 Starting immediately to Mr. Lambert's left is Jeff Bialos. He is here because he had the same job that Brett has in the administration twice removed, the Clinton administration. To Jeff's left is Byron Callan, who here represents Wall Street here today. And it is noteworthy. And has not yet been arrested. Only in its... It is useful to note that there has not been a QDR before that even had the phrase access to capital in its text. And so there's a sea change just in the recognition of that dynamic as important to defense and to the industrial base. To Byron's left is Alan Javotkin. Alan is here because in fact half of our industrial base now, half of the money that DOD spends under contract is with services rather than for platforms and systems and research and technology. And a recognition of that, I think, is something that is important for us to focus on today and to look at the QDR through that prism and lens. So Mr. Javotkin is here representing that side of the equation. And then finally, Bill Greenwald, who was also a previous deputy under secretary for industrial policy in the Bush administration. So we've got a group here who can provide a variety of perspectives on this QDR itself and on what it says and on what it doesn't say. I'll ask that they'll each provide some remarks. You hold your questions. When the four of them have finished, we'll open the floor for questions. But I am reserving the first question for Brett Lambert, who has graciously agreed to stay through the panel session as well. So you get to think about what you're going to ask these guys as they're going through their process. So with that, Jeff, you've got the floor. Helps to turn it on. Being here with John Hammery made me think about the changing errors, if you will, that we face. And we've been in a bull market in defense the last seven, eight years here after 9-11. And it does look like we're at something of a crossroads. And I think what John touched on is, are we back to the late 90s, in the period when he gave his speech, bemoaning the fact that the capital value of major defense contractors was less than Martha Stewart and her enterprise. And the question is, will, as budgets flatten inevitably in the next period, is our industry able to weather the storm? And I would submit, I didn't come here to have this discussion per se, but I would submit our companies are better equipped today to weather a flattening of demand, and maybe even some declination. And they were a decade ago, but it points out the need for vigilance in an era when we're going to see potentially some flattening and declination of demand in your app to see concerns about the industrial base. And I think John's point was we have to watch out for the fragilities in this era. But to put all this in context, we're here to talk about this in the context of the QDR. And let me make a few general comments and then talk about the defense industry. First of all, this QDR, it's evolutionary, not revolutionary. And that's to be expected. We have a Secretary of Defense in his third year in office, and this QDR is entirely consistent with, by the way, quite good, I think, but entirely consistent with his speeches, actions, and budget decisions over, particularly the last year and a half, but really his whole tenure of office. It would be shocking at this point if it was a radical departure. And I think that's good because I think continuity is good, but in that continuity is changed because he's effectively said, let's shift the focus, let's shift the balance somewhat toward the wars we're fighting. And this particularly pertains to the acquisition community and the comment that Brett made that, you know, the Defense Department is a war and AT&L isn't. Let's shift the balance toward the wars we're fighting. And I think that's done that in every which way. And it's very hard to disagree, therefore, with the vectors in this QDR. A few other just general points of things I think that are not worthy that are not covered in this QDR that relate in general ways to the industry. One is force structure. You know, if you're going to shift the balance, one thing to think about is making adjustments to the force structure. You know, we have an army under stress. We have an army that has shifted its focus toward the continuum of low intensity conflicts they're fighting, but there are really two questions going forward, which is, one, is the army really institutionalizing this change away from the concept of fighting the big one to essentially becoming in some respects a large special operations force. And two, can we shift the force structure, the active army force and the reserve in a way that takes the stresses off. And I think these were not addressed in the QDR, but my impression is they're going to be addressed going forward. I would just say it's hard to restructure the force when it's at war, frankly. But I think it is an important issue if you go forward. Second, which again relates to the industry, little discussion of interoperability among coalition forces, particularly Europeans. Lots of discussion in the QDR about partnership, which is important, but I think there's not that much focus on less focus on Europe and the role of Europe in our defense. In part that's probably in deference to the fact that the NATO strategic concept has not come out yet. But I would say there are two points here. One, if you look at who it is we fight with in expeditionary warfare, who goes to war with us, it's our European brethren. And my own view is we need to do much more things now, a more robust agenda to maintain interoperability with that force. And that would help promote transatlantic integration if we did that in the defense sector. Two, I think that, and so we need greater interoperability among forces likely to continue to be at different levels of capability for years to come. Two, the reality is Europe has largely become debellicized, other than two countries, the French and the UK, most of Europe is focused on Petersburg tasks and low-intensity warfare. And we need to encourage that because we need to have that burden shared. And all of this points towards some degree of more cooperative defense programs with Europeans and more efforts to ensure that we can work with them in an eccentric environment. And I think those to me should be priorities, and I would hope that as we go forward, while not mentioning the QDR, they become greater priorities. I was heartened to see a mention of the EU in the QDR, and I didn't go back and look, but my guess is this is the first QDR that mentions the European Union. And it reflects the fact that the EU is taking on a more prominent role in defense, particularly in this low-intensity side of the equation, and it's just put a package of directives out there to regulate the defense market and to open its internal defense market. And one point I think that's not quite mentioned in the QDR, but I think is an important point is I believe the