Hearings to examine defense innovation and acquisition reform.

1[Senate Hearing 119-309]2[From the U.S. Government Publishing Office]34                                                        S. Hrg. 119-30956               DEFENSE INNOVATION AND ACQUISITION REFORM7=======================================================================89                                HEARING1011                               BEFORE THE1213                      COMMITTEE ON ARMED SERVICES14                          UNITED STATES SENATE1516                    ONE HUNDRED NINETEENTH CONGRESS1718                             FIRST SESSION1920                               __________2122                            JANUARY 28, 20252324                               __________2526         Printed for the use of the Committee on Armed Services2728[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]2930                 Available via: http: //www.govinfo.gov3132                                __________3334                   U.S. GOVERNMENT PUBLISHING OFFICE3562-948 PDF                  WASHINGTON : 202636-----------------------------------------------------------------------------------3738                      COMMITTEE ON ARMED SERVICES3940         	ROGER F. WICKER, Mississippi, Chairman4142DEB FISCHER, Nebraska			JACK REED, Rhode Island43TOM COTTON, Arkansas			JEANNE SHAHEEN, New Hampshire44MIKE ROUNDS, South Dakota		KIRSTEN E. GILLIBRAND, New York45JONI ERNST, Iowa			RICHARD BLUMENTHAL, Connecticut46DAN SULLIVAN, Alaska			MAZIE K. HIRONO, Hawaii47KEVIN CRAMER, North Dakota		TIM KAINE, Virginia48RICK SCOTT, Florida			ANGUS S. KING, Jr., Maine49TOMMY TUBERVILLE, Alabama		ELIZABETH WARREN, Massachusetts50MARKWAYNE MULLIN, Oklahoma	        GARY C. PETERS, Michigan51TED BUDD, North Carolina		TAMMY DUCKWORTH, Illinois52ERIC SCHMITT, Missouri			JACKY ROSEN, Nevada53JIM BANKS, INDIANA			MARK KELLY, Arizona54TIM SHEEHY, MONTANA                  	ELISSA SLOTKIN, MICHIGAN5556		   John P. Keast, Staff Director57		Elizabeth L. King, Minority Staff Director5859                                  (ii)6061                           C O N T E N T S62_________________________________________________________________6364                            january 28, 20256566                                                                   Page6768Defense Innovation and Acquisition Reform........................     16970                           Members Statements7172Wicker, Senator Roger F..........................................     17374Reed, Senator Jack...............................................     37576                          Witnesses Statements7778Sankar, Shyam, Chief Technology Officer and Executive Vice            479  President, Palantir Technologies.8081Diller, Nathan P., Chief Executive Officer Divergent Industries       782  Inc..8384Geurts, The Honorable James F., Former Assistant Secretary of the    1085  Navy, Research, Development and Acquisition.8687Questions for the Record.........................................    518889Appendix--The Defense Reformation................................    609091                                 (iii)9293               DEFENSE INNOVATION AND ACQUISITION REFORM9495                              ----------9697                       TUESDAY, JANUARY 28, 20259899                              United States Senate,100                               Committee on Armed Services,101                                                    Washington, DC.102    The Committee met, pursuant to notice, at 9:30 a.m. in room103SD-G50, Dirksen Senate Office Building, Senator Roger Wicker104(Chairman of the Committee) presiding.105    Committee Members present: Senators Wicker, Fischer,106Cotton, Rounds, Ernst, Sullivan, Cramer, Scott, Tuberville,107Mullin, Budd, Schmitt, Banks, Sheehy, Reed, Shaheen,108Gillibrand, Blumenthal, Hirono, Kaine, King, Warren, Rosen,109Kelly, and Slotkin.110111          OPENING STATEMENT OF SENATOR ROGER F. WICKER112113    Chairman Wicker. This hearing will come to order. Thank114you-all for coming. The Committee meets this morning to discuss115the topic that is of great interest to every member of this116panel. We're here to talk about defense innovation. We must117change the way the Pentagon does business, otherwise there's no118way we can maintain deterrence particularly against China.119    Today, we'll hear from three experts. Shyam Sankar serves120as the Chief Technology Officer at Palantir, which has done121important work for the military. Mr. Sankar has published122widely on innovation, and we look forward to hearing his ideas123today. We'll also hear from Nate Diller, who has worked at both124the Department of Defense (DOD) and the House Appropriations125Committee, where I previously worked in another life. Today,126Mr. Diller is the CEO [Chief Executive Officer] of Divergent127Technologies, which is seeking to make revolutionary changes in128manufacturing, and we need revolutionary changes in DOD.129    Finally, James Geurts, is with us today. In addition to130having one of the coolest nicknames around, Hondo, he is ably131and successfully served this country as the acquisition132executive for both SOCOM and the Navy. So thank you-all for133being here to talk about innovation.134    The past few years have been marked by some success in135innovation improvements, but we have much more work to do. Most136of our work is actually ahead of us in this regard. I believe137we're poised to go faster and further than we have thus far.138I'm optimistic that many of my colleagues' ideas for139improvements and reform will have an enthusiastic reception in140this new Pentagon team.141    I appreciate my friend, Ranking Member Reed, for holding a142hearing in the previous Congress on the planning, programming,143budgeting, and execution of the Reform Commission. I expect we144can continue to make progress in this