acquisition and Technology. We invited Mr. Oliver to join us,
because in addition to Under Secretary Jacques Gansler, he is
responsible for developing the Pentagon's contract bundling
position and he is in a position to address the rationale and
justifications behind those policies. We are particularly
grateful to Mr. Oliver for being here.
We have asked Mr. Oliver to focus his remarks on the
following areas. First, what is the guiding principle behind
the Department's contract bundling policy? Specifically, we
asked him to address whether monetary policies or benefits
associated with procurement efficiencies have a greater impact
on the Department's decisions to bundle contract requirements.
We have also asked Mr. Oliver to address the long-term
effects of contract bundling on competition and the ability of
small businesses to win prime contracts. I am particularly
concerned that by shutting small businesses out of prime
contracting opportunities, the Department may be irreparably
harming our Nation's small business defense industrial base. If
that is the case, the policy is surely, at best, penny wise and
pound foolish. I am not so sure how penny wise it is either.
Finally, we asked Secretary Oliver to address how the
Department plans to meet its small business goals and its small
and disadvantaged business utilization goals in light of
several mega-bundles such as the Flexible Acquisition and the
Sustainment Tool bundle within the Air Logistics Command and
the DTS-CE bundle within the Defense Information Technology
Contracting Office.
The Committee is also going to hear from several small
business owners who will address the impact Defense Department
contract bundling has on their businesses. We invited Ms.
Vanessa Morganti, the owner and president of Future Solutions,
Inc., a woman-owned 8(a) firm from Broomfield, Colorado, to be
with us but because of other commitments she was unable to make
it. I would ask unanimous consent that her written statement be
included for the record.
[The information may be found in the appendix.]
Chairman Talent. Our first witness on the second panel is
Mr. Paul Murphy, President of Eagle Eye Publishers in Fairfax,
Virginia, who will discuss the results of his study on contract
bundling which he recently completed under contract with the
SBA's Office of Advocacy.
We will also hear from Mr. Maurice Allain, President of
Phoenix Scientific Corporation, a small defense electronics
manufacturing firm in Warner Robins, Georgia, who will address
the proposed mega-bundle known as the Flexible Acquisition and
Sustainment Tool, FAST, bundle.
We will also hear from Mr. Craig Brooks, President and CEO
of Electra International Telecommunications, a small
telecommunications company located in Bethesda, Maryland. Mr.
Brooks will discuss the effects of large-scale bundle of
telecommunications service within the Defense Information
Technology Contracting Office.
Finally we will hear from Ms. Josephine Ursini of Virginia
Beach, Virginia. She is the outside counsel for the Society for
Travel Agents in Government and will discuss how the Defense
Department is shutting out smaller travel agencies from
government travel management contracts.
I would encourage members of the Committee to read the
statements of these witnesses, if they haven't done so yet, to
see the impact on bundling on small business and also to really
begin thinking about whether bundling accomplishes what the
government says it accomplishes.
At this time I want to recognize the gentlelady from New
York, Ms. Velazquez, for any remarks she may have.
[Mr. Talent's statement may be found in the appendix.]
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Chairman, we are here today because we continue to be
concerned with the state of Federal Government contracting. We
are here because we continue to see that our Nation's small
businesses are being cut out of the loop. After 6 years of
discussions, this situation is unacceptable. So I begin with a
message to government agencies that should be evident from the
fact of this hearing. But that bears saying: We are still
paying attention. We are still here and we will not go away
until the situation for small business improves.
Now, the questions we face today might all be different if
we knew there was a concrete benefit to bundling. For example,
if we knew bundling saved the government money, we could
discuss how to balance the needs of small businesses against
taxpayers' dollars. But that just is it, we do not know if
bundling saves money. We hear unsubstantiated claims but they
were just that, and they have little more weight than other
claims that bundling actually costs money.
The fact is that we do not know, and we shouldn't pretend
otherwise. Benjamin Franklin said, ``Being ignorant is not so
much a shame as being unwillingly to learn.'' we need to ask
why certain departments, like the Department of Defense, seem
unwillingly to learn.
One of the things I am most eager to get out of today's
hearing is the chance to shine some daylight on the murky
recesses of bundling practices. There is the question of the
Warner Robbins Air Force Base contract, where we cannot even
get a straight answer about what is or isn't in the contract.
And what about bundling that already exists? Are we supposed to
believe that small businesses cannot provide janitorial or
messenger services? And we know for a fact that small
businesses can fulfill government telecommunications and travel
agency contracts.
There have been some attempts to stop the blatant use of
contract bundling, including the interim rule recently released
by the SBA. While these changes will put teeth into requiring
measurably substantial benefits, the rule also includes a
loophole allowing bundling if it is critical to the agency's
mission. It doesn't take a military genius to realize that is a
loophole you can drive a tank through.
We should not fool ourselves that this is merely about
adjusting a rule or a definition. This is about keeping small
businesses in business and in business with our government. We
have already held a hearing looking at the proposed rule. Now,
we need to find the courage to ask the hard questions. If DOD
is saving so much time and money, why are there no numbers to
support it? If DOD's aim is to keep small businesses
contracting with their agency, why are they being put out of
business? Small businesses are facing a crisis in Federal
contracting, and we need significant, meaningful action if we
are to move forward.
I thank the panelists who took the time to be here today,
especially those members of the small business community who
will share their horror stories about government contracting. I
look forward to hearing what you have to say, and I thank the
Chairman for having this hearing today.
Thank you.
Chairman Talent. I thank the gentlelady for her comments
and fully endorse them.
Chairman Talent. All right. Our first panel consists of the
Honorable David R. Oliver, the Principal Deputy Under Secretary
of Defense for Acquisition and Technology.
Mr. Oliver, we appreciate you being here and please give us
your statement.
STATEMENT OF HON. DAVID R. OLIVER, PRINCIPAL DEPUTY UNDER
SECRETARY OF DEFENSE FOR ACQUISITION AND TECHNOLOGY
Mr. Oliver. Yes, sir, Mr. Chairman. I appreciate the
opportunity. I have submitted a written statement, let me give
a more general summary.
Chairman Talent. Fine.
Mr. Oliver. There are, in my opinion, three reasons that
are captured rather well in a Rand study for bundling. One of
them has to do with scale economics, and what it says--and this
is sort of a technology-driven problem. It says that with the
changes in information technology, it is important to recognize
that one can get data and exchange it between parts, and that
better communications mean that it is--that sometimes there may
be a change in scope that is important.
And when we get through at the end, I will talk about the
DTS-CE contract because it sort of follows on that. So you
essentially have scale economics, and I would maintain that
that is driven by technology. And what we should consider is
with technology changing so rapidly--and I would particularly
in two areas, in information technology and also in
transportation, which applies to some other things that this
Committee has looked at, you have to consider whether or not
you need to change the way you are contracting. So that is one.
The second is in scope economies. In scope economies, what
I am talking about is the ability to use cross-training and
also to get efficiencies of people. Let us say we are talking
about security on a particular installation. If I have security
units on an installation and they are all broken up, then I
have to maintain a certain number of reserves in order to
respond to a problem. I have to worry about numbers of people
who are going to report in sick at any particular time, take
leave, et cetera.
If I should bundle those together, choose to bundle them
together, there are obvious savings because I can smooth out
the rough edges in those things. And I only have to maintain
many fewer response forces. So there is an opportunity for a
scope economics in some areas.
Chairman Talent. Just to clarify, you are not talking about
the Department's own personnel in managing the contract; is
that correct?
Mr. Oliver. I am going to get to that. I am actually
talking about, for example, security forces that you hire;
where you go out and you would hire security forces to provide
for this part of a base, this part of the base, this part of
the base. In that case, you are obviously better if you hire
one contractor to handle the whole thing.
Chairman Talent. The whole base. Now you are talking about
the contractor's resources?
Mr. Oliver. Right.
Chairman Talent. I am sorry.
Mr. Oliver. Which results in less costs and more efficient
organization to the government.
Chairman Talent. Okay.
Mr. Oliver. The third has to do with the delegation
responsibility.
Chairman Talent. I will say to the Committee, I just wanted
to clarify--we will have plenty time for questions. I just
wanted to clarify his statement. Believe me, the gentleman will
have time. Go ahead.
Mr. Oliver. The third has to do with the delegation of
responsibility. The purpose of business--the business's core
capabilities, particularly in some businesses, is management,
the business management; and the purpose of the core capability
of the Defense Department is war fighting. In those cases where
we are requiring--using people in uniform to manage these
various contracts and to shift assets between them and make
lots of contracts, et cetera, we are not asking these people to
do what the Nation expects is their core competency. And so the
question is, do you want to transfer that core competency to
those people who have a core competency in management of these
people and these small businesses?
And I think that those three general areas, in other words,
scale economics, scope economics and delegation responsibility
cover the primary reasons that one might choose bundling. At
the same time, of course, just as you are, we are concerned
with the balance that is necessarybetween these efficiencies or
cost savings, or better government issues and needs and the interests
of small business.
And in the small business requirements, there are two
critical factors that I think are important, one of which is
that we are required to use as a source selection factor--if
you do a bundling, you are required to use as a factor what the
plan is for whoever wins that contract to utilize small
business. I mean that is terribly key, because it becomes an
important factor in an evaluation of the award.
The problem that one, a cynic, would say is what happens if
the person makes a great plan but then doesn't do it? And the
other SBA rule that I think is important, there is another
factor you specifically have to use, is you have to use what
the past performance of that contractor is in using small
business.
And many of the people that I have been talking to, the
question is, then, do you do it, do you evaluate that each
year, do you evaluate that when the contract comes due? In
other words--but the teeth are there to make sure that the
people are using small business.
Now, there are two good studies on this, one by Rand and
one by--actually, there are several. There are a couple of
studies from Rand and also from the Center for Naval Analysis
on this, but I don't think there is a good study that addresses
all of the Committee's questions.
And I am going to commission that study. They have written
a Statement of Work for it, and I am going to go--what I want
to do is, I want to focus in fact on the Committee's questions.
And I am also interested in making sure that the savings,
whether they were fiscal savings or management savings or scope
savings, I want to see how they were from predicted to what
they were when the contract was initiated. So I am going to do
that. I think that is going to take about 6 months to get that,
because I want to make sure I get some good data. But I will
sign that in the next 10 days, it has got to be done in a
couple of months.
So the Committee is correct. I am not sure there is a
plethora of data out there that proves it one way or the other.
The part that I think that is interesting when I looked at
this more carefully in the last couple of weeks is that this
has been going on for 5 or 6 years, and there is no decrement
in the Department of Defense's use of small businesses. In
other words, I am not sure that I--I don't have the data right
now to say a particular contract resulted in what the people
thought it was going to result in.
But I am sure that when I look at the figures, that there
hasn't been a decrement in small business in the Department of
Defense. And, in fact, if you look, it has been remarkably
steady and over time, over the last 10 years, the numbers have
actually gone up. And if you particularly look at it and see
whether it is statistically significant, I will assure you it
is not. In other words, the changes either way are not
statistically significant.
So when I look at the big picture, I see it as the same; in
other words, the same percentages going to small businesses to,
et cetera, except we are slowly increasing that, and I
attribute a great deal of that, to be honest with you, to Bob
Neal who is sitting behind me, who is my deputy for that. So
that is the big picture.
If we want to talk about--let me establish right off, let
us talk about DTS-CE and also let us talk about Warner Robins,
and I will get that out in the open. The DST-CE thing I don't
think it is a good example, and I will tell you why. When you
look at the DST-CE bundling, they did essentially for the
fiberoptics contracts across the United States--what you see is
that is driven by military requirements; in other words, as you
worry about information security and you worry about the
ability of people to get into your system, then you decide on
several things, one of which is a physical separation of the
circuits, and the other is protection of those switching
centers by which people could get in or could disrupt.
I talked to the people from DST-CE this week, this week or
last week. And I think that those were reasonable military
decisions that they wanted to protect the security of those
switching circuits, switching centers and also the physical
security, the separation of those, and that really happens at
the switching centers. When they decided to enforce--when they
decided to make a specification for security, that tends to go
to a larger company because you need a nationwide thing.
If we are going to worry about the United States defense in
this world, it is a national--in other words, it is a national
exchange of communications, information, et cetera, and I think
they made a good choice. I think that number, it ends up being
about 2 to 3 percent of DST-CE's total budget. I looked at
their evaluation, I thought it was valid--I don't think that is
good impression--we ran right up against military requirements,
and that is a tough thing to debate. And I will have to say
that I think those military requirements are good.
If we get into it, we are going to find that small
businesses who have tried to compete, I am not sure that they
were--that is a tough one.
With respect to Warner Robbins, and the FAST contract, I am
not sure it is timely. I think it is good the Committee is
interested in it, because it forces me to be interested in it,
and it forces the Department of Defense to look at this
carefully, but they are not ready to talk. For example, when I
talked to them yesterday, I guess, they are not ready to say to
me precisely what safeguards they have in place. In other
words, they have decided, for example, that what--now, this is
technology-driven, and the question of technology-driven is the
Air Force doesn't have the technology, some of the advanced
technology to do the repairs, and they end up having different
small businesses in many cases who are doing various technical
things, such as the repair and maintenance of communications
equipment aboard a particular aircraft.
To manage those individuals is much better done in a matrix
organization. It is much better done by someone, to be honest
with you, outside the military, because as I have talked about
before that is not the core capability of the military, that is
the core capability of business.
They are thinking about right now awarding three contracts
to whoever wins it as prime and one that is specifically
reserved for small businesses. And each of the primes, of
course, would have to, as I said to you, one, demonstrate what
the small business plan is for incorporating small businesses;
and, two, what their past performance is doing. And they would
have to periodically prove that.
The reason I say that is not right, is they were unable to
explain to me yesterday what their plan was, when they were
going to review it, when they were going to check as to what
the guy's performance was, et cetera. So I think the Committee
is absolutely right to be interested in that and ought to watch
us carefully. But it is a difficult one to evaluate on because
it is not firm enough at the moment to be criticized either
way. They are going to get back with my staff, by the way,
before they firm up my acquisition strategy, because we had
some questions.
That is the end of my statement, sir, I am ready to answer
any questions.
[Mr. Oliver's statement may be found in the appendix.]
Chairman Talent. Well, I appreciate very much the
informality and candor of your statement. And what I want you
to understand up front, and Mr. Gansler also, is that this is
an aspect of what the Department does; that this Committee has
not only a longstanding interest butan interest as mandated by
what we have been told to do under the House rules. We are interested
in the effects of procurement on small business.
Beyond that, however, I want to repeat a point that Ms.