Defense Department needs to engage much more deeply with the European Union on a range of issues from regulating the defense market to civil military cooperation. We just finished a study at Johns Hopkins called Fortresses and Icebergs, and that was one of the key findings in that study. I think there has been forward movement in the Pentagon in this to the point where, you know, you hear people in the policy side of the house saying, we're open to engaging with the EU, but I think we have to move beyond that and develop a robust agenda with our most important partner in these areas. Now, we turn now to the defense industry. As I said, as I kind of jokingly said, there is not much in the QDR specifically on the defense industry, but what there I think is quite good, and I think Brett has laid out a very good vision in this area. I think the QDR is properly focused on both the demand in the supply side of the equation, if you will. And the question is what are the acquisition system deficiencies on the demand side and what do we do, and this is really the question, to ensure we have the defense industrial capabilities that are robust and competitive source defense industrial capabilities to meet our national security needs for the future. And particularly, as I said, how do we do this in an era of potentially declining demand? We're back to that era potentially, where it's flattening and potentially declining, and how do we make sure that we address the fragilities of the industry in effect as they happen. On the demand side, the QDR, I think, asked the right question, which is how do we institutionalize the rapid wartime acquisition capability? You know, there's been really, for many years, two acquisition systems at the Pentagon. There's the long-term one we all know with large programs that start with requirements, and that's the bulk in the bulk of the spending. The second is one that wasn't all that big until 2009-11, and we started fighting these wars, and now has become much larger, and that's a short-term acquisition system driven by the needs in the field of a combatant commander. And it's sprung up in the Pentagon a series of ad hoc committees, ad hoc approaches, and lots of money. You bring it to Aberdeen and test it, and if it's good, we'll use it, is one extreme. And things like MRAP grew out of that. They didn't grow out of that long-term system. And the question is really, the QDR asked the right question, it doesn't really give a solution to this, is should we do something to institutionalize this kind of a wartime system? Do we reform the big system, or do we do something to give us the standing, if you will, authorities and monies to better organize our effort for this sort of more short-term exigency-based system? I think that's a fundamental challenge going forward, not addressed, and I think that's a challenge for this group, Brett and his colleagues in the Pentagon. On the supply side, again, I think the QDR does suggest it hints at a more robust, not robust, a more interventionist tilt, if you will, in terms of industrial policy. We've always had industrial policy at the Pentagon, but it tends to be ad hoc and program-specific, and I think what Brett has sort of suggested in the QDR hints at is creating a more coherent, holistic approach to industrial policy across the board. A few comments on the framework for this. Fundamentally, demand drives supply. That is to say, you're not going to buy things largely because of industrial needs. You're going to buy things because we have national security needs for those things. But that said, supply has to inform demand, and the capabilities the industry can offer, get taken into account in shaping defense demand. I think within that framework, there are a number of steps and tools that have to be taken, and some of the tools have fell into abeyance. I don't think there's any magic to these tools. Monitor and assess the supplier base, particularly relative to the priority set forth in the QDR. Take industrial capabilities into account in shaping acquisition strategies. When we work on the man side in the Pentagon, taking the defense industrial capabilities into account, considering foreign sources as supply, establishing some sensible organizational conflict of interest rules, adding commercial suppliers, making it more sensible for commercial suppliers to play, merger reviews, maybe we need some guidance here as we go into this new era, and ensuring better stewardship, or good stewardship by primes of the defense supplier base. I'm not going to talk about all those, but I want to touch on a few. Look, on monitoring the supplier base, that's what Brett's office and Brett are about. And that's the historic responsibility. What you need to do here is matrix demand to supply. The QDR lays out a bunch of priority areas, and what I would urge them to do is to go sector by sector and look at each of these sectors. The issue here is resources. Poor Brett's office has atrophied over the years. I don't think necessarily by intent. And he just today doesn't have the resources to do this. So I would ask the Pentagon leadership to give Brett more resources to bring to the task, so the ambition in the QDR can be realized, because without more resources, he can't do much more than react. And so that's point one. The second point, so they need to do shaping acquisition strategies. We began to do this in the late 90s, and it really fell into abeyance. When we look at the demand side in the Pentagon, we need to look at industrial capabilities and bring it into play. Now, again, that doesn't mean we make source selection decisions on the basis of we need this industrial capability, and therefore we're going to do it that way. It does mean as we shape long-term acquisition strategies in a capability area like radar or whatnot, we need to look at industrial capabilities as part of that equation. And I would favor a more holistic looking capability sectors at, let's say, sectors like radar, like UABs and where you bring together the requirements, the budget, the acquisition and the user community, and you essentially do a set of trade-offs in a holistic and coherent way. And that's not really done today. And I think that's the way to bring industrial capabilities into account. And if you begin to shape acquisition strategies that way, you can do things like address supplier-based issues. You can say, uh-huh, let's have some competition at the subsystem level in program A and B and C. We can eliminate some program redundancy if we do that too. Foreign sources of supply. The QDR mentions foreign sources of supply. I think we need to look at our defense industrial base in an expanded way, and indeed we have, in practice in the last eight years, as the study we did showed, foreigners have gotten a good portion of the uptick and the bull market. And most of the major foreign firms today have secure facilities here, a ticket to the dance. And I think we need to take more