W. BOWMAN CUTTER Questions

Will adversary nations not see that information warfare techniques will be the best way to counter United States strategy? How vulnerable are we to information warfare? What is being done to defend our information system? With history as a guide, will we not someday need information warfare arms control?

In view of the diminution of the threat from the former Soviet Union and our record of having new systems not able to meet performance requirements, what is the hurry to shorten the cycle for major weapons programs? Why not make sure technologies work?

PAUL G. KAMINSKI Answers

Let me comment on the last one first, Bow, if I may. The first comment is the two are not mutually exclusive, that a shortness and having things that work are not necessarily at odds. A key and reasonably new tool being used by the Department is this program called Advanced Concept Technology Demonstrations. The emphasis here is on the word "concept," which, as we are looking to do some things in a different way, the idea is to built a prototype system, to infuse the prototype with the key features that need investigation and evaluation, and before building a large number, to field that prototype system and get it in the hands of users. We so often in the technology community underestimate how creative users can be in applying some of the equipment that is developed. I would also say in my own experience, very often the critical performance of the system is determined by how creatively it is employed. The idea of this Advanced Concept Technology Demonstration program is to field a small number of prototype systems, get them in the hands of the user, and then there are three outcomes that can happen. The first outcome is that this is not very useful, and that is the end of that: we have made a fairly small investment by fielding the prototype system.

The second outcome can be that this is extremely useful, and we want this in large numbers. The plan then is to jump-start our acquisition system to put this in, not at a milestone 0, but at a milestone 2 kind of phase, where we are ready to complete engineering and development and put this into production. Now the risk ahead is the risk of being able to produce this in numbers, not the risk of whether this will work operationwise.

The third potential outcome is that this is not quite good enough, but please let us keep the prototype system because it is useful. That is not a bad outcome for some of our applications in fact, for a number of information system applications.

Bo, let me take a whack at the earlier question, and let Craig comment as well.

There indeed is very high leverage to our information systems in terms of having platforms that are fielded today. One of the ways to get so much more out of those platforms is to equip them with what I would call "off-board" information, information driven from other sensors to provide a situation awareness, a picture of what is going on. That is very valuable to us. As it becomes clear to our adversaries how valuable that is to us, they will be looking at various means to remove that capability for us. So the information warfare aspects are very important.

This is a complex field. I think we pay significant attention to it in our military operations. We should be and will be paying more attention to it in our military operations. But I would note another issue that was not addressed in the question. It is that the information warfare is very broad. It is not limited to our military operations. It extends to our whole national fabric, and it is a complex issue that we are going to be dealing with as a country in many ways.

CRAIG FIELDS Answers

The only thing that I would add on the question concerning information systems is that even in the narrower focus of military affairs, the breadth of systems that are related to battlefield success is greater than most people think. So it is not just Command and Control systems, it is not just embedded systems in various aircraft, the weapon systems and so on, but it is also the systems of logistics, the systems of personnel, and the systems of medical support. It is not only systems that are owned and operated by the Defense Department, but it is the employment during wartime of civilian systems plain old telephone systems. It is a very broad issue that has to get faced. It is one that DOD is facing jointly with NIST. They have to work hand-in-hand on this. As long as we can maintain a position ahead, which is true today, I think we can do quite well.

W. BOWMAN CUTTER Question

How do you counter claims that fiscal policy, or any tax credit, capital gains, investment tax credit, etc., is more effective than federal technology partnerships in terms of stimulating technology innovation and commercialization?

MARY L. GOOD Answer

The argument of whether you do "either or" is a false argument from the beginning. The tax infrastructure in the United States has always been used to focus on things we would like to have happen. For example, the whole issue of home ownership is really based on being allowed to deduct your interest rates from your taxes. Tax structure has always been used to focus on outcomes that the general public would like to see. Tax policy is very important. You can design a tax policy that is very inhibitory to private investment, and so the tax structure is extraordinarily important. It needs to be designed to the best of our ability to support investment and innovation and creation of wealth within the United States. The issue is a false dichotomy, because just to fix the tax structure will not necessarily fix technology issues. One can prove that by simply looking at how people in the past have used those tax incentives.