Velazquez made. It is one thing if we can have some reasonable
confidence that bundling contracts saves money to the taxpayers
or increases quality provided to the taxpayers, then we have a
classic kind of conflict between the desire we all feel to
promote small business as an avenue of opportunity for
individual entrepreneurs, and maybe the interests of the
taxpayer in inefficiency in a particular contract.
Where, however, we are not saving money for the taxpayers
for a bundle, where quality is going down, and then you have
something that everybody agrees is a bad thing to do. And I
will just tell you, and I am working with this and Mr.
Abercrombie on the Armed Services Committee has also worked on
this, others have here as well. We have been presented with a
number of instances of bundles where, when you get into it, you
have a serious question whether it is not costing the
government more and whether the quality isn't going down; the
reason being that when you reduce competition for a
particular--and this is classic economic thinking--you reduce
competition for a particular bid, the price tends to go up. And
the bigger an enterprise is that gets a bid, the bigger the
bundle, the fewer the competitors, the less pressure on the
eventual winner to maintain high-quality services, particularly
if it is a bundle for a longer term.
You get a contract for 2 years, 3 years, 4 years, well,
now--maybe you have tried to discount the price to get it.
There is tremendous pressure on you in order to make money by
reducing the costs of that bundle. You mentioned a couple of
things that mitigate in favor of bundling.
Let me flip on the other side of that. You mentioned
economies of scale. There is such a thing as diseconomies of
scale, too, where the bigger the enterprise is the more
overhead it has to have to manage all of its parts.
Mr. Oliver. Right.
Chairman Talent. You look at the rest of the American
economy, the trend is towards smaller enterprises, and the
bigger enterprise is trying to act like smaller enterprises. So
I would argue that, yes, it is true there can be economies of
scale, and particularly that is why WalMart is successful. But
WalMart is not only purchasing from huge contractors, WalMart
does an awful lot of business with small businesses who beat
out big businesses.
I ought to give you a specific instance, and Mr. Brooks is
going to testify about this: long distance service for
particular bases. And the point of his testimony is that when
this was bundled, it used to be individual marketers of long
distance servicers could bid with particular bases for services
to handle the long distance services and network services for
those particular bases. And then it was changed so that it was
bundled, and only the three big--AT&T, Sprint, WorldCom--which
is going to become two, by the way, because they are going to
merge--was allowed to bid.
He makes a point in his testimony that in almost every case
where we have documented, the government ends up paying more
for circuits from one particular base to another. Here is what
he says: ``a particular circuit analysis is contract number,''
and then he gives the number, which was for a T-1 point-to-
point circuit between Robbins Air Force Base in Macon, Georgia
and a DOD Computer Megacenter in Slidell, Louisiana. Under the
new bundling system, AT&T charged DOD $215,000 for the life of
that contract, while the then-current market rate for an
identical circuit procured through the old system was about
$125,000, $90,000 or 67 percent delta. Thousands of such
circuits were procured under the bundled volume-discounted new
contracting system.
He says an agency report filed by the DOD with the GAO
described AT&T's bundled contract as high priced, cumbersome,
unwieldy, burdensome, sluggish, inadequate, unresponsive,
inflexible, nightmare.
And then they did more research and said it was not alone
in comparing the bundled pricing to that of the old system. A
DISA study in March of 1995 compared new bundled prices for
comparable transmission services from three sources. The old
system--the agency found the old system, the competitor system,
invariably lower than the bundled system, normally by a wide
margin.
I will tell you personally I have encountered this over and
over again.
I am going to finish in a second, and you can tell me why I
am crazy, because intuitively if you got more contractors
bidding on the contracts, the pressure to hold the price down
is going to be lower.
That is just, it seems, intuitively correct. Now, tell me
why it isn't.
Mr. Oliver. No, I absolutely agree with you. I mean, Jack
and I spend a great deal of time worrying about how do we
increase competition, to be honest with you. This happens to be
probably 40 percent of our time is worrying about increased
competition because we know that the marketplace works, and
that if we can increase competition, it will protect us from
making a lot of mistakes. I mean, that is the crux of what was
good.
But I don't--I wasn't clear. My problem is I don't think it
is a good example. I think there may be some other better
examples. And what I would like to do, if I can talk to your
counsel, is get some examples of the ones that you have heard
where the results were not the same. I would like to make this
specifically part of my study. I am absolutely--I want to put
of some of this to bed and get some data, and there will be
people who come in and talk to you where the people who lost
the bids and people--if I go out and talk to the people who won
the bids, they will tell me it is terrific, right? Because the
people who win the bids don't come in and talk to you. And the
same thing for me; we both hear from the same kind of
constituents. So I will do that.
Chairman Talent. Sure.
Mr. Oliver. But let me talk about that one. The reason that
is not--this is my opinion--the reason it is not a good example
is because what you had was--it has been a great concern the
last several years about hacking and about the ability of
people to get into our network and destroy our network in times
of war. And so what DST-CE did was decide to make a network
specifically invulnerable. And to do that, what they did was
they decided they would essentially separate the switching
networks from the normal switching networks and they would also
insist on security controls of each of the places that you
could enter, and they would also insist that you could track
what that switching network was doing.
Now, you don't do that in a normal business. In other
words, I would not deny to you that I think that is a much more
expensive way than the way they were doing it before, which was
bidding out to all the companies that could work it. But what I
am saying is the problem that you run afoul here is I think
that is a valid national security decision. And it is just like
the fact that you tend not to do fighter work with 707s. It
turns out that you would rather do that with fighters that it
is specifically paid for. We pay a cost differential when we
make those kind of decisions.
Jack believes, as do I, it is better to keep as much in the
commercial world as possible, and we are really trying to do
that. And I know you are supporting us on that. But that
example, when I looked at it, and I spent some time looking at
it, I am not sure it is the best example. I am surethis
Committee can find a lot better examples for which I would have much
more trouble explaining, but that one is tough.
Chairman Talent. Let me stick with that one for a minute,
because Mr. Brooks also brings up the security issue. And, of
course, from his point of view of small business, they are used
to the fact that when they can prove to the Department that it
actually costs more money to bundle, then the Department will
come back and say, well, yes, but there is some special
requirement that only the larger contractors can perform.
So security was the reason given for this. He goes on to
say this: Contracts for over 5,000 telecommunications service
were awarded in using the old system. Less than 1 percent of
those services had security network management and/or delivery
requirements that disqualified any one of as many 50 of the
small business competitors.
So before the bundling occurred, there was no security
requirement. After the bundling occurred and after they found
out, well, it actually costs more to bundle, now there are
security requirements, and that is the reason we have to
bundle.
He then goes on to make the point that many of the larger
contractors can't meet the security requirements. They say
special requirements are often not needed for service and
because of the nature of some services, national carriers such
as MCI-Worldcom, AT&T and Sprint, cannot satisfy those
requirements regardless of their capitalization and the size of
their national networks.
So it increasingly appears to the small business community
and, I have to say, to me, that bundling has become not a means
to some other end, but an end to itself. And what I begin to
suspect, Mr. Oliver, is that it does save, I think, time and
frustration for the procurement officers and the people who
have to put out these contracts. And I understand that.
I mean, I can imagine that they are besieged. And so their
desire to save this time becomes the end in itself for
bundling. Why don't you answer the security issue? I mean are
these legitimate security questions? And if they were, why
aren't they part of the contracts before the bundling?
Mr. Oliver. I need to go back and check, Mr. Chairman,
because when I talked to the people, they told me they were
there ahead of time. Now I know there are some other problems.
For example, you said that only large contractors could bid. I
know there were two small contractors who bid. I know, for
example, one of them bid, and his bid was 7 percent higher. And
it was submitted on Sprint stationery that was marked off.
But I know these two small contractors bid. I also know
that they put a limit that that some people had to bid at least
for 5 percent of the business. In other words, they had to--
they were trying to get fewer than 20 contractors involved. But
I will go back and check on whether the security was a problem
before. But I know two of the other factors that the man will
testify on were not true.
Let me talk about one other thing that you mentioned, sir.
Chairman Talent. Sure.
Mr. Oliver. You talked about short contracts versus large
contracts, and that is an interesting problem. The first
bundling contract that I remember was up in Bangor, Maine when
they bundled the base, and it was really--I mean, it was
changed and, of course, if you think that this Congress or
constituents don't like change, you ought to try to do change
in the military. I will tell you that nobody wanted to do it.
And there were lots of arguments against it. The interesting
thing from my perspective was how much it improved the
efficiency and the state of life on that base. In other words,
it was much better for the military person, because you
actually had somebody competent instead of a bunch of small
groups of people that was not the core capability, they really
weren't interested in it, they were not a flat organization.
The other thing that was fascinating was that each time the
contract was rebid, somebody else won. Because what happened
was someone else, and in all cases--Lockheed won the first one,
small businesses won--because what happened is thereafter, what
happens is they would think about how to do it, and they would
figure out a better way to do it. And they would combine trucks
to do both leaf picking-up and also do other stuff, whereas the
first guy had had separate vehicles for it. It was really
interesting to watch. And the costs to the government went down
each time.
And more importantly in this case, because I know this is
why this was done, the service to the service member went up
significantly, it was much preferable to have--I can go on, to
be honest with you, for a long time about that because that was
interesting to watch. But the interesting part, with longer
contracts what you see is the guys that put forward their bid
and proposal money, they lose money in the first year,
whatever, what you see is it takes them about 2 or 3 years in
which they introduce process changes.
In other words, what they do is they take it over and what
normally happens is they take the people who have been doing it
and just bring in new management. It takes that new management
with those people to do a culture change and to start doing
process changes frequently, 18 to 24, 36 months.
So while small, short contracts may be good to make sure
you are continually reopening this and ratcheting the price
down, on the other hand our experiences are it is not good. And
there are a couple of studies that say this with respect to
getting the process changes and innovation, and so that tends
for you to go to longer contracts, to 5 to 10 years.
When I was in industry, it was--there was a terrific
contract, I thought, done by IBM, in which IBM said we are
going to give up the management of all of our facilities--and I
was talking to the people who did the contract, the people who
won it, and there they are then managing--IBM is managing all
the facilities and IBM recognized that was not the core
competency, so they went to somebody else.
And that somebody else gave them a bid of 40 percent less
in the first year, plus they would give them 8 percent less
each following year, plus they would eat inflation. And the
interesting part about it was the company that came in and bid
that had a bunch of people who really cared about insulation.
There is nobody in this room that cares about insulation.
There is a group of people in Dayton, Ohio that care about
insulation and can tell you, based on which way the building
faces and which way the wind blows, whether you want 2 inches
or 2-1/2 inches, and they will take that half inch of savings
because it gives you the same stuff.
I don't want to spend my life, but there are people that
want to do that, that is their core competency. We are best off
if we employ them rather than having government people putting
4 inches of insulation on each building in accordance with the
government spec. What I am saying, it is a balancing issue.
Chairman Talent. I agree with that. What you just gave
really is an argument for contracting, but not necessarily for
bundling it seems to me. But I am going to--I know members of
the Committee have questions so I am going to defer the rest of
mine and recognize the gentlelady from New York.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Oliver, before we get into the questions, I ask
unanimous consent of the Chairman to include into the record
this letter. And----
Chairman Talent. Sure. The gentlelady is describing a
letter that----
Ms. Velazquez. I will explain it.
Chairman Talent. Oh, I am sorry. Without objection.
Ms. Velazquez. This letter will be sent to Mr. Oliver
today, requesting of him information regarding the Warner
Robbins contract bundle, whether or not Warner Robbins Air
Force Base has determined the FAST contract to be a bundle.
This information is very important to this Committee. And
we are requesting a clear definition of the requirement; a
listing of all activities that will be authorized to use the
FAST program; a list of the standard industrial classification
codes anticipated to be included in the acquisition; an
estimate of the number of contracts that will be replaced by
the FAST contract at all locations; a list of contracts
currently being performed by small businesses, names and
contract numbers of all small businesses, minority-owned
businesses and women-owned businesses; the expiration dates of
contracts in place and whether or not options apply; finally,
the dollar amount of all options that will be exercised for all
locations.
And I request, Mr. Chairman, that this information be
provided to my office within the next 10 days.
Chairman Talent. I will certainly put the letter in the
record, and should read that it is going to be--I guess it is
from the gentlelady from New York, and we will put it in the
record. And the gentlelady's request for a 10-day turn around
time is noted.
[The information may be found in the appendix.]
Chairman Talent. And I think this should--perhaps we should
add this is because of the statements on the part of some of
your people that this contract is not a bundle and therefore
they don't have to go through the various requirements required
under the law.
Mr. Oliver. It is a bundle.
Ms. Velazquez. It is a bundle.
Mr. Oliver. It is a bundle and I will work. Ten days may be
tough for some of the stuff, and I will also provide to you our
rationale for why we intend to do it.
Ms. Velazquez. Ten days, what?
Mr. Oliver. Ten days may be tough.
Ms. Velazquez. I know. Since 1993, you will be conducting
the first study to determine the impact of contract bundling.
So it has taken 6 years. I hope it will not take 6 years----
Mr. Oliver. It will not, ma'am.
Ms. Velazquez [continuing]. Each time around.
Mr. Oliver. There are a actually a couple of decent
studies. The Center for Naval Analysis has one and so does
Rand. I will be happy to provide you copies.
Ms. Velazquez. I guess it is refreshing that you come
before this Committee today and say you will be asking for a
study.
Mr. Oliver, a kickoff was held for the FAST requirement at
Warner Robbins Air Force Base in Georgia on August 24th and
25th, 1999. Mr. Dave Burton, the head of the contracting
activity at Warner Robbins stated at the kickoff that he had
received a message from General Goddard that a contractor had
claimed that FAST is a violation of law. Mr. Burton commented,
and I quote, ``as soon as someone says we are breaking the law,
then I know we are doing the right thing.'' .
Mr. Burton also stated that the Air Force has been too
concerned with following the law. He said, and I quote, ``We
can be shortsighted and comply with the law or be longsighted
and help small businesses.'' finally, Mr. Burton said we ought
to have the leeway to make our own policy.
Mr. Oliver, what is your response to the fact that the
Department of Defense employees are not only talking about
breaking the law, but bragging about it?
Mr. Oliver. Ms. Congresswoman, that is obviously not right.
If I could have a copy of that, I will get back to you.
Ms. Velazquez. You will get back to me.
Mr. Oliver. I will take that for the record. I would also--
--
Ms. Velazquez. Mr. Oliver, you know what is also the point
that I want to make this morning. There is a notion out there
that the Department of Defense has disregard for small
businesses, and today I am giving you an opportunity to show me
otherwise.