steps to encourage more globalization with our industrial support and support of that. And my second to last point is on export controls, which is segues, this issue of globalization segues into. I was heartened to see in the QDR and in the present Union the focus on export controls, which is the key impediment to this kind of globalization and collaboration with allies. I just came back from a trip to the UK where senior acquisition officials there are now talking about ITAR-free programs. When His Majesty's government, our closest ally, starts talking about ITAR-free programs, we need to listen. ITAR is not the root of all evil, to be sure, and we need export controls, but we need to listen. OCI is an important issue going forward, and I know the roles are coming out. It is not directly mentioned in the QDR, but I think having organizational conflict of interest rules in implementation of the Weapons Equipment Reform Act is a critical issue for the industry going forward. And I think there's some things that need to be done here, and I do worry here that we need to set a rules that provide greater certainty to industry. We need to carve out the most sensitive tasks from these omnibus contracts on the demand side and lay out a policy that says it's good to have omnibus contracts on the support side. Those omnibus contracts should carve out the source selection and test the eval activities that are creating these conflict situations. I think we need some merger guidance here on what happens when you have a company with a lot of support services buying a company with products in the same field, and I believe that we really need to look for some guidance here to say that we're going to have structural solutions in those kinds of mergers. Firewalls don't work. Finally, I think we need a set of regs that create some safe harbors. I don't think it makes any more sense to give all the discretion in this area to program managers to carve solutions out to OCI when the solutions affect the structure of the industry. I think we have to create some broad safe harbors and clear rules. For example, if the answer is that a separate subsidiary will cure and mitigate some OCI's, I think we need to lay that out explicitly and not leave the parameters of that to a program officer. If collaborative activities between company A and B are going to give rise to OCI's in an industry where teaming is the norm, I think we ought to not leave that to a program officer to do. Finally, on the merger review, as we get into this era again here of flattened demand, you're apt to see more consolidation and I do think again we're going to look to some guidance here on a couple of points. One is I would like to see some guidance on distinguishing innovation markets from legacy markets. I think we probably should be more willing to accept consolidation in the legacy area than in markets like a UAV market where innovation is so critical. Two, I think we have to think about the role of private equity and what is the feeling in the Pentagon and the role of private equity as a steward of a sector where we really would prefer stewardship with a long-term vision in mind. Let me close on that but I think the question is, Brett needs the resources and can the Pentagon give them the resources to take the set of tools I just outlined and use that to implement the vision here articulate. Thank you. Thank you, Jeff. Now we'll turn to an exploration of what is perhaps one of the most complex dialogue arenas in western civilization and that is the dialogue between Wall Street and Washington and for insight on that and the industrial base views of QDR I'll turn to Byron Callan. Byron? Good, thank you. Thank you, David. Thanks everybody for coming here this morning. I want to try and keep my thoughts fairly brief and start out with the financial markets perspective. I guess the first thought is just as a QDR talked about a nuance defense industrial base the financial markets are obviously very nuance as well we tend to think of Wall Street as maybe akin to the very large defense contractors but the financial community is also very nuanced it's not just the large cell side research analysts that are quoted in the newspapers it's a whole range of institutional investors both here in the United States and frankly globally Jeff just mentioned the private equity community there have been a very important player and I think will continue to be a very important player in shaping the industry venture capital is important at sowing the seeds for the young emerging companies and clearly commercial banks that provide credit lines and assist in the merger and acquisition activity are part of this broader financial community too so I'd expand that notion it's not just Wall Street it's the financial markets in general. I do think it was very significant that the QDR chose to acknowledge not just the defense industrial base in approximately two pages but that paragraph about the acknowledging the role of the financial community in basically maintaining and shaping the industrial base was unique it's not just the United States it's something I haven't seen in the white papers that have come out of Australia or the French white paper last year the UK paper is a green paper yesterday and I think there was one on acquisition paper that just came out so the capital markets have been a key strength in shaping this industrial base and I think that role and that acknowledgement is very significant going forward my perspective right now that the large public companies are in fairly good shape financially but the small and the mid-sized companies are going to continue to tap capital for their growth needs and for consolidation I think it's going to continue there will be restructuring of the industry going forward and really kind of across the spectrum for the publicly traded companies at least equity is going to be an important component to retain and attract people and provide stable career paths I know Boeing for example recently did an equity contribution their pension plan that provided security for their people going forward so this isn't just about the mergers and acquisitions or it's also about a component of compensation that the defense institution has to compete against the private companies or public companies outside of defense as well that I think is important there was a lot in the industrial part of the QDR about dialogue and transparency and I think this administration has really gotten off on a good start Brett mentioned the meeting recently with Wall Street analysts I think that's extended to CEOs and industry as well too I think those are important means they're not obviously ends in their self from my perspective the most important issue for the financial markets is going to continue to be risk and return I think the nature of this piece is that risk is just going to be inherent in the defense industry as it is in other sectors investors inevitably want stability