The research and development tax credit is an interesting case. The Administration does believe that is an important tax credit and we should try to continue to have it. It would be very important to have it as a permanent tax credit.

There are a couple of reasons for that: One is that it is sort of symbolic, that you really do believe in research and development in the country. But much more importantly, there are industries for which it is very important. For example, the biotechnology industry, which is very research and development-intensive, can use it and has used it very effectively.

However, if you look at some of the other industries, what you find is that the research and development tax credit actually never changed anybody's behavior in the sense of either using more of their money for research and development, and the decision of how they spent their research and development was not based on whether or not their tax credits from the research and development tax credit would improve.

So the issue is to look at the innovation model that is evolving today. You are absolutely right on with respect to understanding the innovation model and then filling in the gaps so that we will be in a position to actually fuel the new technologies beyond generation two.

Paul and I were in a meeting the day before yesterday. One of the major semiconductor companies in the world put up their data. What it said is that in the three generations that I spoke to you about the one that they are presently manufacturing, the one they have in pilot, and the one they are developing the amount of research dollars that are spent beyond model two is less than four percent. This is one of the most profitable companies in the United States today. They do need to spend on that kind of process and product improvement for those three models. But at some point, if you do not put money into something that is beyond model two, there will come a time when there will be no model three. They were making the argument that the investment that the Defense Department makes, particularly in engineering research, was absolutely crucial to their survival.

The issue of making choices, between the tax structure and technology development, is a false choice, I think. They really are different. You do want tax structures which are helpful to innovation and growth, but on the other hand they will not in and of themselves guarantee that we have a technology base that will also fuel that growth in the future.

W. BOWMAN CUTTER Question

The dollar growth of the ATP program would stress the best-managed of organizations. Why should anyone believe Commerce is up to the job?

MARY L. GOOD Answer

There are two reasons why this program works and why it has not stretched the capability of doing it correctly. I deliberately put that chart up for two reasons. One is that it has not grown as fast ss many other programs. It started with a $10 million commitment in 1990, which allowed you to do a very well worked-out pilot to see how it worked. It moved the next time up to about $35 million or so, so you could regroup and do the kinds of things that needed to be done to revise the program. But once we have the process in place this is a competitive program that we are not doing in-house once we have the right people in place and you have the competitive process in place, it is not a difficult program to expand, it just is not.

The other issue here is that the overhead on this program is very small. The total project management team at NIST is 55 people, for the whole $430 million program, because the money is spent outside the government. In fact, it looks very much like what the National Science Foundation does in the sense that their overhead is about the same magnitude. For every dollar the government gives it, the National Science Foundation still delivers over ninety cents. That is true of ATP as well, and that is very important to remember.

Once you work out the mechanism for reviewing the programs once you work that out and you have all of the reviewers placed and you have all of the cards of the people you have to call to do the reviews it does not take very much to increase the output from $200 million to $300 million. It really does not. It is not a knowledge-intensive chore, once you have worked out the bugs.

W. BOWMAN CUTTER Question

In the past dual-use has foundered on the legitimate need for Defense-unique characteristics. In the past these were met by MILSPECS and Defense Production, but now we must forego those. Are we not risking battlefield failures due to heat, interference, or whatever?

PAUL G. KAMINSKI Answer

Yes, we are risking some of those as we move to some things that are untried or unproven. The issue is to try to make informed judgments, Bow, on where commercial equipment can be applied and where it cannot be applied. Our move away from MILSPECS wholly in the Department causes us to have to bring some more thought to the process and more carefully look at the pieces. Our major thrust has to be on the side of pushing forward much more aggressively.

I can remember experiences back about 10 years ago, where it was absolutely required that we have ceramic packaging for our Defense semiconductors because they were used in very hardship environments, and we could not operate any other way.

I remember being at one of the DELCO operations in Kokomo, Indiana, looking at their semiconductor line, and what was being produced there were semiconductors for spark controls. These were going on top of an engine block, and they were being encapsulated in plastic. They were not having any problems with them at all. I could not think of a much more hardship environment either, from the standpoint of vibration, electromagnetic interference, or the fuel contaminants that were around.