Mr. Oliver. Yes, ma'am. What I was trying to say in my
opening statement is there is a balance that we are interested
in doing, all right? In other words, I talked about there is a
scope problem, there is scope reasons. There are reasons for
management responsibility----
Ms. Velazquez. Mr. Oliver----
Mr. Oliver [continuing]. That has to be balanced with----
Ms. Velazquez. I know you like to give long answers, but
there are too many questions that we want to ask this morning.
I am only asking you what is your reaction and your response to
the fact of the attitudes that was exhibited by this gentleman.
Mr. Oliver. I think it is wrong. I think it is wrong, Ms.
Congresswoman, period.
Ms. Velazquez. Would you talk to him?
Mr. Oliver. That is the reason I asked you for the paper.
Ms. Velazquez. Pardon?
Mr. Oliver. Yes, ma'am.
Ms. Velazquez. How many small businesses participate in DOD
telecommunication contracts as large as the one we are talking
about?
Mr. Oliver. I don't know. I have to find out, ma'am.
Ms. Velazquez. Mr. Brooks, and he knows his industry, says
that there are around 50 firms currently able to perform
smaller DOD contracts, but none who can perform this one. Is
there still a place for these 50 firms to do business with DOD?
Mr. Oliver. I think, yes, ma'am. Do you remember me
saying----
Ms. Velazquez. Not as subcontractor, as prime contractor.
Mr. Oliver. Do you remember me saying this was 2 percent of
all of DTS-CE's awards. I mean what you are talking about, that
prime, is 2 percent of DST-CE's awards. There is 98 percent
left that are not involved in this very specific security high
effort. And so therefore there is obviously rooms for those
other 50 firms to compete in a great majority of things.
Ms. Velazquez. You will talk to your contracting officer
and make sure of that?
Mr. Oliver. I did this week.
Ms. Velazquez. You did?
Mr. Oliver. Yes, ma'am. I am supportive of this. I
absolutely am supportive of small business.
Ms. Velazquez. Mr. Oliver, but you are telling me that you
spoke to your contracting officer this week.
Mr. Oliver. Right.
Ms. Velazquez. How long have you been in your position?
Mr. Oliver. Sixteen months.
Ms. Velazquez. So we are holding this hearing today and you
are telling me this week you spoke to your contracting officer
about practices?
Mr. Oliver. I have a whole organization of small business,
and the fact is that the individual in charge of small business
reports to me; I talk to him several times a week on all sorts
of issues and how to keep small business high. I talk to his
people. I go over and have lunch with his people. I have more
contact with them than I do with anyone else on my staff,
because I want to keep them encouraged because theirs is a
tough area.
Ms. Velazquez. I am glad you talked to them.
Mr. Oliver. But you are talking about one specific
contractor, DST-CE.
Ms. Velazquez. I am talking about practices.
Mr. Oliver. I am telling you how much I pay attention to
this area.
Ms. Velazquez. As we all know, the Federal Government for
small business participation is 23 percent. Yet the Department
of Defense, by far the largest Federal buyer, has a goal of
20.6 percent. The Department of Defense purchases more than all
other agencies combined.
Would you please explain to me why the Department of
Defense has negotiated a lower goal than the rest of the
Federal Government?
Mr. Oliver. Actually, what happens is it gets set each
year. What you will see, of course, is among other things, that
while we are talking--you are talking primes, and as I said to
you, the numbers indicate that there has not been a significant
change. Our number was--we have--we adjust those numbers based
on what the budget is and how many large-ticket items you are
going to be buying, as opposed to those things which will go to
small business.
It was 23 percent in 1995 when we had more money, it is 20
percent now. The other thing you have to consider is, it is
over 40 percent of the subcontracts are going to small
businesses. I don't think that is a bad record. And also what I
am saying to you is there are no statistics for----
Ms. Velazquez. You said 20 percent. You don't consider 20
percent--when you have the largest budget compared to all the
other agencies combined?
Mr. Oliver. But I am also buying things that other agencies
aren't buying that tend to be not small business. It is very
difficult--there are lots of subs, for example, in the F-22 and
the joint strike fighter that are small businesses, but there
are not a lot of primes that are in that kind of business,
building warships and tanks, et cetera; whereas in many other
agencies, they are not building big-ticket items, they are not
appropriate.
Chairman Talent. All right. I think this is a good time. We
will break for the vote and then come back for round two.
Mr. Oliver. Round two is not the right way to refer to
this.
[Recess.]
Chairman Talent. Okay. The Committee will come to order.
And I will recognize the gentlelady from New York.
Ms. Velazquez. Mr. Oliver, before we went to vote, you
maintained that it is big-ticket items that prevent you from
achieving the 23 percent goal. But isn't it just as plausible
that it is all the bundling that you are doing that is reducing
the opportunities for small businesses? We have a witness--yes,
sir.
Mr. Oliver. Go ahead, ma'am.
Ms. Velazquez. We have a witness coming up on the next
panel who will testify that bundling has a big impact on small
business prime contracting opportunities, so----
Mr. Oliver. And what I have said to you, I was unable to
get data that said one way or the other and what I was left
with was people who have said, ``This is what we think,'' and I
don't particularly like that. And I am going to commission, as
I said to you, a study to get some of the data, which I will be
happy to share with the Committee as soon as I get it.
Ms. Velazquez. Mr. Oliver, I am concerned that over the
past several years, the Department of Defense has been
combining its procurement goal for 8(a) and small disadvantaged
businesses into one goal. Can we be clear that for fiscal year
2000, these goals will in fact be separate, like they are for
every other Federal agency?
Mr. Oliver. To be honest with you, I have to check what the
law says. We will do whatever the law says.
Ms. Velazquez. Well, the law says that 8(a) is one and that
you should not combine.
Mr. Oliver. Let me see those charts. Yes, ma'am. I am going
to follow along.
Ms. Velazquez. Good.
Mr. Oliver. Yes, ma'am, and what I think--what I need to do
is check the law, but I think there is a different set of
statutes that applies to us. But in my reporting that my people
do and the reports they submit to me, they do break them out.
So we can monitor that, but we are going to comply----
Ms. Velazquez. You are going to comply.
Mr. Oliver [continuing]. Whatever it is.
Ms. Velazquez. Because I haven't seen that law that would
allow the Department of Defense to combine.
Mr. Oliver. Whatever is the law, we are going to comply.
Ms. Velazquez. Very good.
Mr. Oliver, as of the third quarter, fiscal quarter of
fiscal year 1999, the Department of Defense did 1.5 percent of
its procurements with women-owned businesses. It is clear that
the Department of Defense is not going to meet its 5 percent
goal for this year.
Can you tell me what the Department of Defense is going to
do differently in fiscal year 2000 than you did in fiscal year
1999 so that we can increase the number of contracts with
women-owned businesses?
Mr. Oliver. Yes, ma'am, let me get back to you, please.
[The information may be found in the appendix]
Ms. Velazquez. Mr. Chairman, Congressman Underwood from
Guam was here and he asked me to ask this question on his
behalf. At the U.S. Navy base in Guam, the SBA had to intercede
when the Navy had established a preconceived notion of small
business participation in a bundled contract for base operating
support services at the Navy base; essentially, the Navy has
declared that small businesses will reap only subcontract
awards. After intense negotiating, the Navy committed in
principle to open both the prime contract to small businesses,
and establish some direct small business set-asides. Out of a
possible total contract, a $230 million contract, $60 million
will go to the small businesses as set-asides.
How is the Department of Defense ensuring that small
businesses will share in prime contracts?
Mr. Oliver. I think the SBA guidance in which the factors
for evaluating the bids which include what the plan is for the
inclusion of small business as a factor in evaluation, and also
in using a fact of the past performance, a factor which has to
do with what that organization's performance has been in using
small business are good, safety measures which we are going to
use.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Talent. I will recognize Mrs. Kelly from New York.
Mrs. Kelly. Thank you very much.
Mr. Oliver, this seems a little bit difficult for you to
answer some of the questions we are asking you today. How long
have you had to prepare for this testimony?
Mr. Oliver. Let's see when I was in Russia, 10 days is when
I was notified I was going to speak.
Mrs. Kelly. So you have had 10 days?
Mr. Oliver. Yes, ma'am.
Mrs. Kelly. Okay. Do you feel that has been somewhat of an
inhibition on your ability to respond to some of the questions
that the----
Mr. Oliver. No, ma'am.
Mrs. Kelly. You do not. There are a couple of things I am
interested in here. You said you are going to commission a
study. Are you willing to work with us as the Small Business
Committee to let us take a look at the specifications and to
select a contractor to do the study or to let us take a look at
the draft statement of scope of the work and things like that?
Mr. Oliver. Yes, ma'am. Let me tell you what I will do. I
will let you--I would ask for you to help me with the statement
of work and also to look at specific contractors--or not
contractors, at specific contracts to look at. I will select
the contractor.
Mrs. Kelly. You will select--will you let us have a look
at----
Mr. Oliver. You bet.
Mrs. Kelly [continuing]. Who is doing that, who is in that
running?
Mr. Oliver. You will understand whose study it is. I will
be happy to.
Mrs. Kelly. I am not asking you to abrogate your
responsibility, but I am asking that this Committee, which is
so focused on small business and has concern for minority
businesses and women-own businesses, in particular, to have a
chance to take a look at what you are doing with this.
Mr. Oliver. Let us do a couple of things. Let me get the
statement of work over to all the Committee members, and I will
give it to the Chairman and ask for you to get back to me in
something like 10 days, and then we will talk about it. And the
other part we will do is, to make sure none of us are
surprised, I will hold meetings about every 2 months with the
contractors to see how his progress is going and ask the
Committee if they would like to send staff to listen to that so
that we can all be comfortable that what is going on is
professional.
Mrs. Kelly. You will let us have a look at the
specifications and perhaps have some--look at the contract, is
that what I am hearing you saying?
Mr. Oliver. I am going to send it to you, and I would like
to get your comments back in 10 days. And we will resolve them.
And I will--you know, but if we disagree, we will go with my
favorite person.
Mrs. Kelly. Being you?
Mr. Oliver. Yes.
Mrs. Kelly. I just wanted to get that on record.
A couple of things about things that you said I need to
understand. One of things you said here in front of us today
was that you were talking about the process of contracting and
putting--and bundling of the contracts. And you said even
though contracting, unbundling the contracts might lower the
prices, the process of putting the thing together is still more
convenient on long-term contracts to bundle.
So basically what I understood you to say is the process
takes precedence over getting the price down in some cases. And
I want you to clarify that; will you please?
Mr. Oliver. Yes, ma'am, I would be happy to. I don't think
I said that, and if I did, I misspoke. I think I was responding
to the Chairman--I think the Chairman said that.
Mrs. Kelly. Actually you did, and I copied it down here.
Mr. Oliver. Then I misspoke. Because what I was trying to
say is, it is not just costs that is important. It is important
if you can get--if you can align yourself with where technology
is going, the scope economics, if you can align yourself with
better management, if you can provide better support to the
people, to the field so that--say, for example, the full
operational capability of a particular airplane increases by 15
or 20 percent, you may well want to do that.
Let me give you an example that I am very familiar with,
which is moving expenses, moving people in the Services. We are
deliberately going to spend more money to move the people in
the Services because it is one of the great dissatisfactions
with military life; that is, a bundled contract deliberately
done and that we know we are going to spend more money, but we
are going to get a much higher quality level of moving.
Those are deliberate decisions, so you may well do that at
some point. I do not intend to say that I think it is more
expensive to do bundling in each case, because I don't.
Mrs. Kelly. What you are saying, there are instances where
you have bundled contracts deliberately, and they are more
expensive because you have bundled them?
Mr. Oliver. And I have gotten one helluva lot better deal.
Mrs. Kelly. How?
Mr. Oliver. You get much better performance.
Mrs. Kelly. If you are getting better performance, what is
the end yield, is it money, is it time, is it quality, what is
the end yield?
Mr. Oliver. Well, I think that is the problem with the
Committee's questions, to be with you, and what I have tried to
say to you is there has to be three things that you are
worrying about.
You are worrying about--you are terribly worried about
performance. You may very well spend more money to get better
performance for the soldiers, sailors, airmen, and Marines. I
mean if the performance is not good, you very well may spend
more money, more money for that. At the same time, you may be
money neutral but want to get out of the business of managing
something so you can take those soldiers, sailors, airmen and
Marines and turn them into real war fighters instead of people
who are doing non-core jobs.
Mrs. Kelly. I am sorry, I still don't get the answer I am
asking you; and that is when you are saying you are willing to
pay a higher cost because of a bundled contract, what is your
bottom yield?
Mr. Oliver. I am willing to pay a higher cost for
performance, into doing that, the decision is that you have to
bundle that contract.
Mrs. Kelly. For performance?
Mr. Oliver. For performance.
Mrs. Kelly. Is that measured in quality? Is that measured
in time?
Mr. Oliver. Quality, quality.
Mrs. Kelly. Okay.
Mr. Oliver. That particular one is measured in quality.
Mrs. Kelly. Okay. I really question the efficacy of this,
and I wish you would have given us some supporting facts and
figures on why you feel this is better. You say you talk each
week with your counterparts about these bundled contracts and
so on. Apparently, the talk isn't having a whole lot of a
effect on unbundling some of the contracts and letting some of
these smaller contractors have a shot at some of the contracts.
So what else can you do besides talk?
Mr. Oliver. Ms. Congresswoman, here is the problem, I have
come before you and said that I don't have data which I am
comfortable with that proves that bundling doesn't have an
effect on small business, except for the general--my look at
the general Department of Defense in which I know it, that I
know small businesses is continuing to win the same amount of
awards.
Mrs. Kelly. But you have said----
Mr. Oliver. I don't think you have data that says it is the
other way.
Mrs. Kelly. But you have said, sir, that the big ticket
items, it is just too expensive to include small businesses
and, therefore, no small businesses can be involved.
Mr. Oliver. No, I did not say that.
Mrs. Kelly. Again----
Mr. Oliver. I didn't say that.
Mrs. Kelly [continuing]. I wrote this down when you said
this.
Mr. Oliver. This may be a failure of the paper, because
what I said, I hope, was in that case it is not going to be the
prime. The absolute is going to be the sub. There are going to
be lots of subs. But you would not expect a small business to
be the prime in that case. And so, therefore, if you are only
measuring it by primes in cases where you buy lots of big
ticket items, you are going to have fewer subs-- or small
businesses as primes. You are going to have lots of small
businesses involved in subcontracting.