and predictability but the future is have to be unstable and unpredictable nothing really unique or insightful in that comment but there's always going to be that tension this dialogue and openness and transparency I think can help that but even other parts of the QDR suggested that there's going to be continued uncertainty and opportunity and things like the aircraft modernization programs happens to spare parts demand as you flush out older generation aircraft those are parts that the financial community is just going to have to work through there was language about fixed price contracts and the alignment of profitability with performance so those issues are going to continue to weigh on how investors look at the sector I think in the past where capital has really been spooked by what's happened in the defense sector has really come from these big surprises sudden surprises abrupt changes the PBD 753 decision in 2004 where we saw a number of programs canceled abruptly the F-22 C-130 that came as a surprise I think really caused people to pull back from this sector the other obvious era or periods where investors have shied away from the sector have been where risk has overwhelmed a particular company Lockheed in the early 1970s with the C-5 program or McDonald Douglas with the C-17 program in 1990 so I think this dialogue and transparency that was addressed in the industrial base I think it's very important that a good part of that is going to acknowledge the risk and returns that are expected on both sides of the fence finally the QDR can't encompass all the issues we could have a thousand page document I think pretty quickly and maybe two or three hundred pages on the industrial base but there were some things that were kind of left hanging and maybe these will come up in the Q&A discussion about the QDR and the industrial base I think Brett mentioned the comment about sunset industries for business models I don't really know at this point what is a sunset industry I've got my own ideas but we could argue ten or fifteen years ago that maybe track and wheel vehicles might be something of a sunset industry and yet a program like M-Prap has proven how important those shifts and changes could be there was a comment in the back of the room about Willow Run and it's just a reminder that not just the defense industry it's the broader economy and the skills and capabilities that the broader economy brings to the defense to the national security United States so thinking this about how do we sustain a qualitative advantage in defense when other companies have access to technology and lower cost manufacturing skills I think is going to be very critical going forward and something that we could write a book on easily Those are my remarks. Thank you, Byron. Thank you very much. We'll turn now to the services side of the equation as I mentioned earlier defense now spends about as much money under contract with services as it does in procurement and research and development that's a side actually to call it an industrial base sort of implies a level of imprecision in the term but as some of you know we here at the Center for Strategic and International Studies have for a number of years spent a good bit of analytical time on what we call the professional services industrial base that is those industries and companies and workers who do provide those services to national security and so now we'll turn to Alan Chavotkin for his reflection interviews. Alan? David thank you and good morning ladies and gentlemen thank you for the invitation and the opportunity to be here the professional services council is a national trade association represent over 340 companies all of whom sell professional and technical services to the federal government so we naturally focus on the way the defense department buys goods and services generally and services in particular and we're struck by the QDR because it starts with a description of some changing department missions and of course in our perspective the industrial base exist to support the department's missions and the recognition of this evolving change in missions is important because the industrial base has to exist to support that. The QDR talked interestingly about a whole of government approach reiterating some of the secretary's views and support of the president's views of a 3D strategy of defense diplomacy and development but then went on to raise some concerns about the quality of the interagency coordination and so I think we've got some goals set out yet some challenges ahead. It talks about the importance in the industrial base of a total defense force which recognizes the contributions that the active military and garden reserve can make along with the defense civilian employees and the contractor community and the contributions that each of those make yet it proposes to reduce the amount of support contractors working for the defense department and I think there's some questions about priorities and signals. It recognizes that the industrial base is not monolithic in fact I'd submit that it's not even very well organized and so as we look at differentiating among the many suppliers I think it's important that we at some point and this QDR isn't the place to do that otherwise it would be 10,000 pages not simply 1,000 or 160 to look at the contributions and the role of domestic versus foreign almost no mention of small business but the role of the small mid-tier and large firms that we're looking at. The differentiation between platform companies and integrators and services providers. Brett touched on the importance between prime contractors and subcontractors particularly those who are critical technology providers and what my honor talked about the role of financial institutions. Secondly there was a discussion of the workforce although not a very elaborate discussion of the workforce repetition it seemed of some of the clear departmental policies already in place to grow the size of the federal workforce and the defense department workforce in particular and that's a goal that we support unquestionably that the defense department's workforce has atrophied not only in the critical areas of acquisition policy but in some of those technical skills as well and it's important to approach to regrow some of that but it has to be done strategically and I think the guidance that the Deputy Secretary of Defense has issued some of the statements that Under Secretary Carter has made and the Office of Management and Budget have discussed focuses on that strategic nature identifying the key skills and how to accomplish growing the workforce in a strategic manner. Unfortunately what we've seen so far is growth that is opportunistic rather than strategic and some of the insourcing and I could take the rest of the time to talk just about insourcing but I won't. We see much of the insourcing activities taking place in the defense department today being driven by the budget rather