That opened some of our eyes a few years back. In fact, Bill Perry and I were together involved in seeing that operation. The way I would describe this is there is risk in moving wholly away from Military Specifications. There are areas in which a military classification is probably appropriate. But if we balance the gains versus the losses, our experience in the past has been relying wholly on Military Specifications. What we need to be doing is moving this back to an even keel, to trade the risks and the rewards knowledgeably.

G. BOWMAN CUTTER Questions

There are too many federally-funded laboratories. All federal laboratory budgets are being cut. When will we wake up to the fact that we are cutting the best, and the best without reference to quality? Why do not we fund only the best and have truly national laboratories that work with industry and are not tied to the parochialism of any one government department?

CRAIG FIELDS Answers

Why don't I say some words in support of Mary's budget level first? I actually would like to, and get on to that question later on.

The thing that made me supportive of your budget growth, Mary, was the following calculation: This actually was asked of me by Congressional folks a few years ago when it was being talked about. The way it operates, ATP is not unlike the way ARPA operates, or DARPA operates, and the limiting factor is people. In ARPA it is replacing people, it is folks coming and going. In your case it was scaling up. I have had some experience with ARPA as to the approximate amount of money someone can sensibly manage and achieve good outcomes. I have had some experience, in hiring: How many could you reasonably hire in a year? The fact is that your budget growth is well within the range of hiring good staff, within that mechanism. Now, with regard to the laboratory issue, there are really two parts to the issue, and I think they have to be carefully separated. One was the concerns about quality, and the second was the concerns about management oversight. They are really very different.

With regard to quality, I agree with the questioner. I would like to have the best people. If we have to downsize I would just as soon performance be one of the major factors in deciding what we are going to do. I do not like budget cutting just at the same percent from everybody. I think that is, if you will excuse the vernacular, a cop-out in management, and I do not know what else to say about it. So I am in agreement.

With regard to management oversight, there I really can't support the notion that there should be one person, organization, agency, whatever you like, overseeing all the federal laboratories, national laboratories, whatever, because in fact, almost inevitably they can, should, and will have different expertise, different capabilities, different foci, and different sort of technical directions. If you are going to have management oversight at the federal level, you have to know what is going on, and that really is in the mission agencies, and it is different among the mission agencies. Furthermore, by having that management in the mission agencies you stay close to customers, which I think is absolutely critical, rather than being further away from customers.

W. BOWMAN CUTTER Questions

Has there been any word thus far concerning what has been decided about TRP in the conference on the DOD supplemental? If TRP does not continue in fiscal years 1996 and 1997, will the dual use and matched funding programs continue within ARPA programs?

PAUL G. KAMINSKI Answers

With respect to the first question, I do not really have good insight today on what is likely to come out of the conference. My best guess would be that it will be a position between that taken by the Senate and the House, and that the ATRP program will survive, but it will be wounded somewhat in this process.

With respect to the second question, I think this dual-use program that I was describing is at the core of what the Department is doing, and it will continue. And, in fact, this dual-use program also is not very new. If I look back at the history of ARPA we have been at this a couple of decades, at least, doing this in a fundamental base, leveraging off of what is being done commercially. This is not a very new idea.

The scope has been expanded somewhat, and I am pushing on this much harder to be able to feed our major Defense systems with a richer stock of commercial components and subsystems where it makes sense to do that.

W. BOWMAN CUTTER Questions

Real-time intelligence and acceleration of Command Control functions to revolutionary speed is high-tech intensive and will affect both Force structure and operational doctrine. How are these advances being adjusted to within the rest of the Defense establishment and Defense institutions? Can they be affected in the absence of significant procurement?

PAUL G. KAMINSKI Answers

Eventual adjustment of introduction of technology to reduce Force structure is a slow process, because it takes operational acceptance of the technology to really be convinced it works in such a way that people are willing to trade Force structure in exchange for that. I think we have some very enlightened military leadership in the Department today, a group of people who are willing to make those trades, but there still is the "show me" aspect of it that is a real issue that we have to work through.

You can see how this advanced concept technology demonstration idea might be a factor in this process, in being able to deploy equipment, and in showing in how it does begin to work.

I would cite for you an example concerning slowness of this process: About 20 years ago we first proclaimed the value of precision-guided weapons, the idea of one weapon and one target, and 20 years ago it was mostly a proclamation and not much of a reality. In the last 10 or 12 years it has begun to change and become a reality, as was illustrated in Desert Storm.