Mrs. Kelly. Okay. Mr. Oliver, I think we have all--we are
all kind of going at the same thing here. I think you can get
an understanding of what we are trying to ask you. I hope you
will be able to give us some clear answers. Thank you.
Chairman Talent. All right. In view of the large number of
Members who want to ask Mr. Oliver questions and the fact that
we do have another panel, I am going to put the lights on. And
so we will try and stick to the 5-minute rule if we can, but I
want to recognize Mrs. Napolitano.
Ms. Napolitano. Thank you, Mr. Chair. And I just briefly
discussed this with you in the hallway, Mr. Oliver, is the
Marine Corps bundling the food service contracts, they are
going to consolidate 15 contracts into two regional cook and
chill contracts, and they relied on a study performed by large
business as justification for this bundling. But according to
the small business owners being affected, this bundling--and he
testified, I believe, at our last hearing in August--the costs
to the government for this bundling will cost more to the
administration for the 15 original contracts.
I am hoping that this is going to be something that I can
get from you, is the assurance that you would investigate and
reevaluate the bundling and effect on this particular aspect.
Part of it--because I did visit this particular business. I
flew in and went in visually, and spoke to the owners and it is
a very lean operation. I mean without a doubt, I mean I thought
it was one of my little old businesses from 20 years ago, that
is how lean they are.
And one of the things they brought to my attention is that
the quality in the new contract was not the same as called for
in your contract. That means our servicemen are not going to
get the top quality meat, the top quality beef, chicken,
whatever. And I am concerned, because we have them primary in
our mind to do the service and be sure that they are well fed.
Well, part of this is something that I am concerned.
Then some of the ones that are bidding on it, one is a
foreign contractor. So I am going to take very good exception
to this particular one, and I certainly would look forward to
working with you on this.
And there is many other questions that--I read a lot of the
report last night, and it really begs a lot of questions. And I
will go because I am on 5 minutes, I would yield to the next
speaker, and I am sure we will try and have another round.
Thank you, Mr. Speaker.
Chairman Talent. We will stick to 5 minutes if I can.
Mr. Oliver. I promise the Congresswoman I will look at that
and get back to her.
Chairman Talent. This is cook and chill for these men and
women?
Ms. Napolitano. Yes.
Chairman Talent. I hope we don't try and justify this one
on the basis of quality. That is airplane food, Mr. Oliver, I
mean not cook and chill.
Ms. Velazquez. Not quality, not quality; security, security
reasons.
Chairman Talent. I should tell the Members Mr. Abercrombie
hasn't come back. Mr. Oliver is our friend, so we should be
grateful that he is here. And I do appreciate the fact that you
are willing to take another look at all of this and that we
have made the point to you that you----
Mr. Oliver. Yes, sir.
Chairman Talent. Our next questioner is Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman.
Mr. Oliver, thank you for coming to meet with us. I want to
piggyback on Congresswoman Napolitano's questioning of food
products. But before I do, I also want to share and associate
myself with the frustration that Congresswoman Kelly expressed
in that we just don't feel that we are getting real answers
that we can go back to our constituents and discuss that we
have had this meeting and we found some solutions.
Honestly, I am very disappointed in what I have heard in
this first hour of this discussion. I know that in the
Department of Defense different Secretaries of Army and other
Forces have told us that the goal is 5 percent, to buy 5
percent from small businesses. And, actually, I think that the
performance has been less than 2 percent on goods and services.
You said that you wanted to talk about big ticket items, that
there is no data, you said, using your words that would show
that small businesses have negatively been impacted--let me say
that the reality is that in the area of goods and services, I
am going to divide my questions and stay within the 5 minutes
on to big ticket items on food.
I have experience on that, so I will say that on food
products such as beef, pork, chicken and so forth, in the
categories of raw frozen meat products, in the area of cooked
frozen products, charbroiled frozen ready, fully cooked frozen,
in those areas are now going to prime vendors, large national
distributors. An example of that would be my friend Ed Cisco,
and what they have done is they get these contracts and the
interpretation of the law has been by the Department of Defense
that you can bundle and that you can combine contracts for
transportation, for janitorial supplies and janitorial
services, and throw them in with food products, and thus show
that you were meeting the 30 percent objective that was set out
by the Department of Defense to satisfy the small business
Committee.
And that doesn't work, that doesn't work, because you have
wiped out where we used to have over 30 small businesses
bidding on these categories that I gave you, they have just
been knocked out, because they cannot bid directly to you, to
the Department of Defense. They now have to give bids to Cisco
or any national distributor and the way that it is working now,
you have just done away with the small businesses that we used
to have such a hard time creating because it is capital
intensive; and, therefore, by discontinuing to buy from them
and take their bids directly, they are not getting it into the
big distributors.
Also you have done away with using domestic beef, pork and
chicken, because a lot of those products are now imported, and
they are being sold as just commercial product to those
distributors; and thus our farmers and ranchers are negatively
impacted because we are not creating the demand that we once
had. And if our farmers and ranchers are complaining about
commodity prices plummeting because of innocent demand dropping
and because our Department of Defense is not using our
products, then I think that this is proof that it is
negatively, I am talking of bundling and prime vendors, is
negatively impacting, not only our small businesses, but our
ranchers who produce the chickens and produce the pork and
produce the beef.
All of this to say that I didn't like what you said that we
did not have data to show that small businesses are negatively
impacted; that is not our job, that is your job. Our job is to
listen to our constituents who hire 10 people or 100 or 300 or
more; and if they are telling us that they lost the Department
of Defense contracts and friends like Solomon Ortiz, who is the
ranking member of Armed Forces and Silvestre Reyes from El Paso
also on Armed Forces tell us that one of the biggest concerns
that they hear on their subcommittees is the loss of minorities
supplying the military, then there must be some truth to what
we are hearing in Oklahoma and in Texas that our small
businesses are no longer supplying Department of Defense.
There has to be truth to what we have heard these last 3
years. I would like to hear from you what you are going to do
about it.
Mr. Oliver. I am going to get the data. I am going to get
the data and determine facts. I am saying to you that when I
looked at this in the last 10 days, I do not think there is
adequate data at the moment.
Mr. Hinojosa. I agree, there is no accurate data.
Mr. Oliver. I will get it.
Mr. Hinojosa. Can we get it by the spring?
Mr. Oliver. That is fully my intention. And as I said, I
will do it with you. In other words, we will work on the
statement of work together. I would like you to have some
people that participate in our intermittent--when we get the
data as it goes intermittent. We ought to do this together,
because otherwise I will just bring a report up here, and you
will yell at me, and then that will hurt my feelings. So let us
do it together and be comfortable with it.
Mr. Hinojosa. I am willing to do it together. And I am
willing to lower my volume. And I simply want to show you that
after 3 years of listening to constituents who say you guys
come down here and you call these meetings of business, small
business people, and we tell you, and you do nothing. It is
just a bunch of political rhetoric that you all come up here
with.
And so I am telling you, I didn't come to Congress to give
political rhetoric to small business people. I came to try to
find solutions that are going to create jobs.
Mr. Oliver. And I didn't come into government to not do
anything, so it is a nice match.
Mr. Hinojosa. Good. I look forward to working with you, Mr.
Chairman, and with the Ranking Member and, of course, with Mr.
Oliver. Thank you.
Chairman Talent. All right. I am going to recognize next on
the list in the Democratic side is Ms. Christian-Christensen.
Ms. Christensen. Thank you, Mr. Chairman, and thank you for
this very, very important hearing. I have a few questions.
As far as women, minorities, and other disadvantaged
businesses, the process of bundling leaves much more of the
responsibility for other subcontracting to the prime
contractor; and, in the past, we as the Federal Government have
had to intervene on behalf of women-owned, minority, and
disadvantaged businesses. How has contract bundling in your
estimation--I don't know if you were able to answer in the last
questioning, how has it really affected the minority small
businesses? Have they increased or decreased? Do you have
numbers?
Mr. Oliver. Let me say this again. I am really a fan of
real data. And, for example--let me give you an example. There
is an effort going forward in the Department of Defense to use
credit cards for minor purchases. It seems to me that there is
a logical question that if you use credit cards and you allow
the people to use credit cards, there is a question about
whether or not that impacts small businesses as that credit
card limit rises.
Right now it is $2500. There are a whole bunch of people
who say we want to be $10,000 and above that. I won't let that
happen, because nobody's produced the data to show me what has
happened with respect to small businesses, you know, before we
started and all that.
And I have got all of these companies that are supposedly
producing all this--have data and all of that, and they can't
tell me where the impact is, but you guys have to pass it. But
I won't bring that forward, because there is no data that
enables me to come testify to you and say I am comfortable with
it.
I would like to say this again. I do not think there is
sufficient data to say something either way. There are a couple
of studies that talk very nicely about why bundling could be
good and can be good in some circumstances. And I think we have
to be careful about rejecting change in all areas because as I
talked about in some technology areas, you may want to do that.
At the same time there is a balance that we are interested in
maintaining, it has to do with society and it has to do with
other things that we believe in.
I am not comfortable with this data. I will work to get
some, Congresswoman.
Ms. Christensen. Okay. My next question. I am also a member
of the Travel and Tourism Caucus Steering Committee. And we are
going to hear testimony from the Society of Travel Agents in
Government. But while I have you here, I would like to ask you
a question about some of the issues that they are concerned
about.
It appears that what the Department of Defense has done has
made it just about impossible for small businesses to
participate because most travel agencies are small and, on the
other hand, it may have made it impossible for even some of the
larger travel agencies to compete, because they already have
very large contracts to manage. And then looking through that
testimony also, the official travel is large in and of itself,
but then you have attached leisure travel to those contracts
making them more impossible.
How do you foresee fulfilling the responsibility of the
Department of Defense to small businesses in the travel
industry under those circumstances?
Mr. Oliver. Let me get back to you, Congresswoman, because
I was looking at that this week, and I am not comfortable that
I fully understand all of the ramifications. I will get back to
you on that.
[The information may be found in the appendix.]
Ms. Christensen. Okay. I think my other questions would
probably be repetitive, so I am going to move on, Mr. Chairman,
and I will have some of my other colleagues to ask questions.
Mrs. Kelly [presiding]. Next I would like to call on Mr.
Manzullo.
Mr. Manzullo. Thank you. I just have a couple of questions.
And I am sorry I didn't have the opportunity to listen to your
testimony, though I have read most of it while I have been
waiting here.
My question concerns itself with, how you are going to do
this study. I mean who is going to be hired? How are we going
to have people who have been aggrieved who have contacted us
involved, and who is chosen to do this study? Is it going to be
a think tank that doesn't know what small businesses are about?
Can you give us some guidelines that you are thinking about?
Mr. Oliver. Yes, sir. Yes, sir. What I said is that I would
get the draft statement of work over to the Chairman and each
member of the Committee today or by the end of this week. And I
would like all of you to have your staffs take a look at this
within the next 10 days, and then we will talk about it then.
In other words I would like to do this together. I mean it is
important, I don't want you to think----
Mr. Manzullo. You want our input on how to do the study?
Mr. Oliver. Yeah, I would like your input on how to do the
study. I would like your input--I would like to get some of the
people who have come to you and feel they have been aggrieved.
Ms. Velazquez. Mr. Manzullo, would you yield?
Mr. Manzullo. Of course.
Ms. Velazquez. I would just like to suggest to the
gentlemen that maybe he should be working with the Office of
Advocacy so that they could help identify an independent firm
to conduct the study. That is a suggestion.
Mr. Oliver. Yes, ma'am. I will take that. I mean, to be
honest with you, what I said was that I worked the Committee
completely I think, and I will take everything on. I want to
have somebody that I think is competent do the study. And I
know a lot about this, okay? So what happens is that is the
only reservation I said is if we end up with disagreements over
who is going to do the study, I am going to choose it. Because
I want to have somebody who I think is competent.
But I really like to work with it and rather--and in
addition, once we get it established, what I would like to do
is I would like to hold--I am going to hold meetings every 2
weeks--every couple of months and say what are you doing and
how are you doing, because if you care about a study, that is
what you do, and you don't wait until the end and the guy
delivers you a piece of paper that you think they missed the
whole point.
I will invite your staffs to be part of that. I am willing
to be completely cooperative, I know this is surprising,
Congressman Manzullo.
Mr. Manzullo. We still vote on your appropriations bill; I
would remind you.
Mr. Oliver. I noticed that, sir, that is the only reason I
am here. I am just saying let us make this--let us do this
together.
Mr. Manzullo. We are very much concerned, because the
little business people are going to get squashed. You are going
to hear from four groups here today, what I would like to see--
in addition, I would like to see not only the people that you
propose, I want to know their background; I want to know what
studies in the past they have conducted; I want to know if they
worked with small businesses; I want to know if the people who
are going to do the study have any small business background
themselves.
Because small business people--I was raised in small
business. We think differently than people who work in
government, including myself, we think differently than big
people. That is just the way we are. We are a very unusual
breed of people and insist that--I mean, we may come down to
the fact that you may not agree on the people to do the study,
we will have another hearing.
And at that time, we will have some small business people
have the opportunity to have input on why they think that the
people that you want to choose may not be the particular people
who--for example, maybe somebody like the National Federation
of Independent Businesses might be good people to contract
with. They do something like that, because they know small
business people.
Mr. Oliver. Congressman, I am absolutely open and willing
to discuss this period.
Mr. Manzullo. I appreciate that.
Mr. Oliver. If you don't like it, you can call me back for
another hearing, because you guys are in charge.
Mr. Manzullo. Thank you, I appreciate that. That is all I
have.
Mrs. Kelly. Thank you, Mr. Manzullo.
Mr. Phelps.
Mr. Phelps. Thank you, Madam Chairman. I just have really a
general question, and this can't be a new thing that has been
brought to your attention, the idea and the mentality of women-
owned and minority-owned businesses getting a piece of the
action of the Defense contracts.
So I guess my question is, none of this came up in the
August hearing. Do you have any policies set forth for your
people to say, your people to say I would like for us to meet
this goal, that goal, to make sure we are active? And I guess
in that I would follow up to Nydia's questions and concerned
working with the Advocacy Office and people in small business
in every aspect to try to improve the atmosphere.
You would think you would want to come before us, and say I
have got good news to report to you before you ask the
questions that are haunting us, this is what we would like to
say we have improved on; is that coming about?
Mr. Oliver. Yes, sir. We have policies, which I think are
very explicit about the importance of small business, minority-
owned business signed by the Deputy Secretary of Defense.
Mr. Phelps. Are these new policies, or have they always
been there?
Mr. Oliver. They have been there for years. I think the
first one, the one that is currently--anyway they have been
there for years. We are tracking to--I get reports like this
every quarter about how we are doing with respect to our goals.