than by any overall strategy and I think to the extent that workforce issues can be addressed as part of a four-year strategy the department has to come to the recognition of how it wants to address the insourcing issues and baked into that budget are some arbitrary savings from this insourcing activity and I think that needs a little bit more inspection as well. So if we've got a new strategy for the department's missions and we look at an industrial base capability we have to look at how the government buys goods and services and what the acquisition system is and that links these two to support the department's mission and I think as Brett mentioned in his remarks in the QDR's properly notes one size can't fit all in the industrial base and nor can one size fit all in an acquisition system. The QDR talks about the importance of agility in the acquisition but there's little indication to me that there's going to be change at the core system. What I do see is several references to developing ways to circumvent the current system whether that's the creation of a contingency acquisition fund or rapid acquisition cells these are really recognitions of the challenge at the core system and the importance of the agility and ways to make sure that the department can meet its mission and if we have that at the edges we ought to consider doing so at the core as well. We need to look then at the techniques that are available and Byron mentioned some of the techniques available. I thought the QDR did a masterful job of acknowledging some of the acquisition techniques around fixed price development for example but noted that that's to be used only where appropriate and I think that's a signal to folks that this is not the only policy to be available. In fact recent report from the Defense Business Board highlights the findings that fixed price contracting particularly in terms of development is rarely appropriate and I hope the department and its acquisition techniques would take a look at that in a slightly unrelated context Norm Augusting once said that the area is unblemished by success and I think he could talk specifically to fixed price development as that poster child. Finally if we understand that we have a workforce available and an acquisition system that can support how the department buys its goods and services and we're using the right techniques to do that then we have to look at a set of potentially conflicting policies and priorities that have been addressed and Jeff mentioned some of them and Brett mentioned some of them but I think the department of the QDR doesn't really talk about how to balance some very significant challenging priorities and policies from competition to the role of organizational conflicts. How do we handle job retention and creation particularly at the technology level with issues about buy America particularly in contingency contracting. There's a whole list of policy issues that I think are touched on because of the strategies in the QDR but certainly not resolved. I think that gives Brett and his colleagues in the department plenty of opportunity for more work. I'm hopeful that the partnership will bring us lots of opportunity for dialogue but these are just a few of my favorite things. Thank you Alan very much. Now our final panel member Bill Greenwald also served as the deputy undersecretary for industrial policy during the second Bush administration and here to reflect on his views of the QDR. Bill. Thank you Dave. It's actually kind of nice to go a total last because I can say everything they've said and they've pretty much touched on most of the issues. This is I think the QDR is extremely important for the first time institutionalizing industrial base considerations into the QDR and I think that's something that a lot of outside observers and industry have been hoping to see and I think it's a very positive first step. I think we've heard the number of things that are in there and the QDR industrial base sections really asking the right questions so I think I might take this just to the next step and say well how should that be implemented and what are the challenges to implementing it and I think the first issue to do is to gain visibility of the supply chain and to do that I think I have to key off on the analysis point is you need the capability and the workforce to do that and since the reduction in the acquisition workforce over the last 20 years industrial base analysis has not been as strong as it used to be and to build that up it's hopeful that the of those 20,000 acquisition workforce positions that the secretary would like to get hopefully a few of those happen to be industrial based analysts and who can really cut across and look at the industry Brett has some tremendous staff and some tremendous capabilities there but they need to clone them and they're so good that even David's hired one of them so I mean it's I'm not done that's a good question to look into that so I think the workforce is going to be key and therefore but it's not just going to be the workforce that's hired it's the getting into the PEO office and getting into the capability managers to have them start looking at what is it we need to cut across these programs and getting into DDR&E and the S&T community to look at and institutionalize these are the type of industrial base and partners we're going to need in the next decade and beyond once you have a visibility into the supply chain you really need a criteria for intervention if you're actually going to intervene and that is going to be one that's going to require a lot of thought and a lot of analysis but you can break it up into various time frames like what is it you're going to need to do rapid acquisition in other words what do you need to support the NRAPS and the counter IDs and the ISR needs of the future and how is that industrial base looking into the midterm kind of your typical MDAPS and smaller programs and then out into the future as far as future technology now I know your office started developing that type of criteria in a number of studies dealing with the S&T base going out in the future and that criteria may be a good one to start applying to the various segments what are those technologies and what are those areas where we need to be ahead of the world what are those areas where we can partner with our European and other allied industrial bases and what are there is that we're happy to be dependent upon the commercial industrial base and so that's getting that criteria for interventions I think is going to be a key I think the third area to be successful here is going to be funding and there are a number of programs designed to how to intervene in the industrial base and to support the industrial base whether it's EPA title three money or whether it's Mantec money but the problems that one faces in these are more near term than that in other words you faced with how do I intervene I've got a supplier that's going out