We are just now beginning to make adjustments in our Force tables and logistics to be moving in that direction, because it is been sufficiently proven to people. We have a fair amount yet to go to bring that to closure.

These advances can be affected in the absence of significant procurement, but certainly they will be affected much more with growth in procurement. Let me just comment a bit on the Department's plans here. We are in the midst of a procurement pause because of the transient that I was describing in Force structure. As the Force structure reaches steady state, which it will do over the next year, our investment in new systems will have to increase. The plan in our future-years Defense program is to increase procurement by 47 percent.

There is still leverage in these applications. The Army has a program; and it is going forward in terms of digitizing our battlefield: Putting digital communications into the major platforms and netting them all together so the commander of a tank has a picture of what his whole unit is doing, where they are, where the enemy is deployed, and what the objective is. I think you can see that with a small investment in an applique system, you can greatly multiply investment in the tank.

It still requires procurement to buy and deploy the system, but there is opportunity for information systems to collect, diffuse, and provide external information to offer leverages that are usually 10-to-1, and sometimes 100-to-1, vis-a-vis the base platform that was in place. A more expansive procurement program is planned to get the full, broad application.

CRAIG FIELDS Answers

Every company that is trying to employ new technology that is analogous to the Advanced Command and Control and Intelligence technology you allude to has to undergo a process with highly compensated consultants, called "re-engineering" or "re-invention" and change the business practices and business structure in order to get real effects on the business, rather than just get the boxes on the desks. The same is true for the Department: The strategy and doctrine will have to change. This is not a simple matter. The way it is being approached, which is very good, is to heavily employ the new technology in concert with game-simulation exercises: there is no theory; you can not go to a book; there is no equation; and you have to work it out. This is going to accelerate the process of genuine impact on military affairs.

W. BOWMAN CUTTER Question

How do you feel about bringing together participants across a value chain of industry (or direct competitors) in consortia and in ventures like this?

CRAIG FIELDS Answer

We have 10 or 15 years of experience with these cooperative ventures now. There are a few hundred in the United States, along with many abroad. I do not know that any two are exactly alike, and that is actually good news. It means you can look at them and get some sense of what works and what does not work, because every consortium is unique. I won't take the time to give a speech on what I used to call Twelve Rules of Consorting, subtitled Everything Is Possible, Nothing is Probable.

It makes a lot of sense to have consortia that have ending points, because people change their goals and ideas, so having off-ramps is critical. There are 11 other rules like that. The most successful consortia (there are very successful ones) obey the rules that we have learned.

W. BOWMAN CUTTER Questions

In many of the ATP programs, i.e., tools for DNA diagnostics, what percent of the total investment is subject to being supported by the ATP funds? In dollar terms, is it large or modest in terms of the total? And if it is small, why does it make a difference?

MARY L. GOOD Answers

It would be about a $50 million program with an equal match by industry. These are significant programs. That is why it was thought appropriate to move toward the targeted programs. Without that, it is very difficult to have an impact that you can measure in a reasonable amount of time. Each of those programs has relatively large pieces of the allocation for any given year. They are designed to be long-term, and they are five years in duration. The funding can be as much as $2 million per year per company. It can indeed be a significant amount of funding; people can do something worthwhile with it.

I think the issue here is ensuring that funding is relative to what the companies are trying to accomplish. There are projects here that do not require a large amount of funding. There are others that unless you give them that order of magnitude, it will take too long, or they will not be able to have the resources and people to do them.

The question is quite relevant. We do feel in the targeted areas that these are relatively large chunks of the budget; enough to have an impact, and clearly the companies do have an impact. The fact that there is a cosharing arrangement means that we are leveraging those projects so that the size of the project is twice the size of the government funding. When you think about getting $2 million from the government, to which you are adding $2 million of your own, you are now talking about a $4 million research and development project. Those of you that have managed research and development projects on generic technology or pre-competitive technology in the private sector know that a $4 million a year project is a respectable project that has enough rationale, resources, and people to move it effectively.

W. BOWMAN CUTTER Question

Mary, there is a rumor that ATP's budget will be reduced and the program canceled. What is going to happen to ATP?