I talk--how often do I talk to you, Bob? I talk to Bob 2 or 3
times a week. I know where we are in the goals, that is the
reason I said at the beginning, I don't have data on how
bundling is affecting specific things, but I do have data on
the overall picture, and in the overall picture there has been
no significant change since bundling started, okay?
And we have met our goals in most years, eight out of the
last ten, the goals have essentially been increasing. And I
think the amount that is going to--and in my indications
statistically isan amount that is going to small business is
increasing over the years. I think there is a good story there, but I
am not sure that is the issue of this hearing. But I want to tell you
that I understand there is a good story.
Mr. Phelps. I understand. It is my understanding, of course
I am not a new member, that I guess this issue is somewhat
focused, but it involves many things that are not described as
probably the agenda.
Mr. Oliver. Yes, sir.
Mr. Phelps. I am just interested in knowing if this has
been such a policy that has been in the record, and it is part
of the format and it is--and you are pushing to get these goals
met, if they haven't been met, someone needs to answer why and
then maybe we can play a part, instead of blaming everybody, we
are just trying to help.
Mr. Oliver. Yes, sir. And----
Mr. Phelps. But I know the data is maybe the key.
Mr. Oliver. We have not met our goals in 2 years, I mean I
know----
Mr. Phelps. Has anyone stepped forward and said perhaps
this is a reason why or why not?
Mr. Oliver. Not meeting the goals in 2 years out of 17 to
meet? We have met our goals in 15 out of 17 years and every
time you meet the goal, what you tend to do is ratchet the goal
up because this is an important issue.
Mr. Phelps. Raises the standard, I understand.
Mr. Oliver. Yes. So we met our goal in 15 out of 17 years,
what I am saying is----
Mr. Phelps. But the goal of minority-owned business is my
specific question. You are saying you met that goal and you are
pretty much satisfied; is that what you are saying?
Mr. Oliver. No, no, I am saying that----
Mr. Phelps. You made the goals specifically.
Mr. Oliver. I will tell you what I was thinking about with
this hearing. I may have interrupted. Instead of coming forward
and giving you a general thing that says--in fact, this is what
my staff said, they said, look, what you go over and do is, you
say, look, we met the goals 8 of the last 10, 15 out of the
last 17, et cetera, et cetera.
And you can talk about the changes in government
procurement and the changes and the money, where it goes to, I
don't think that is the issue. This is me. I think your issue
is what does bundling have to do with what is going to happen
to small business?
In other words, you are thinking about, you are doing in
some limited cases bundling of contracts. What is the impact of
that on small business, and what do you expect it to be? Do you
understand what I am saying? I am not giving you platitudes in
how we are meeting this in 15 out of the 17, 8 out of the last
10. I am trying to address what I think is the Committee's
questions.
Mr. Phelps. For a new Member, maybe I am out of place, you
keep referring to bundling as if it is already understood what
it is, and then part of the questions we have is can you define
bundling.
Mr. Oliver. Yes, sir. There is a very specific definition
of bundling which is in the legislation or the SBA regulations
that says it is two or more contracts of $10 million which are
put together, which are currently out as smaller contracts. I
think there is pretty good guidance, which is good, because it
means I have got thousands of people in the field that have a
feel for what bundling is and therefore then what small
business restrictions they have to make.
Mr. Phelps. Thank you very much, sir.
Mrs. Kelly. Thank you, Mr. Phelps.
Mr. Davis.
Mr. Davis. Thank you very much, Madam Chairman.
Mr. Oliver, we were talking about the Office of Advocacy a
moment ago. It is my understanding that they have developed
statistics which show that for every $1 of bundling that small
businesses lose $1, but every time a contract is bundled, the
dollar amount is just the reverse for small business
opportunity and small business development. How would you
respond to that?
Mr. Oliver. Congressman, I will get that data and review,
and I will give you an answer. I need to review it.
[The information may be found in the appendix.]
Mr. Davis. Just a moment ago when there was a discussion
relative to the meeting of goals, which goals were you talking
about?
Mr. Oliver. I was talking about small business prime
contract. As you know, there are a whole bunch of goals. I was
just looking down at small business primes.
Mr. Davis. So you are saying that DOD has been meeting
those rather consistently?
Mr. Oliver. Yes, sir. Absolutely.
Mr. Davis. As an example of what is being met, having been
met, would you share--let us take it year to year.
Mr. Oliver. Yes, let us take 1997, the goal was that you
have--21.7 percent of the primes would go to small businesses,
we were at 22.9 percent. Let me give you a year we don't make
it. 1998, the goal was 21 percent, which is $23 billion and--or
the goal was 22 percent, we made 21 percent. Eleven months this
year, we are at 19.9 and the goal is 20.6. And I don't know
whether we are going to make it. But I mean that is an example
what I was looking at.
Ms. Velazquez. Mr. Davis?
Mr. Davis. Yes.
Ms. Velazquez. Would the gentleman yield? But he doesn't
say to you that the goal for every other Federal agency has
been set at 23 percent, even though they have the largest
budget of all the Federal agencies combined.
Mr. Davis. I think--and that comes back to actually----
Mr. Oliver. What you are buying.
Mr. Davis [continuing]. What you are buying. And the
question is, is there anything about the Department of Defense
in terms of structure or in terms of what it uses that makes it
more difficult to use small minority-owned business in
procurement? Is it more difficult for Defense to do it than
somebody else?
Mr. Oliver. I don't know if it is more difficult, because
we have really good contracting officers, and whether or not
members of the Committee believe this, they really are pure of
heart of people, I mean that are interested in doing good
government. And so the people I have seen work really, really
hard to do what roles are set down by this body that are of the
interests to the country.
Now with respect to--there are some questions, and I
haven't explained it well and I need to try better, but what
happens is if you are buying services or if you are buying
things for the General Services Administration that are
relatively small items, and you are buying aircraft carriers,
there is a difference in the number of small businesses that
can be primes.
And I am telling you that we do--out of the money that we
spend, approximately $60 billion a year goes to what I was
referring to as big ticket items, really complex items that
take a great deal of experience, a great deal of experience,
that is more difficult for a small business to be prime on it,
and at the same time when I look at the numbers, I have got
small businesses as subs for more than 40 percent of what we
are doing. And I don't know if it is the right number or not,
but it hasn't decreased. So I think there are some special
things about the Department of Defense.
Mr. Davis. Has the Department given any thought to looking
at other kinds of items and perhaps targeting or skewing those
numbers towards small business?
Mr. Oliver. Those numbers towards that.
Mr. Davis. Yes.
Mr. Oliver. Yes, sir. And we have different goals in
different areas. And I will have to get them to you, but I know
it is going on, because in the construction business, for
example, this is an area specifically that you can go after.
Mr. Davis. Yes.
Mr. Oliver. I will get back to you.
[The information may be found in the appendix.]
Mr. Davis. I appreciate that, because it seems to me there
would be just the opportunity to try and compensate or make up
for the inability to compete as effectively on the big ticket
items that you might make up on some others.
Mr. Oliver. Yes, sir.
Mr. Davis. Thank you very much.
Mr. Oliver. That is a good point.
Mrs. Kelly. Ms. Millender-McDonald.
Ms. Millender-McDonald. Thank you, Madam Chair. Good
morning, Mr. Oliver. It is good to see you here. I hear you
have been in your position just for 18 months; am I correct in
that?
Mr. Oliver. Eighteen months, June of last year, whatever
that works out.
Ms. Millender-McDonald. That is about 18 months. Madam
Chair, I do have a statement for the record. But I would just
like to just read excerpts from that statement, Mr. Oliver. And
it states here that the proposed Air Force bundle known as the
Flexibility Acquisition and Sustainment Tool which is FAST,
bundle would consolidate thousands of contract requirements
into as few as three prime contracts, for three out of five Air
Force Bases. The estimated value of this bundle ranges from a
high of $18 billion over 15 years to $3 billion over 5 years.
And this is a type of bundling because of its size that
would exclude small business from prime contract opportunities.
Given that and given my position as Ranking Member on this
Committee's empowerment subcommittee, I am determined to ensure
that small businesses are empowered.
Now from that premise, we recognize that small businesses
will be the engine that drives the economy in the year 2000. I
have voted for the DOD budget because of the jobs that are in
my district from the Defense budget. But by the year 2000 small
businesses will be creating more of those jobs.
Given all of this, I have now read the GAO report that
indicates that you were asked, or the DOD, you were not there,
that is why I asked if you were there, but I need you to follow
up onthis. April of 1994, the GAO report said that Congress to
the DOD, in terms of your contracting, that Congress had expressed
concerns that small businesses are losing opportunities to contract
with the Federal Government because contracting agencies are packaging
contract requirements into acquisitions that effectively may preclude
small businesses. This practice is known as contract bundling.
It goes on to say that DOD advised us it could not provide
any historical data from which we could have accessed or
assessed, I am sorry, the extent and impact of bundling. That
was 1994.
Someone has done some type of empirical data, hopefully, to
suggest why contract bundling has not been effective for DOD.
This is 1994.
I would suggest that you go back and look at whomever was
there, because this GAO report suggests that someone should
have been looking into the impact, the negative impact of
bundling as it relates to small businesses in DOD.
I further call your attention to the fact that DOD
officials and others believe bundling could have a negative
impact on small businesses that want to compete for government
contracts. I am just reading excerpts from this, because it is
important that you understand this issue has been raised by a
GAO report to DOD. And there has to be some empirical data
someplace that we can draw from to see why is it that if your
policy continues to be a bundling policy, then we need to go
back and revisit that, because it is important that, again,
small businesses get those contracts from DOD; or I will have
to reassess my position when it comes time to being on the
floor.
Now, the other thing I want to know is that if you are
looking at the reports from your contracting officers and you
are evaluating that, do you not see that disparity between
those contracts vis-a-vis prime, sub, small businesses, large
contractors; and if you haven't, I really firmly suggest that
you do that and report back to this Member. And I am sure all
other Members want it, because we all have small businesses,
but it is important that you go back and see why is it that
this was raised in the GAO report in 1994, and yet you are
saying that you do not have--I am thinking I hear you saying--
empirical data. Thank you, Madam Chair.
Mr. Oliver. Congresswoman, there are a couple of things you
might want to have your staff look into. One is with respect to
FAST, the people told me that they are specifically including
three contracts and a contract which has to be awarded to a
small business association. One of the primes has to be a small
business, okay?
Ms. Millender-McDonald. Okay.
Mr. Oliver. And secondly, the other criteria they are
looking at very carefully----
Ms. Millender-McDonald. One of the three.
Mr. Oliver. I think it is three in one. And I think they
are going to--they intend to award 4 contracts, one has to be a
small contract.
Ms. Millender-McDonald. One in four, okay.
Mr. Oliver. The other part is they have--they are looking
at very specific criteria to insist that the other three--the
three primes are not small businesses, have significant small
business inclusion. So somebody--there may be a data flaw
there.
Ms. Millender-McDonald. Would you double-check that and
then get back to me on that?
Mr. Oliver. Yes, ma'am I am.
[The information may be found in the appendix]
Ms. Millender-McDonald. I am also understanding your prime
gets paid within 10 days, and your subs that are related to the
primes have a much longer wait for their money, which is
absolutely unacceptable.
Mr. Oliver. It is a separate issue. And I will take it Ms.
Congresswoman. As you know it is a separate issue, but I will
get back to you.
Ms. Millender-McDonald. Please do.
[The information may be found in the appendix.]
Mr. Oliver. Let me--there is another--something you said
and--anyway, if my staff--I mean all the people who work this
work for Jack Gansler and me, they have been unable in 10 days
to locate any data. I don't think the data exists.
Ms. Millender-McDonald. Someone has just given you a blue
note.
Mr. Oliver. I will read it to you verbatim just to show how
much I share with the Committee. I hope it doesn't say anything
about my laundry. All 8(a) contracts will remain. What he is
trying to tell me is that the 8(a) contracts--that currently
all the stuff that FAST is going to do with this, the 8(a)s are
going to be exempted from it. Do you understand what I mean?
They are not going to be bound up in the bundles that is
besides the point.
Ms. Millender-McDonald. That is a different program
altogether?
Mr. Oliver. Yes, ma'am. We will get back to you.
Ms. Millender-McDonald. I understand that.
Mr. Oliver. What I am pledging is to go out and get data in
cooperation with the Committee so the Committee can see all of
this. And we will determine that. And that is it.
Ms. Millender-McDonald. All I am saying is, sir, we need to
have you go back and look at this 1994 report as to why data
was not collected at that time, given the question raised on
the GAO report. Thank you.
Mr. Oliver. Yes, ma'am.
Mrs. Kelly. Thank you, Ms. Millender-McDonald.
Ms. Millender-McDonald. Thank you.
Chairman Talent. Mr. Oliver, I just want to ask two quick
questions here. I would like to know what effect, what the
effect of this change will be on the small business primes? How
many of them are likely to be wiped out?
And the other thing is that they may be able to bid on--the
small businesses may be in the initial contract, but when that
contract then is reupped, they are going to be out.
Mr. Oliver. Yes.
Mrs. Kelly. So we want to make sure that doesn't happen,
and I want to go on record as saying that.
And now I am going to call on Ms. Tubbs Jones so that she
can quickly ask some questions here.
Ms. Jones. So you won't have to be here after the break.
Mr. Oliver. Yes, ma'am.
Ms. Jones. Mr. Oliver, I am reading from your statement on
page 6, and it says, in the DTS-CE program for example we were
unable to award prime contracts to small business. We required
the successful contractors to commit a 20 percent business
subcontracting goal.
My question is, how did they do?
Mr. Oliver. I will find out, ma'am.
[The information may be found in the appendix.]
Ms. Jones. Okay. Secondly, I keep hearing you say that we
can continue to meet 20, 21 percent with small businesses. My
question is, in light of the fact that we are in a bull economy
and the economy is supposed to be doing so well, why would it
not be that you are exceeding the 20, 21 percent for small
business so that small business enjoys in the fruitful--in the
fruit of this great booming economy? Because what it would
suggest to me if you are still at 20--at that level, that small
business may not be really----
Mr. Oliver. My economy isn't increasing. My economy is
dependent upon you guys completely, and you guys are reducing
my economy.
Ms. Jones. Not you guys, because I have only been here 11
months, so it is not me yet, but if you don't continue to deal
with small business, I will move to reduce it.
Mr. Oliver. You will help to reduce that.
Ms. Jones. Yes, sir. Thank you. But I want to associate
myself with the comments of my other colleagues, and only
because we are short of time, but it is clear to me that we
need to be sure and understand the impact that bundling has on
small business and for me particularly minority and women
businesses and to understand if it is not doing what we need it
to do, then we need to figure out bundling is not what
government needs to do.