of business what do we need to do here and where do you get the money well if it's within a program probably the program is going to deal but if this cuts across a multitude of programs it's very difficult to get the resources to actually help to intervene there and I think the congress tried to set up what was called the industrial base and innovation fund to do that and the issue is whether that is the appropriate mechanism or not but something like that is probably needed and then the department is going to continue to partner with the commercial industrial base an industrial base policy needs to really look at the acquisition process and the acquisition system and the incentives and disincentives to non-traditional commercial contractors continuing to be in the industrial base and this is a long long history acquisition reform of the mid 90's essentially tried to bring these companies in I think was very successful some of that is that consensus may be under threat at the current time so this is a good time to ensure that those companies and those barriers are maintained and then obviously there are a number of areas where there are still barriers to bringing in non-traditional contractors to help help the base and obviously looking at whatever disincentives to future innovation that can so with that since Jeff pretty much did all the rest of my topics I will key it over for questions alright thank you Bill let me give you an administrative announcement before we proceed into the questions at 10 o'clock and it's right now about 9 minutes after 10 at 10 o'clock another event began here in the basement on the other side of that back wall the Philippine Foreign Minister is giving a talk so we're not going to go over but I want to alert you to that I don't actually we won't take a poll on which one you'd rather attend but I do want to alert you to that because there may be some they've been asked to be respectful of our needs for noise abatement and we've been asked to do the same and particularly when we wrap up and get ready to leave I'll ask you to exit with the quietness of new fallen snow I am also here to tell you that it is not yet snowing and so we're all still fine in that regard let me now open up the floor to questions we do have staff with microphones I would ask you to raise your hand I'll recognize you you wait for the microphone identify yourself and your affiliation you can direct your question to one, two or all of the panel here let me start over here on the left since I ignored that side of the room my left your right during the first round of questions here comes the mic Bill Courtney with CSE the last supper was referred to how did the consolidation after the last supper work out on balance with any lessons learned that would be helpful for what may lie ahead if there is flattening and perhaps decline in defense spending well I mean I don't think we truly know the answer to that I think one of what I take away and this is just a personal view having been in the industry when it occurred was that it was necessary it was the right thing to do at the right time I think what we struggle with is from a business point of view is largely a consolidation of stock symbols not necessarily capacity and we perhaps overlooked as a department the need to promote the consolidation at the capacity level so we weren't working at 20 or 30% of a factory's capacity and the taxpayer was paying that overhead rate so I think again I think it was the right thing to do at the right time and tremendous respect for everyone who was involved in that process that they lived through it I think if there were to be not another last supper because I don't think that's going to happen but maybe a first breakfast at some point that we would try to think more about the business implications the financial implications and what incentives and disincentives we would look to I'd actually be interested in everyone's comment on that particularly buyers because they see this in the financial community all the time the implications of that consolidation I think you certainly created maybe Jeff mentioned it and I alluded to I think for a number of the companies the large companies that were at the forefront of the consolidation you've got a much more financially stable industry right now the large companies some have more cash in their balance sheets and they do debt right now so you know with whatever comes out of the budget in the next couple of years I just don't think the company should be able to work through this without the kind of perils of Pauline drama we've seen in the past of Lockheed I alluded to in the early 70s or McDonald Douglas in the 90s so I think from a financial perspective that's probably the most significant change. If I could just add to one of the other implications is the way the department approached the marketplace and so the growth of large IDIQ contracts, multiple award contracts, the growing the size of the procurements in part as a result of the shrinking of the acquisition workforce those two factors I think both have to be addressed one on the industrial side and one on how the department goes to market thus over time we've lost some of the agility and flexibility that the department has I think both are from a capability standpoint as well as a contracting standpoint we're now seeing the results of that consolidation as new markets and new requirements are emerging and sort of compromising a little bit on the flexibilities I mean as I alluded to with the outset there are some lessons learned from it one is I think as we go into and as we go into a declination period and a consolidation period we need to be more vigilant about the effect on the industrial base the fragilities that emerged in the last cycle the debt on Raytheon and Lockheed or sort of known but really only became a focus late in the game and I think there needs to be this goes back to the monitoring point more monitoring of this I will say it wasn't inevitability and the question you have to ask yourself do we have a sufficient number of robust competitors in the core sectors in the industry and I think we kind of came out of it and the answer you know special exceptions the answer is by and large yes we had as much competition as we can afford in the major sectors alright other questions I'm having trouble seeing hands because actually the lights are more bright than your faces so I think there's one in the back and then we'll come over here so yes my name is Raj Sharma from the Fair Institute and my question is pertaining to some of the issues addressed around bringing in really third and fourth tier suppliers or attracting new suppliers that are capable of addressing some of the emerging needs suppliers that are really bringing new and emerging technologies and could you speak to a little bit about we've written a paper around some of the barriers to entry in the in the federal market from a defense market specifically defense