MARY L. GOOD Answer

Our thought is that this rumor is not correct. Everything remains to be seen. Let me tell you where it is. The 1995 rescission in the House bill is $107 million, so it would pull it back from $430 million to about $320 million. The rescission, however, in the Senate is $32 million, so we will end up with a conference for the 1995 dollars somewhere between those two numbers.

We hope for the best, but we do not know yet. That conference may actually be ongoing at this moment. The program for 1995 will be reduced from what we had hoped, but it is by no means a dead program, I think.

We have been asked in some of the hearings how big a program like ATP should ultimately become. This is not a program that should grow indefinitely it should not become a miniNational Science Foundation.. We would like for it to be large enough to be a national program, because to really measure and understand what value it has, one needs to be able to reach a national audience. Our view is that, with somewhere in the neighborhood of $700 million, it can become a real national program. This would allow us to have about 20 of the focus programs and one open competition. That would allow you to turn over about five focus programs every year, and you would end up with an equilibrium kind of arrangement, which is what one would ultimately like to do. We do not visualize that this program should be unending, nor should it grow forever.

W. BOWMAN CUTTER Question

In some cases, components developed overseas may have the highest performance and be the least expensive. DOD off-the-shelf procurement would appear to favor use of these components. How does this relate to our economic and national security?

CRAIG FIELDS Answer

It is really quite different on the economic side than on the military side. On the economic side, DOD's quantity of purchasing is such a small percent of almost anything we do globally that it would be pretty unlikely that DOD's buying components (except in some very extreme cases) from a foreign company would genuinely hurt the United States economy. I think that is not a reasonable likelihood, although there could always be an exception.

One of the more interesting questions: Is there too much dependency on foreign sources in some components and in some weapons systems? The bottom line is that it is really hard to know. There is hardly a weapon system around (at least a modern one) that does not use some foreign technology and components, but that does not imply necessarily a vulnerability. If simple re-engineering would make it possible to use a domestic component, well, in an emergency that would be fine. Or perhaps with a little re-engineering we could use domestic components, but in fact, there would be just a little decrease in performance, that might be fine.

Perhaps there is not a monopoly supply. Yes, we are buying it from one company in one foreign country, but there are a bunch of other foreign countries with companies selling the same thing. You are not faced with a monopoly.

My general sense is that while there may be some dependence, there is not a lot of vulnerability. This has to be aggressively, actively managed. Many of the same issues are applied to domestic sources. If there is only one United States company selling something, it makes me anxious even though it is a United States company.

Part of my investigation of this was to do a little mini study for on economic warfare, and it is hard to make that work. The most concerted economic warfare of all time was the COCOM activity. Even there, it kept the countries just a little behind for a long period of time. Look at the international cooperation that took. In reality, this is not a big problem just one that has to be constantly attended to.

W. BOWMAN CUTTER Question Mary, how does ATP and other technology regime efforts deal with ownership of intellectual property rights?

MARY L. GOOD Answer

That is obviously a very important question about ownership of intellectual property rights. We do have a problem in the sense that the agencies across the government have different rules for the allocation and ownership of intellectual property. That is a problem, because when I look at all of those partnership arrangements, the ways intellectual property is handled is almost as numerous as the number of agencies. One has to work each of those.

The ATP program, however, is pretty straightforward. The intellectual property belongs to the private-sector investors. It is just that simple.

If it is a consortium, the consortium itself must work out how it will divide the intellectual property rights. That is part of the contract. We do not get involved in how they do that. The consortium has to work it out among the partners. We will not finalize a contract until they have worked out how they are going to divide the intellectual property among themselves.

We do have one problem in the ATP, which is intellectual property with respect to universities and non-profits. The original legislation was written so that the intellectual property could not reside with non-profits. We think that is probably not correct. The language that we are trying to get would let the consortium decide who owns the intellectual property. If there are university partners (and in about half of the projects there are university partners) the consortium should be able to decide if it wants the university to keep some of the property rights. Universities can negotiate for that. We do not think we should deny intellectual property rights to the universities by statute, but that ought to be decided by the people who are involved.