I would like that to be my statement for the record. I am
done.
Mrs. Kelly. Would you like me to hold the hearing open so
you can continue?
Ms. Jones. No, I don't want to be accused of that. No, no,
I associate myself with the rest of my colleagues.
Mrs. Kelly. Mr. Oliver, I am going to hold the hearing
record open for a certain period of time because there are
written questions and there are people who were not able to be
here to ask their questions, so you should expect that.
At this time I am going to--we are going to adjourn just
simply to go and vote for a certain space of time and then we
will be back. Ten, 15 minutes. When we come back, I am going to
impanel the second panel.
[Recess.]
Chairman Talent. All right. If the witnesses for the second
panel will come forward, please, we will get that part of the
hearing going. And I want to thank these witnesses, many of
whom came a distance for being willing to do that. When we get
to--we can turn that down when we get--when we need it I think.
Our first witness on the second panel is Mr. Paul Murphy,
who is the President of Eagle Eye Publishers of Fairfax,
Virginia. We will have members of the Committee coming back in,
but I want to get going because we are a little behind time,
Mr. Murphy.
STATEMENT OF PAUL MURPHY, PRESIDENT EAGLE EYE PUBLISHERS, INC.
Mr. Murphy. Good morning, Mr. Talent, members of the House
Committee on Small Business, thank you for the opportunity to
testify today about the impacts of contract bundling. As you
may be aware, Eagle Eye is currently under contract with the
Office of Advocacy at the U.S. Small Business Administration to
update our 1997 study about the impacts of contract bundling on
small businesses.
Our new study is in the final stages of completion. And I
am sharing with you today several of our key findings that will
be incorporated into the final analysis, and the final report
should be available later this month.
According to our latest figures, contract consolidation in
general and bundling in particular are at their highest levels
since the start of year-by-year measures in fiscal 1992. The
share of all contracts that are bundled reached a new high of
12.9 percent in fiscal 1998, up from 11.6 percent in 1992.
The annual share of bundled contracts bottomed out in
fiscal 1995 at 10 percent and has risen steadily since. I
reference table 1 at the back of the testimony there. The
increasing tendency towards bundled contracts has occurred
during a period of overall contract consolidation. Since fiscal
1992, accounts of prime contracts valued at least $25,000 have
declined at least 16 percent from 200,198 to 167,255 in fiscal
1998.
Total prime contract dollars remained a relatively stable
$184 billion in fiscal 1998 leading to a growth in average
contract size from $915,000 to $1.1 million. Although the
number of large contracts valued at least a million dollars
declined with the overall decrease in the number of contracts,
the share of large contracts; that is, contracts greater than
$1 million grew from 18 to 21 percent. At the same time, the
share of small contracts valued less than $1 million dropped
from 80 to 79 percent.
During this 10-year period, the average size of a large
contract became smaller, while the average size of a smaller
contract became larger. Now as the average prime contract grew
in size, the number of individual contractors as measured by
unique DUNS numbers shrank 16 percent from 83,915 in fiscal
1992 to 70,755 in fiscal 1998. In fiscal 1992, small businesses
represented 69 percent of all contractors but constituted only
66 percent by fiscal 1998.
So in other words, our data show that larger and larger
contracts are being awarded to a shrinking number of prime
contractors, a growing percentage of which are large
businesses.
Let me talk a little bit about our methodology in analyzing
bundled contracts. Our study captures only a portion of the
bundling that actually occurs. And there are a number of
reasons for this. The first has to do with how we define a
bundled contract. As we did in our first analysis, Eagle Eye
still considers as bundled those contracts exhibiting
dissimilar standard industrial classification or SIC codes,
contract type, and place of performance codes.
Differing product service codes, another market indicator,
are also a potential sign of bundling as they would show
differences in the type of work being performed on a contract,
similar to differences in SIC codes.
Chairman Talent. Mr. Murphy, let me ask you a question to
clarify this section of it. So you only consider contracts as
bundled if the bids that are put together have dissimilar SIC
codes?
Mr. Murphy. Yes.
Chairman Talent. So they are different kinds of work?
Mr. Murphy. Yes.
Chairman Talent. I mean I don't understand the logic of
that, because let us take the travel agent-type of contracts,
they wouldn't have dissimilar SIC codes, but if they put
together all the different travel agent bids for several bases,
that certainly is a bundle isn't it? Or would they have
different SIC codes?
Mr. Murphy. You anticipate my third paragraph there.
Chairman Talent. Okay, all right. Go ahead, then I will
probably ask about that later then.
Mr. Murphy. Okay. Differing product service codes are a
potential indicator of bundling as they would show differences
in the type of work being performed on a contract similar to
differences in SIC codes as we said. However, we found many
differences in PSCs to be spurious as a result of changes in
the PSC coding system over time. Also some differences in PSCs
are subtle and need further study before we treat them as
indicators of bundling.
For instance, I am thinking there in terms of R&D codes
which show different stages of R&D which can sometimes be very
subtle differences and we didn't necessarily think that was an
indication of bundling. Had we included the 72,749 contracts
fiscal 1989 to 1998 that exhibited differences in PSCs in our
assessment of bundling, the bundled contracts share we are
measuring likely would have jumped to well over 20 percent a
year.
A second reason our measure of bundling is understated is
that in this analysis, we altered our methodology to include a
4-year lookback period in determining instances of bundling on
each contract. In our year-by-year measure of bundling that is
fiscal 1992, 1993, 1994 we began in fiscal 1992, in our year-
by-year measure, we flag a contract as being bundled only if it
exhibits differences in SIC, contract type and place of
performance code up to and including the year being measured.
This controls for the tendency of older contracts to show
increased signs of bundling over time. Am I----
Chairman Talent. Now, you go ahead.
Mr. Murphy [continuing]. To rush? This controls for the
tendency of older contracts to show increased signs of bundling
over time which has the effect of boosting bundled contract
rates in the later years of the analysis. We estimate as much
as 1/3 of all bundling that eventually occurs over the life of
longer contracts is missed using this lookback strategy.
A third reason the study understates bundling is that, by
definition, a bundled contract requires a modification. If a
contract shows no mods in the database; that is, only one
action, then it cannot be considered bundled.
A fourth source of understatement is the fact that
bundling, and here is your point, Mr. Talent, is the fact that
bundling can occur within the same SIC contract type and place
performance codes. If modifications occur on a contract that
show no differences in these codes, then again the contract
cannot be considered bundled according to our methodology.
Still another source of understatement is that our measure
relies on contract officers who are willing to go to the
trouble of reclassifying contracts as the work performed under
a contract changes over the contract's life. Given the
increased workload COs must perform, we must assume that many
bundled actions go undetected because COs are simply trying to
push work off their desk as quickly as possible.
Finally our bundled contract measure is understated because
our methodology only captures 62 percent of all dollars on
contracts worth at least a billion dollars. Most people would
agree that contracts this large are by definition bundled.
Distribution of bundled distributions. Bundled contracts
are distributed disproportionately to large businesses. Our
data show that between fiscal 1992 and 1998 small businesses
received a total of 784,427 contracts or 62 percent of all
prime contracts awarded during this period. However, small
businesses receive only 53 percent of the bundled contracts. In
terms of dollars, the $310 billion small businesses received in
the 10-year period constituted 17 percent of all prime contract
dollars, yet their $106 billion share of bundled contracts
constituted only 10.8 percent of all bundled dollars. That is
referenced in table 3.
So in conclusion, contract bundling and contract
consolidation are occurring. And it is working to the detriment
of the small Federal contractors. Average contract sizes and
rates of contract bundling are at their highest levels since
fiscal 1992, having grown steadily since the mid-1990s.
The trend toward contract consolidation benefits large
businesses at the expense of small businesses, because large
firms are better able to position themselves as recipients of
contracts of increasing size and complexity. Overall declines
in the numbers of small businesses may be linked to recent
declines in small business Federal market dollar shares. Plans
for further bundling and contract consolidation by DOD and
other agencies will only exacerbate these trends.
I brought along our database if we have time to take a look
at it. RPTS SEBO
Chairman Talent. Yes, please.
Mr. Murphy. Ms. Velazquez had asked some questions about
Warner Robbins. Eagle Eye has the Federal Procurement Data
Center's database on CD-ROM, and about 3 years ago we put it
all on Windows to enable quick, interactive reporting. And the
database, as you know, is a database of all the prime
contracts, $25,000 and up. It is a database of all the
transactions, which is all the task and delivery orders on the
contracts. But we have taken the data and presented a top-down
view, basically a view 10,000 feet, if you will, to show key
trends very quickly.
We are looking at contract transactions that occurred on
contracts that were active between fiscal 1994 and fiscal 1998.
And we present eight screens with which to view the data. You
can view the same selection of data by agency, by claimant
area, contract number, company, place performance, product
performance, SIC codes and weapon codes. Right now we are
looking at the agency screen with no filter set.
I am going to switch to the place of performance screen to
show you the same set of data, ranked by place. And as we
scroll down, obviously we see California is ranked first.
California received $130 billion over this 5-year period. These
are contractors doing business in California, not just with
street addresses in California.
Then comes Virginia, Texas, Maryland, and so forth, until
you get down to 11, which is Georgia. And they received----
Ms. Jones. Can you blow it up?
Mr. Murphy. That is what I am going to exactly.
So you get down in Georgia here in the lower window here,
you see all the cities in Georgia ranked by their 5-year dollar
totals of the Federal prime contracts that were received by all
agencies, DOD, DOE, NASA, etc.
Now, what I did before coming here to save time was--let me
just jump here to the company screen and show you again the
same information by company, Lockheed, Boeing, Raytheon; and as
you scroll down in the top window, you see all the subsidiaries
and the divisions of those companies change.
And the same thing with contract. You have contract numbers
up here, and down below you have all the mods on those
contracts, and you can tap this data around and see who
received the contract, who awarded it, the Air Force,
headquarters, what work was done, the contract, product
service, SIC code, where it was performed--this one happens to
have been an area--and various terms and conditions of the
contract until we get back to the mod record itself.
Prior to coming here, I set a filter--since I knew somebody
was going to be talking about the Warner Robbins situation
here, I set a filter on place of performance Robbins Air Force
Base or Warner Robbins. There were actually two place
performance designations for Robbins in the database. If you
are familiar with the data, you also know there is a code
called the type ofbusiness code that starts with ABC and goes
down to JK and L. Type A represents all the SDBs, all the minority-
owned businesses 8As and so forth. And business type B are all the
other types of small businesses.
When you set this filter on the data and then you look at
the Agency screen, we can see not surprisingly that DOD spent
99 percent of the money at Warner Robbins in the 5-year period.
But when we go to the company screen now, Ms. Velazquez,
here is an answer to one of your questions. Here are the small
businesses, ranked in dollar order by the work that they are
doing at Warner Robbins. And this number up here tells you
these companies--these small businesses received a total of
$398 million over the 5-year period. A total of 347 contractors
received that $398 million.
And I did another analysis without the type A and business
type A and B filter set. And I know the total amount of money
spent at Warner Robbins was over $900 million over the 5-year
period. These dollars represent about 41 percent of that total.
If you want to know what kind of work they are doing on these
contracts, you can just go to the SIC codes and see that there
is a lot of 1542 work, nonresidential construction, that was a
significant part of it, 102 million; 42 million of it was
engineering services; 37 million plumbing, heating and air
conditioning; a lot of the kinds of services that small
businesses provide.
If you go to the contract screen, you can see the same
data, sorted, totaled and ranked by contractor. Here we see
that small businesses received 712 contracts; that is what this
712 number represents, 712 contracts at Warner Robbins over the
5-year period, the largest one being $16 million total, and
then followed by 11 million, 9 million, 9 million.
So, the question that arises as far as bundling at Warner
Robbins goes is--is it too much of a burden to ask the
government to maintain this group of contracts and these 300 or
so small business vendors or; is it better, more efficient,
better value to consolidate under one contract?
There are a lot of considerations that arise, but you are
talking about eliminating as many as 712 contracts and a total
of 347 companies. So this gives us a sense of the scope of the
impact of the proposal to bundle the contract.
Chairman Talent. Very briefly. We want to go to the other
witnesses. Show us how many of those are just SDBs, small and
disadvantaged businesses. Which was it, filter A? Let us just
see how many there were.
Mr. Murphy. Yes. Now it is just going to be filtered by
Warner.
Chairman Talent. Just how many at Warner are small and
disadvantaged businesses?
Mr. Murphy. I have to go back in and set business type A.
It will take a few seconds. It is actually pulling over 2
million records of data and setting these filters. So we go
into the contract fields. And there is a field down here called
``Business Type.'' Let's see if I can pull it out here quickly.
You just go in here, enter, filter, add business type A.
It is actually doing a subselect of all the business type A
contracts over the 5-year period, and then when I click okay,
it will merge it with Warner. Also, I might point out that
Eagle Eye, my firm, is the company that developed the Federal
Funds Express Website for the House, and you have some
capability to do this on your Federal Funds Website.
We didn't--we weren't asked to provide all of the fields
like business type fields that you see here to select the data,
because there was a limited number of fields that the House
Information Resources felt that they needed to provide to
fulfill their mandate. But the system that we have on-line for
you is built in a modular fashion and can readily be modified.
Okay. We should see--it should come up here momentarily.
There we go. Over 5 years there were 328,000 actions with the
SDBs. I am going to click okay. And it is going to merge that
with Warner. As you can see the filter says business type A and
then place performance, Robbins and Warner Robbins. So now we
are in the contract screen. We are looking at a total of $118
million, 117.5 million worth of contract over 5 years, 179
contracts. And now I am switching to company. Here we see that
we are talking about 93 minority-owned firms, SDBs.
Chairman Talent. These are as primes?
Mr. Murphy. These are the just the primes, working on
contracts worth $25,000 and up, unclassified work being
performed.
Chairman Talent. The minute you bundle all of these, they
are just gone?
Mr. Murphy. They go away.
Chairman Talent. Okay. Thank you for your testimony, Mr.
Murphy.
[Mr. Murphy's statement may be found in the appendix.]
Chairman Talent. Next, Mr. Brooks will be next, if we can
have your testimony. Again, thank you for coming. I have
already gone over some of it in your questions. I found your
testimony very helpful, Mr. Brooks.
Mr. Brooks. Thank you so much. I appreciate that. I have
basically summed up my written testimony in a brief prepared
statement.
Chairman Talent. Go ahead.