sector specifically what do you see as really key barriers to entry and key barriers to attracting those types of companies that are developing new and emerging technologies I guess I'd start by saying having spent my previous career working with many of those companies you might want to switch your question to what isn't a barrier to entry into the federal marketplace and this is why I think the QDR was hopefully effective in at least illustrating our commitment to begin to understand the complexities of that issue because everyone up here has a different take on it there's a financial take on how they get access to capital Byron alluded to the fact that many of our primes have two year backlogs at least our second and third tier may have six months some 12 months the restriction to access for capital for them and the procurement process we have and how we pay them and how they can get paid from the primes has a tremendous effect on their capacity for both innovation and growth and we have not adequately addressed the complexity of that issue there will always be barriers where we can't rewrite all the defars that would need to be written it's just not going to happen and that's why I go back to that we have to rule with reason we have to do what's practical and what's in the best interest of the taxpayer and the warfighter one of the vehicles that I think has been quite effective is this rapid acquisition process and to the points that were made earlier there's always a danger of that process and in fact I've seen it with one program where I was looking that something got into a rapid acquisition process with an IOC I think of 2018 and so as the system adjusts the building will adjust so that's always a danger but I think it's a serious question on a whole bunch of different levels is how we promote this innovation and I think what's exacerbated and at least in my concern what's exacerbated the issue is the collapse of access to capital and I see this quite often in the smaller firms and it's not just the firms that are trying to offer innovative solutions for rapid deployment it's the second and third tiers providing to programs of record that can't get access to capital that's forcing the primes to actually make investments that are in fact unnatural acts and so I don't have an answer to that question I think we don't understand the intricacies of that question well enough yet. Let me add to historically the concerns have always been around by commercial firms intellectual property rights the issue of what to do with the technology whether it can be what the export control process is going to deal with in general unique acquisition rules and regulations and auditing and financial burdens that they have to place and historically there have been a number of ways to allow those companies to participate whether it's commercial item exemptions or other transaction contracting authorities and the issue I think in today's environment is we can easily buy commercial off the shelf but can we actually get modifications to those and what are those rules having to impact so I think it's we're kind of in that transition but it's a number of issues that historically the congress and the administration has been trying to address to bring access to these nontraditionals so we'll go from there. It's probably worth noting that that's an issue that you never actually get to the end of and say okay we got that one fixed now what because it will constantly evolve in that way I think I saw a hand up or a couple of hands up over here let me take the guy at the middle table there we haven't had a middle table question yet on this side Joe listened in from ATK in the context of the insight before oversight comment as well as some information that I've heard from Secretary Lynn this past fall who is kind of framing the issue which is operating the railroad at the same time you're laying the track and a lot of good ideas came out here today from the intertemporal nature of looking at the industrial base in addition to the intertemporal time way to look at the industrial base how do you intend Mr. Lambert to prioritize these great ideas that are here and getting that insight at the same time that some congressional decisions are pending and industries are changing and reforming and restructuring very quickly at the same time which will ultimately impact defense capabilities well of course I constantly and fervently agree with Secretary Lynn let's make sure we get that sorry he has I mean I've known Secretary Lynn for some time he has a unique perspective having been in both industry and the government and I think his insights as well as those of Dr. Carter and frankly Secretary Gates bring again kind of a new paradigm for understanding these industrial complexities in terms of priority I have to say it is everyone said this when I came in that you're gonna be drinking with a fire hose I had no idea what the challenges that the department faces across the services and across policy you know we immediately set out to understand items better we've met with your CEO we've met with most of the company CEOs in here and that's new and what we can't figure out and I've had this discussion with Dr. Carter we don't know when and why the department stopped having these meetings and stopped gaining the insight and creating the transparency and dialogue so we are we're learning in real time and I think that goes to Secretary Lynn's comments about trying to run a railroad while you're laying the tracks in terms of priorities and I can only say that I've now learned from Microsoft Office how you move tasks to 8 a.m. but it is difficult when you get calls because our office is all these folks up here know and have had to deal with you know we have a reactionary portion which is SIFIUS and FOKAI and where we're on clocks that are not of our own making and so a lot of the priorities are not of our choosing but dictated to us by law and so our priorities literally shift daily in terms of the tactical priorities what I'm trying to do and I think what everyone has reinforced here is that the Office of Industrial Policy should be thinking ahead we should be thinking about not solving yesterday's mistakes but trying to address tomorrow's problems and I'm desperately trying to get the Office oriented in that direction we're not there yet I have to be honest and it's going to take us some time to get there. Let's go to here and then up to the front here. Bill Edgar with IHS Chains on the question around broadly around the partnership this is probably more for the panel no offense Mr. Lambert but given that you're speaking directly he used to work with me so obviously I never want to set you up with that respect because it ever comes back in that respect but around the partnership I'd be interested in your thoughts around the impact particularly as you look at developments in the UK on the East Pacific Rim Asia in terms of acquisition procurement policies if