There are other issues that have to do with the kinds of companies that can be funded. That, of course, is in the ATP language. It says that the projects must be in the best interest of the United States, and the final decision is up to the Secretary of Commerce.

If the language says that if it is not a wholly American-owned company, then they must do a substantial amount of research and development in the United States, have manufacturing in the United States, and that the country of ownership has reciprocity. So there are safeguards there. The issue is to try to get the research and development done here and get at least a portion of the manufacturing done here, but not all of it necessarily.

W. BOWMAN CUTTER Questions

In 10 to 15 years United States industry will fall far behind, because "breakthrough" products from other nations will capture our product refinement markets. How can we best prevent this scenario? What can or should be done outside of government? What roles are required of government?

CRAIG FIELDS Answers

Without taking anything away from large companies, I think the strength of the venture capital industry and entrepreneurship in the United States is so profound, it is such a competitive advantage, that the probability of the outcome that was described, the peril, is vanishingly small. And that whole culture of venture capital, of entrepreneurship really does not need so much government help as to make sure that nothing happens in our Tax Code or whatever that hurts it.

I do not know any particulars at the moment that I would raise but if there is anything to be vigilant about, it would be that. That would be my first reaction.

MARY L. GOOD Answers

The only way that could happen is if we decided to simply gut the infrastructure of the country. That could be done. You could make that decision. I do not expect any of us to do so. But other than that, I think the outcome that is predicted is not a likely scenario.

On the other hand, there are some things that we ought to think about. This whole business about ensuring that we have a technology pool that everybody can continue to draw from is really very important. It may very well be that this problem of long-term research and development in the companies today is somewhat short-term; it is a little hard to say. But presently, with all of the competitive pressures which the companies are feeling, they have to go after what is a competitive product at a competitive price, at a quality that they can sell. It is important that we understand that.

Both the Academy of Engineering and the Council on Competitiveness have a study underway to look at how industrial research in particular is done today and how products come out of it.

We do need to understand the innovation system in the United States and how it has changed; we need to be able to articulate that to people. Most people who make decisions on how we spend our money do not understand the interaction between large companies, small companies, and start-up companies, and the fact that all of them are necessary for the infrastructure that keeps us afloat.

Much of the start-up intellectual power comes from people who learned how to do business in a big company, took some technology that was there, and managed to move and do something really entrepreneurial with it.

Secondly, people do not understand the relationship between large manufacturing companies and the supplier chain the fact that you have got a lot of small manufacturers who are the suppliers to big companies. Without the health of the big companies, the little ones do not survive either. It is a very integrated system that works very well. We need to understand that each of them have a role to play and each of them are very important. The infrastructure needs to be designed so that all of them can do well simultaneously. I get very incensed about this question about corporate welfare that the government should never provide any support of any kind to large companies. In many cases they are the ones who have the resources to make that particular technology grow. If you can get them to spend their money doing long-term work and bring some small companies along with them, the end result of that can create whole new industries that simply would not happen without the support of all of those people at the same time.

We need to have a much better picture of the innovation scheme: how it works, how fundamental science works, how the people work, and how the whole thing matures into products and processes and into jobs and wealth. We just do not articulate that very well, and we really do not give people a real understanding that small companies with no big companies does not work, as well as the other way around.

In the United States today, 100 industrial R&D spenders account for over 50 percent of the total R&D expenditures in industry. If you do not understand that manufacturing and bigger companies are important, those numbers will get you there fairly quickly.

W. BOWMAN CUTTER Summary

In conclusion, I think that if there is one theme that although we did not plan it, it came through in the remarks of all of the panel members, it is this notion that there is such a thing as an innovations system and that ours is changing. And if you take the references that Paul made while he was here, to cycle time, that Mary has just finished making to the need to look across the whole supplier chain of an industry, to Craig's comments with respect to the significance of the venture capital industry, I think that you get the glimmer of the point that we are, that we have been trying to make, that we have a new system of innovation that is evolving in this country. It includes such components as cycle time, supplier chain, and venture capital industry that really did not exist significantly 15 years ago. It is of enormous importance to the future of this country, both for our economic and national security. It is reflected in programs of the kind that Paul and Mary stressed today. We hope to begin to deal appropriately with that system. Thank you all very much for participating with that system.

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