STATEMENT OF CRAIG BROOKS, PRESIDENT, ELECTRA INT'L
TELECOMMUNICATIONS
Mr. Brooks. Thank you. Good afternoon, Chairman Talent and
distinguished members of the Committee. I appreciate the
opportunity to speak before you today. My name is Craig Brooks.
I am president of Electra, a small business that provides
telecommunications services to the Department of Defense. I
appreciate this opportunity to describe how arbitrary,
unjustified and what I believe to be illegal bundling has had a
devastating impact on my company.
In 1989, Electra began to participate in the DOD's open
competitive market for telecommunications services. Since then,
Electra and as many as 50 other vendors, including other small
businesses, have competed vigorously for contracts. Although
the market was successful for both participating vendors and
DOD agencies, it has now been all but eliminated by a single
bundled contract, and that is the DISN Transmission Services-
CONUS Extension. We know it as DTS-CE.
I will cite a few specific ways in which contract bundling
severely harms small businesses and follow each with examples
from the DTS-CE contract. First contract bundling favors the
largest market participants. With respect to the DTS-CE, the
DOD claimed to have structured a contract for as many as six
awardees, including one small business; however, the contract
went to three industry giants, AT&T, MCI-Worldcom and Sprint.
The Small Businesses Reauthorization Act defines contract
bundling as consolidating two or more procurement requirements
into a single contract unlikely for award to a small business.
The DTS-CE contract bundled 600 services and special
requirements into essentially a single bundled contract that
then became what I consider a large business set-aside.
Second, the decision to bundle services is often arbitrary,
unjustified and without supporting market research, as required
by the SBRA. With respect to the DTS-CE, SBR required the DOD
to conduct market research to determine whether consolidation
of contract requirements was necessary and justified. I am
unaware of any type of research in this area that has been
conducted at all by DOD.
SBRA further states that DOD should identify benefits of
such bundling, as well as impediments caused to small
businesses. Once again, I am unaware of any study that DOD has
done prior to, as opposed to after the fact, taking a look at
that. And I think what we just heard from Eagle Eye supports
that.
Third, small businesses lack the capital, facilities,
geographic diversity and ability to assume risks inherent in
large bundled contracts. With respect to DTS-CE using the SBRA
definition of bundling, the contract, DTS-CE, employed
diversity and size of performance elements. This made it all
but impossible for small businesses to provide multiple diverse
services within the required delivery intervals.
It employed geographical dispersion of contract performance
sites. This placed small businesses at a significant
disadvantage to companies with large national networks. And,
third, it employed specialized performance elements. These
elements in the DTS-CE were unjustified, discriminatory, and
they added unnecessary risk.
I am going to stray for one moment, and maybe you and I are
on the same wavelength, but security requirements fall right in
here.
Chairman Talent. Before you get into this, because I think
your testimony is particularly good, Mr. Brooks, is step back,
we are all lay people in terms of procurement and
telecommunications.
Mr. Brooks. I understand.
Chairman Talent. Tell us what kind of services we are
talking about here for lay people, how they used to do it and
procure, how and how they do it now. I think you can do this in
a minute or two.
Mr. Brooks. Right. I can give you a very simplified answer.
And I will keep it low on the acronyms. Essentially, let us
take an example local to us here. Let us say we have Andrews
Air Force Base in Maryland, and we have--for some reason they
need to talk to Fort Belvoir in Virginia, that communications--
the DOD would specify that we need a fiber-optic communications
line to go between those two sites.
And the way they used to do it is they had an electronic
bid bulletin board, and essentially this became--I am sure you
are familiar with the concept of an IFQ, an invitation for
quote, or an invitation for bid. And they put out this with
very simple specs, here is where one side is, it is this
building at Andrews Air Force Base, the other side is this
other building is at Fort Belvoir, we need a fiber-optic line
between there.
There are a variety of folks that can bid on this, and on
average, on this electronic bulletin board, you would have 7, 8
and as many as 50 people registered to bid under this bulletin
board by putting in essentially a BOA, to be able to put in a
bid. So you put in a bid, and the government selects based on
various very basic criteria we are all familiar with; meeting
the technical specs, meeting the delivery requirements, and a
price at that point.
Now, if security is in the technical specs, then you have
to meet it, it is that simple. The examples that I had given in
my written testimony, Mr. Chairman, that particular one that
you read to the gentleman from DOD was one of those
specifications. How is the government--and I think this speaks
to really the heart of what I consider kind of some back and
forth and somemisrepresentation of some of the facts. How does
the government achieve security on that type of situation?
Well, it is very simple: Encryption devices on each side,
and the government equipment is in a government-owned and
government-controlled facility, so they are asking for a COTS
solution, commercial off-the-shelf solution. They need a fiber
line that is available from the commercial carriers in the
area, Bell Atlantic, MFS Telecom, Winstar, go down the list.
Some are large businesses, some are small businesses. They need
that service. We bid. Those services are awarded. We install.
The government controls security of the data across that line
to prevent hacking by encrypting the data and ensuring that the
access to get the data into that line is controlled through
their own people in their own facilities.
That is what most of these contracts involved, and over
5,000 of them my company was involved in. We won over 20
percent, we beat AT&T, Sprint, MCI, and now basically we are
locked out because of this bundling.
Chairman Talent. A crude but accurate comparison. This is
like we in our homes buy long distance telephone service.
Mr. Brooks. Yes, exactly.
Chairman Talent. It is as if we decided--and probably most
people have the larger carriers, but you can buy the longer
carriers if you want for your own home.
Mr. Brooks. Correct, correct.
Chairman Talent. Go ahead.
Mr. Brooks. I will just briefly continue here. Anyway, that
does describe accurately the special performance elements that
were in this contract.
My personal opinion is I believe that those were added in
by the large contractors in my discussion with them.
Unfortunately, I can't get anything in writing, as you know,
through some discovery process to find that out. That is just
my personal belief.
There is another worst aspect to bundling even beyond what
we have heard with these contracts that are let and then the
winners walk away with this large money and the small
businesses are left to the side, and that is something that we
consider the gatekeeping aspects of bundling.
Bundled contracts function as market gatekeepers,
preventing all noncontract awardees from competing for future
business. Now this is business that wasn't included in the
original contract. In terms of DTS-CE, the DOD without
contractual requirement made the arbitrary and unjustified
decision to allow DTS-CE contractors to split bids for future
requirements. In essence, the DOD created a bundled contract
that only the largest companies could compete on and now uses
that contract to prevent small businesses from competing on any
future requirements.
Mr. Chairman, in my opinion, the problem can be summed up
in one statement, and that is Federal agencies are not in
compliance with the SBRA. I know that this hearing is focused
on the DOD, but I could speak for hours about situations that
are going on with GSA, with FTS2001, DOJ, et cetera. Bundling
should be used only in those rare instances when it is properly
justified and its impact on small business is minimal.
What small businesses really need is an environment that
stimulates full and open competition. With that respect, I
would just like to offer just very three brief suggestions. The
first is that telecom services could be offered on the GSA's
Federal supply schedule. Right now, believe it or not, the GSA
doesn't allow a vendor like myself to submit a schedule for
telecom services. It says right in the schedule solicitation,
don't submit, because this interferes with FTS2001, so if I
wanted to go to the DOD and say, I have my telecom services on
GSA schedule, you are not allowed to.
Secondly, our experience has showed that these electronic
bid bulletin boards are very helpful for small businesses. They
allow for rapid turnaround, and I believe that they decrease
the administration burden on the government, and I think that
those are some recommendations that the Committee should look
at as far as stimulating small business participation.
And, third, agencies and departments should be empowered to
encourage competition, not forced to use these bundled
contracts that we have seen here today.
In conclusion, you can tell I am a little passionate about
this. I am very frustrated about the impact that the bundling
situation has had on my business. All I am really asking for is
an opportunity to continue to be able to compete in this
marketplace.
Thank you very much. I appreciate your time.
Chairman Talent. Thank you, Mr. Brooks.
[Mr. Brooks' statement may be found in the appendix.]
Chairman Talent. I would encourage Members to have their
staff--if they don't have time to read Mr. Brooks whole
statement, have their staff pull for them those portions of his
statement showing how much more the government is paying per
line under the bundled contract than it used to pay.
Mr. Brooks. Absolutely.
Chairman Talent. Our next witness is Ms. Josephine Ursini--
--
Ms. Ursini. That is correct.
Chairman Talent [continuing]. Who is here on behalf of the
Society for Travel Agents in Government.
STATEMENT OF JOSEPHINE L. URSINI, COUNSEL, SOCIETY FOR TRAVEL
AGENTS IN GOVERNMENT
Ms. Ursini. Thank you. On behalf of Society of the Travel
Agents in Government, which we refer to as STAG, I want to
express our appreciation for allowing us to come forward. It is
something that we have wanted to do for quite some time.
STAG is comprised of organizations who currently have or
are seeking contracts with the government. Seventy percent of
travel agencies are women-owned, and all four officers of STAG
are women. So we are acutely aware of not only the small, but
the women-owned aspects of the industry.
I would like to echo Mr. Brooks' comments that we are
concentrating on DOD, but most of what I will have to say today
has relevance to the GSA travel contracts as well. I would like
to summarize the points from our written submission there.
There are a number of items I would like to amplify on from our
written submission.
There are three aspects of bundling that I want to address,
the first of which is not unique, the second of which is unique
to travel, and the third affects all of government contracting.
The first is the bundling of like requirements. I provided
as an attachment to our testimony the recent Department of
Defense travel procurement that was issued last week on-line.
It contains the workload data's for each of the regions that
DOD has now designated. As in any other industry, the
unnecessary consolidation of requirements will reduce the
opportunities for small and small-disadvantaged businesses to
participate.
The DOD is in the process of reengineering its travel
acquisition requirements and started with the award of what was
referred to as the Defense Travel Region 6 or DTR6. This 1,300-
page RFP, request for proposal, is what all businesses are to
face. Of the 1,300 pages in this RFP that was issued, I guess
about 2 years ago, only 30 have to do with travel services. The
rest have to do with the technology associated with travel
services.
But that is what the travel contractors have to face, small
and large. For a small business in travel, the small business-
size standard for travel agencies is far different than the
size standard for everyone else. It is based on revenue
received and works out to about 14 to 16 people, employees,
rather than the 500 employee standard for other industries. You
can see how a small travel agency with 15 employees would take
one look at a request for proposal of this magnitude and just
sort of shake their heads. It should not be necessary to have a
1,300-page RFP to make travel reservations. So that is obstacle
number one.
But the bundling of the requirements into procurements of
even $20 million as in the new RFP that was issued last week is
still too large. If you look at the breakdown, there is one
aspect that is not reflected in the written testimony. If you
look at the set-asides in the DOD RFP which is the second page
of the attachment to the testimony, all of those set-asides are
Air Force set-asides. The Air Force is the one service
department within DOD that does not use the DOD credit card,
which means that the travel agency has to float the government,
that the travel agency pays for the travel, for the airline
travel, and then has to bill the government for payment.
The other service departments do use the travel credit
card. This means that, ironically, it is the small businesses
that have to have the lines of credit to float the government
and not the large businesses. So although the Air Force may
seem magnanimous in its set-asides for these small businesses--
for small businesses, it is actually more of a burden for a
small business to perform an Air Force contract than it is to
perform a contract for any of the other service departments,
and that is something that is not reflected in the testimony.
One other thing to point out about the workload data in the
attachment is that they don't include leisure travel. That is
the second aspect of the bundling of travel contracts that is
unique to travel, and that is the bundling of leisure and
official travel into one single procurement.
We fought this hard and long; finally got a circuit court
of appeals to agree that bundling of official and leisure was
improper, and DOD turned around and snuck in a provision in
last year's DOD authorization bill to allow them to do that.
This is as ridiculous a situation as bundling a mess attendant
services contract with a McDonald's concession.
That is all there is to it. It is ridiculous to combine the
leisure travel and the official travel procurements. There is
no excuse. They are very, very different. In official travel
you have agents that really have no discretion with the
arrangements that are made. The airfares are set by the city
pair contracts that are negotiated by the General Services
Administration. If you have to be at a meeting tomorrow 2
o'clock in San Diego, then the applicable city-pair is used.
But with leisure travel, it is far more labor-intensive. I
mean, many of us know that you go into a travel agency, you may
sit with a travel agent, look through brochures and really
never order anything, never make reservations.
So the discretionary travel is much more labor-intensive
and requires different skills, which, to be perfectly honest,
the small businesses are better at providing than the large
businesses. So we have the traditional bundling of requirements
that don't need to be bundled. The DOD accounts have been going
along very nicely for about 20 years now unbundled.
We have the nontraditional bundling, which is the bundling
of leisure and official travel, which makes no sense at all.
The Navy, which accounts for about a third of all DOD travel,
has not combined leisure with official at all and doesn't want
to do it. But the Navy is going to be forced to bundle because
Navy will now come under the overall DOD--the new reengineered
defense travel system, and now the Navy will be forced to
bundle a procurement that they didn't want to in the first
place.
Then we have the third. The third area is the area that I
think should be of most concern to this Committee, and that is
how the subcontracting, the small business, SDB, whatever, is
being reported to SBA and to Congress. The travel agencies are
not being paid by the government for the services that they
perform. Zero procurement dollars are going to the travel
agencies. The money goes to the airlines, but DOD is reporting
it as dollars--they are reporting it on a gross volume basis,
and they are reporting it as dollars that go to the travel
agencies. And because of that, they are inflating their
compliance figures to this Committee, to SBA and to Congress.
I could use an example of real estate agents. If you sell a
house for $300,000, and the real estate agent makes a
commission of $18,000, DOD would report it as $300,000 going to
the real estate agent, and that is assuming that procurement
dollars were involved in the purchase of that house. But no
procurement dollars are involved in the travel services
contracts. These are no-cost contracts.
So if no procurement dollars are going to the travel
agencies, how can anything be reported back as being small
business subcontracting? And on the volume of travel that is
involved within DOD, that accounts for a lot of money. So when
Mr. Oliver says he likes clean data, you better be sure you are
getting clean data because we don't believe that you are.
Ms. Velazquez [presiding]. Sure.
Ms. Ursini. Basically those are the three points I wanted
to cover. So I would be happy to answer any questions.
[Ms. Ursini's statement may be found in the appendix]
Ms. Velazquez. Are you telling us that they are cooking the
books?
Ms. Ursini. Yes, I am, in major numbers, because the
numbers are just so large on travel that--you know, I gave some
examples in the written testimony. If you use the figures from
just the RFP that was issued last week, you are talking in the
neighborhood of $145 million that is phantom money, and it is
not accurate.