you're going on the public-private partnership model and the impact which ultimately comes down in the partnership with industry and the government's burden sharing which is heavily by the investment environment in these areas is that a role looking forward particularly with the austerity and the economy with the austerity around the budgeting right now and looking at how do you balance then the investment for the two wars and still keep the long-term investment going around strategy and if so or if not rather you know how does that then affect the transatlantic relationships when the criteria for the businesses in Europe that we want to rate are changing against the fiscal of course and the budgetary constraints that they're under. I'll try the first question and maybe Jeff you can go for the second I don't know. PFI's and such and the partnerships that are going on around there rely on a long-term contracting arrangement and now there are energy savings performance contracts in the US which are ten years long they can go a little longer and there are a few others like that but in the last few years what we're seeing is the length of contracts actually going down and so that's you're going to have a hard time getting industry to make the type of investments that they're making in the UK long-term because they need to know what the return is going to be in five, ten years and if you only have a three-year contract you're going to have a hard time making having those types of partnerships and since the acquisition system is kind of moving away from that here while our allies are looking for cost-saving ways to partner with industry and having more longer-term contracts so I don't know about as far as the latter part as far as how mishmash is going to occur. I think industry will kind of just adapt differently and while our partners overseas may have a different perspective and ability to do that the Department of Defense will want to do that or not and if they do then obviously there might be some opportunities for them because they have experience with that. Well I don't have a lot to add. I agree with what Bill just said I do think an unfortunate circumstance arose here over a period of time when the other transaction authority here sort of withered on the vine so to speak under political pressure and I think that's unfortunate. I think in a period that we're entering again here you would like to see more creative use of that kind of authority you would like to see models like leasing in some contexts like PFI type models I heard a laugh over here but it's the environment for it has just not been great but it may be that as the numbers flatten these types of things work I could give you one example. There was a program called NextView I believe it's called. That's a good example of the kind of future we ought to think about in some of these areas. I mean this is a program that's designed by the Defense Agency that buys imagery data and in the past the idea would be let's build a satellite system or build a satellite system for this kind of imagery data. They did this a different way rather they said we're going to let a long term contract to buy imagery data here's the data we want and we'll sign a long term contract with the winner and then the winner signed the contract and took the contract to the bank and got project finance and went and built the satellite system. That's the kind of model you would like to see particularly in areas where there's some commercial market going on and the companies can sort of value the service and figure out how to do this and you get the government out of being a program manager out of building satellite systems basically. I do think it would be great to be able to see more creativity in this field as I said unfortunately the political overlays made this very hard. We're reaching the end of our time I anticipated actually the time for another question but I didn't anticipate the time for the answers but it's not a slap because I actually think that was a very serious question and deserved a thorough answer as did all of them. Clearly we have only begun to scratch the surface of the issues here this morning and we could go on for another hour and a half and move forward. I want to do a couple of closing remarks. We do try to end these things on time because we recognize people have other commitments as well but we're happy to stick around and take some questions and mics are turned off and help you out in that regard. These are clearly critical questions that have been raised by everybody up here this morning. CSIS is going to continue to analyze and report on these and to hold events like these to sort of further the public debate because this has been a neglected area for many, many years here. What did we hear this morning? We heard Brett Lambert describe DOD's commitment to doing a better job but we heard all of the panel describe ways in which they're going to need a lot of help in order to be able to execute on that commitment and I think that as we move forward collectively across the government it's going to take all of our efforts. Where do we go from here? The QDR actually cites a number of additional areas in need of study and from space and anti-access to forces and manpower and it's not clear what the impact of those studies will be. Clearly some programs and contracts are going to depend on the outcomes but we're not going to have them in time so Congress will have to make its own budget decisions in a bit of a vacuum and I think they are beginning to recognize that as a result of the hearings this week. Those of us who analyze defense and national security are still waiting in addition for the information that we usually get with the budget so we can actually tell whether what the QDR says it did shows up in the budget and in the fit up and we'll see that hopefully over the next few days and weeks and it'll give us the details to really be able to provide a judgment here. And then finally there is as most of you know a congressionally mandated panel to review this review. Earlier this week it was announced that that panel will be co-chaired by former Secretary of Defense Bill Perry and former National Security Advisor Steve Hadley. I would commend and I think everyone here would commend that that panel would in fact pay some attention to these industrial base issues as it undertakes its review and reports out to the Congress in late spring and early summer. So I think that this is going to be an ongoing series of discussions. My final thing is I would like to ask you to join me in recognizing and acknowledging the CSIS staff who made this event possible this morning. I'd like them to please stand and let's give them a round of applause. So before we go I want to remind you about the Philippine Foreign Minister next door. I want to thank you for coming. I want to thank you even more for your attention and support on these issues. Have a great snowy weekend.