Ms. Velazquez. Thank you, Ms. Ursini.
And then our next witness is Mr. Maurice Allain. Thank you.
Welcome.
STATEMENT OF MAURICE ALLAIN, PRESIDENT AND CEO, PHOENIX
SCIENTIFIC CORPORATION
Mr. Allain. Good afternoon, Madam Chairman and members of
the Committee and staff. This has been--it has gotten kind of
late in the day, so I am not going to read everything that I
have already prepared and sent to you.
What I would like to say is there is a lot of confusion
that is being passed around about what it is that hopefully we
are doing. In 1953, right after the Second World War, your
predecessor Committee decided that there should be a fair
portion of the budget that procurements that go out from the
Federal Government should go to small business. Fairness is a
distributive justice issue, and it was based on a period of
time when we were a heavy manufacturing, mining, extracting, in
other words, material-based society.
Mr. Oliver was correct in pointing out that the revolution
that has occurred in information has created another type of
economy. This economy, however, is basically driven by small
business, because you have a situation where you can get rid of
a lot of middle management by going to these new communication
processes. Big companies, like General Electric, decided to
reduce the size of their work force from 400,000 down to
212,000. I believe that is a figure that I got from the Office
of Advocacy. And that is typical, so what you are seeing is a
different kind of organization; however, because of the change
in our defense posture, instead of the 100 businesses that
control 67 percent of the economy in 1946, you have got about
three really large ones, giant ones.
Now, what does this mean? If you talk about just the
distributive justice issue, that is important to society. But
now if you go away from the static dynamics, static economics
of mass production society to the dynamic conditions in an
information economy, where a small business that might have
been suboptimal in reaching the scales necessary to do the
manufacturing is not suboptimal in that field, in fact, they
would be preferred.
If you look at the differences in our economic performances
compared to Europe, compared to Japan, we are doing a lot
better than they are. But our new business formation is a lot
higher as one of the keys. Now, Dr. Gansler, besides being an
excellent, a very good civil servant, is also--has contributed
very heavily to the literature on defense contracting in three
principal books.
He said in his earlier book, I believe, The Defense
Industry, which came out in the early 1980s, in order to
understand the economic operation of the U.S. Defense industry,
and I am quoting him, it is first absolutely essential to
recognize that there is no free market at work in this area,
and there likely cannot be one because of the dominant role
played by the Federal Government. The combination of a single
buyer and few large firms in each segment of the industry and a
small number of extremely expensive weapons programs that
constitute a unique structure for doing business have created
large barriers to entry and exit, and these barriers result in
each firm managing to keep its share of the business even in a
shrinking market.
The history of American military technology indicates that
it has often been the small inventor-led firms that have made
the qualitative breakthrough so critical to military
superiority. Thus their disappearance affects our long-range
future as well. If these small, lower-tier firms are so
critical, why does the Congress and the Department of Defense
think only in terms of the giants--these are Dr. Gansler's
words--such as Lockheed, Boeing, McDonnell-Douglas, and assume
there is uniformity across the overall defense industry?
In his later book, the next one, which is Affording
Defense, he says, many have attempted to describe the very
special buyer/seller relationship that exists in the realm of
defense. The economist Walter Adams called it a closed system
of buyer and seller, interrelated for common interest, that
defies analysis by conventional economic tools. The economist
James McKee said that it is a relationship of participation in
which the large buyer has a direct influence on the policies
and decisions of the large sellers, and that what we observe is
the kind of behavior that is not adequately described by any of
the commonly employed models of market relationships and
economics.
And now I will quote, that is what Dr. Gansler said.
Further in his book he says that the Department of Defense
operates--the defense market is a dual market at the top level
of the market's plan. I am going to buy an F-22, I am going to
buy an Arleigh Burke class destroyer or any of the other large
weapons systems.
Here he is correct. You need a large organization, but 60
percent often of those procurements are done on the subtier
level by small businesses, by small disadvantaged business,
women-owned business, what have you. He said in that book that
it is going to be real hard to get competition. We have
superrivalries, et cetera, et cetera, in the first tier.
He says the DOD can save more money by coming up with more
competition at the lower end, the subcontractor level,
component level, parts level. That is where the true savings
come.
Now, it is very interesting that if the American industry
in general has looked at the gains to be made through
information technology and how they organize their businesses
and firms, we are looking at a trend that is just the opposite,
stronger and stronger vertical integration, and now we are down
to the point there is no more money to give them, let us get
some from small businesses.
If you look at what is being asked for under FAST, this
procurement--this is government data, this is off their Web
page--FAST will establish the means for procurement of services
to include advisory and assistance, modifications, spares,
repairs and systems acquisition. The program will include, but
will not be limited to, direct support for design, integration,
testing, modification, maintenance, configuration management,
quality assurance, system safety, hazardous materials
management and technical and engineering data, support and
analysis, and packing, handling--I mean, I can go on. What is
left? Everything will be under FAST. And you have had various
estimates of the size of the contract and its duration.
Another problem that underlies this whole issue, you have a
lot of goal displacement. Everybody counts numbers. Well, we
are giving the small business these many numbers, it is the
quality of these numbers that are important as well.
The Office of Advocacy found, for instance, that it greatly
enhances the chance of a small business growing up to be a big
business or staying in business if it has a Federal contract.
We are talking major significance of about 30 percent--I am
sorry.
Ms. Velazquez. Would you please summarize, because there is
a vote, and we need to recess.
Mr. Allain. The bottom line to a lot of this is I would
urge you to consider legislation that would tighten up this
whole notion of what the values we are buying when we do a
bundle to something that is measurable. The ABA recommended 20
percent as a minimum in difference of value, however you want
to measure it.
I would also urge the Committee not to allow the projected
savings to be the determinant of whether or not something
should be bundled or represents a substantial advantage to the
government.
I don't have to tell you the basis, you know, the kind of
estimates and projections that have not panned out in the past.
This is a major effort that will be copied, by the way; if this
goes through, this will be copied by other services.
Ms. Velazquez. Thank you.
[Mr. Allain's statement may be found in the appendix.]
Ms. Velazquez. We are going to take--we will be back in the
next--we have got to go to the floor and vote, so we will rush
back as soon as we can. Okay.
[Recess.]
Chairman Talent [presiding]. Okay. If we can reconvene the
hearing. And I again appreciate your patience and thank the
Ranking Member for chairing the Committee while I was gone.
I wanted to ask Ms. Ursini a couple of questions because I
think she can respond to one of the points that Mr. Oliver made
about one of the advantages of bundling. He talked--you may
have already done this, and I am sorry if you have, but he
mentioned that one of the advantages of bundling is because he
is assuming that the bigger contractors have more flexibility
in terms of their ability to meet the needs of the Department,
so they have more people. He was talking about the security
officers at a particular base.
If you get one big contractor handling everything, they
have more people, they are more flexible. You made a point in
your written statement anyway that I thought addressed this
very well, to the extent that they--I am not trying to put
words in your mouth, was that--when the Department's bundling
contracts in a business like yours where all the contractors
are relatively small, and one contractor does bid and get a
bundled contract, that is everything that they can do? In other
words, they don't have any capacity then left over to bid on
another contract? They don't have a lot of extra capacity; is
that correct?
Ms. Ursini. That is correct. If you are limiting it to the
big--the big three are really the only ones right now that can
do the large size contracts. I mean--I don't want to exclude
anybody, but let us talk about the big three. AMEX was awarded
the contract for the DTR6, May of 1998. They still haven't
implemented. They are having problems. And also, unless the
Department of Defense changes its compensation policies, AMEX
may not be interested in the next batch anyway. But that is
another issue.
But if each time you go out for one of these larger-sized
procurements, you are eliminating one of the big companies,
then you keep restricting competition for the subsequent--or at
least the closely followed-on subsequent procurements because
they are too busy doing the implementation of the earlier one.
The other problem that there is on the small business side
even is that, because of the way the small business-size
standard is established for travel agencies, once they get one,
they are now large, so they can't even bid on the next small
procurement. So that is one thing that the Committee might want
to look at is possibly changing the size standard for travel
agents, which is much different than the size standards for
everybody else, so that small businesses can continue to even
compete for the--for what few pieces of small travel business
there are out there.
Chairman Talent. And as to the economies of scale issue,
wouldn't you expect that if in a particular segment of the
economy, there are very significant economies of scale,
wouldn't you expect to see the private market organize itself
so that there were just, you know, a few large contractors? In
other words, if there are economies of scale in the travel
agency business, why are there so many small travel agencies?
Why wouldn't they just in response to the market resolve
themselves into a few big or merged companies?
Ms. Ursini. I think you are correct. I think what happens
with the small travel agencies is they develop specialties,
particularly on the leisure travel side. You have the larger
companies, the American Expresses and the Carlsons, having
large corporate accounts, for example, that the smaller
companies can not handle, they leave the smaller accounts and
leisure travel to the smaller businesses. That is one of the
reasons--I think I point out in the testimony about another
reason why the bundling of leisure and official is ridiculous,
because the smaller businesses can really handle the leisure
much better than the large ones.
Chairman Talent. So they are making an argument based
supposedly on economic efficiency, but it flies in the face of
what the private market has organized itself?
Ms. Ursini. That is absolutely correct.
Chairman Talent. And really the best indicator of
efficiencies in a market is how it has organized itself?
Ms. Ursini. That is correct.
Chairman Talent. And I have seen this same thing with the
kinds of issues that Ms. Napolitano was raising, food service
and private service. If you look around the country, they tend
to be--these businesses tend to be dominated, these segments of
the economy, by smaller businesses, which tells us that in the
real nongovernmental world, those are--that is the most
efficient way of organizing a business in that area.
Ms. Ursini. Yes.
There is one aspect of--one excuse that DOD has given for
bundling that I don't think holds water that I haven't
addressed. And there is a valid objective behind it, but it
doesn't require the bundling of the travel. And that is that
DOD would like, and we applaud their decision to try to get,
more valid across-the-board departmental data about their
travel so that if they can have an accounting system that
accounts for all of the travel on a DOD-wide basis, they can
get better data, maybe better data to negotiate fares with the
airlines, et cetera.
But consolidating the accounting requirements or the
computer fields, et cetera, because all of the service
departments have different formats doesn't require that you
bundle the travel services contract requirements themselves; it
just requires that the individual contractors meet the various
technological requirements. But it doesn't require that you
have--that you have $79 million or $300 million contracts.
Chairman Talent. This is what I have encountered over and
over again. And this is what I think is at the heart of this
bundling. Mr. Oliver talked about core competencies. And I
think that the DOD is having difficulty managing and
administering its various functions. And so it turns to
bundling really as a way of not managing and not administering.
It is easier for them.
We just have a couple of big companies who do everything,
and it may not save money, it may not be better quality, but it
is easier for them. And the problem is you still have to manage
the enterprise, even if you are contracting out particular
functions.
Mr. Allain, the Warner Robbins thing, and we are having a
hearing on it, it is really more of an issue whether they are
going to privatize base management----
Mr. Allain [continuing]. Yes, sir.
Chairman Talent. As opposed to bundling, and clearly they
don't feel they can manage the bases anymore. The thing is if
you get--suppose you get a huge contractor in like a property
management company might. They now are going to run Warner
Robbins Air Force Base. You still have to tell them what goals
you want them to achieve in management. You still have to
manage that. And my concern is they will get somebody in big
and not tell them what they want them to manage the base to
achieve, and so, in effect, they are hiring a private
contractor to tell them what they want and tell them how to
manage the base, and you are just going to be sent into chaos.
Mr. Allain. You know, carry that point further, Mr.
Chairman. What you are having here is a complete blurring of
accountability. I mean you, the people's representatives,
delegate to the administration to perform certain missions.
They subdelegate it to an agency. In the case of, well, we are
going to have small business get larger shares of these
contracts as subcontractors, you now have changed my due
process, which I could appeal; say to the contracting official
who has to operate under the laws that you have passed, now it
is a private matter between me and this large contractor. That
is very dangerous.
And unless Congress wants this to occur and explicitly
tells them to do it, then fine. They shouldn't be allowed to go
and do this on their own.
Chairman Talent. And here is the other thing. I pointed
this out in the context of household goods and moving services
with regard to the departments, which I know the travel agents
know about as well, when you bundle up huge kinds of contracts
and then say, well, small business will be subcontracted out
into the process. Now think about this for a minute. What you
are basically saying is since one of the points of bundling is
supposedly to save money, let us suppose you actually get some
kind of discounted bundled price, knowing they are going to
have to subcontract it out. Now you have got two layers of
businesses which have to survive on one squeezed profit margin.
What is that going to do in terms of the quality that has been
given to our service people?
So I have no--I have no doubt that they are going to do
with--what do they call it, chill and serve, what was it--cook
and chill.
Ms. Ursini. I would like to respond. I am glad you brought
up household goods. In my alter ego, I am a Navy wife, we have
had to contend with four moves in the last 2 years, none of
which, thank God, did I use the military movers. We chose to
use movers selected on our own. It cost us about a third of
what the government would have spent had they moved us. DOD has
a pilot--in fact, I think it is the Navy's pilot program--that
allows service members to contract on their own with local
companies. It is only a pilot program, but it has proven to be
very effective, from what I understand, and certainly in our
experience. Every time we said that we were going to do it on
our own, the response that we would get is, well, you know, if
something gets broken, put in a claim. I don't want my
household goods to--I don't want my crystal shattered. I don't
want my furniture chipped. I want to be able to control what is
going on.
Chairman Talent. Yes. So I mean the point I think they have
to confront, and I have some hopes Mr. Oliver is going to do
it, is, yes, whether it is within their core competency or not,
they have to manage their assets. Now, managing may entail
contracting, may entail contracting out certain functions, but
they still have to tell the contractor, big or small, what it
is they want that contract to achieve; what you are going to
achieve when you, Warner Robbins--what goals you are going to
have.
So they still have to put the effort into identifying the
goals and managing the enterprise. And my concern about this
whole trend is just really simply an intent to abdicate a
certain function, whether they call it a core function or not,
and just sort of spew it out to other contractors in the guise
of reforms. And we are going to continue looking at it.
The Ranking Member wants to ask a few questions.
Ms. Velazquez. No. Mr. Chairman, basically you covered most
of the questions that I had. I just wanted to thank you, and I
look forward to continuing to working with all of you.
Chairman Talent. All right. We are not going to make you
wait through another vote here. I do appreciate your all being
here. I hope you will be available in the future as we need
you, because we are going to follow up on this issue. I believe
we already kept the record open for 10 days for written
questions so the Committee hearing is adjourned.
[Whereupon, at 1:55 p.m., the committee was adjourned.]
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