new Congress. As a matter145of fact, Mr. Reed, and my colleagues, we need a game changer,146and we need it right now.147    The Committee took steps last year to remove unnecessary148steps from the acquisition process and get defense innovators149more powerful hiring authorities. We can and should continue on150that positive trajectory. I recently released the FoRGED Act,151and published this white paper entitled Restoring Freedom's152Forge: America's Innovation Unleashed.153    I must say, I appreciate the positive comments and response154that we've heard from industry and from Government officials.155The white paper lays out in specific detail my plan to156implement smart spending practices at DOD. The FoRGED Act157proposes the most comprehensive set of budgeting and158acquisition reforms in decades.159    It focuses on five areas. First, we must cut the red tape160that burdens our defense workforce. Our regulations are full of161outdated and excessive compliance requirements. Addressing this162is exactly the type of work that DOGE [Department of Government163Efficiency] is contemplating, and I hope we can make progress164in this area. Contracting regulations total more than 6,000165pages. Financial regulations add up to more than 7,000 pages.166I'm interested to hear our witnesses address how this Committee167can reduce the statutory and regulatory burdens, even as we168retain the core elements of good policy.169    Second, we should harness one of our Nation's core170advantages; our world class tech sector, which is built by171American entrepreneurial spirit. Government unique172requirements, have made it nearly impossible for commercial173companies and startups to do business with the Department of174Defense. We need to reward commercial innovation by making it175possible for innovative companies to work with the Pentagon.176    Third, we must create competitive pressure by rapidly177qualifying new suppliers to help build our weapon systems. More178than 20,000 suppliers have exited the Navy shipbuilding179industrial base in the past 20 years, and that's just the180Navy's industrial base. Twenty thousand suppliers gone. I hope181our witnesses will address how we can lower barriers to second182sources, and how we can adopt technologies like 3D printing,183which can dramatically reduce costs and expedite production184schedules.185    Fourth, we must enable senior officials to manage programs186by reducing the bureaucracy's ability to veto their decisions.187A typical acquisition must satisfy nearly 50 documentation188requirements and get 50 external sign-offs. We need to be189careful about the taxpayer's money, but that is excessive. We190need to give program managers all of the tools they need to191success while retaining an appropriate level of checks and192balances.193    Finally, we should modernize the Defense budget process by194allowing money to move as fast as technologies and threats195change. It currently takes at least 2 years to request and196receive funding. Meanwhile, the commercial sector deploys new197generations of technologies in less than 2 years, and the198Pentagon is continually lagging behind.199    We cannot keep conducting business as usual. I repeat We200need a game changer in this regard, and we need it now, because201the United States is entering the most dangerous period we've202faced since World War II. Our adversaries are rapidly203innovating and leveraging commercial technologies. In response,204we must expand our capacity to produce and sustain high-end205weapons like ships, aircraft, and missiles. At the same time,206we must adopt autonomous, adaptive, and networked or swarming207systems.208    This is not an either-or effort. We must produce209traditional and innovative systems quickly, and at the scale of210relevance. Doing so will ensure that we can deter our211adversaries from taking action against us and our interest. In212other words, peace through strength. I look forward to213discussing those initiatives and more with our witnesses, and214again, I welcome all three of them to our hearing, and I215recognize my friend, Ranking Member Reed, for his remarks.216217                 STATEMENT OF SENATOR JACK REED218219    Senator Reed. Thank you very much, Mr. Chairman, and let me220join you in welcoming our witnesses, Mr. James Geurts, Mr.221Shyam Sankar, and Mr. Nathan Diller. Thank you, gentlemen. You222bring unique and important perspectives to this discussion, and223this is a very serious and important discussion.224    For many years this Committee has examined various225challenges for the defense acquisition system. Time and time226again, we have heard the system is too slow, too rigid, and too227outdated to keep pace with the changing world. As such, the228Committee has worked hard and made progress toward streamlining229the acquisition system.230    Importantly, we have helped provide the Department of231Defense with significant flexibility in the acquisition232authorities, including initiatives like middle tier233acquisition, rapid acquisition authority, and other transaction234authority. These authorities are intended to enable the235Department to tailor acquisition strategies and contracting236approaches to fit the needs of each program.237    Indeed, lengthy risky programs demand more rigor and238oversight, whereas less risky non-development programs may move239quicker with fewer bureaucratic checks on the process. I would240ask our witnesses for their views on the successes and241shortcomings of these acquisition authorities.242    Responsible regulation is key to the success of the243acquisition and innovation ecosystem. Decentralizing certain244aspects of the system is beneficial, but going too far may245result in poor coordination among officers, and could introduce246duplication and waste. The lack of coordination among the247services or stove piping is especially problematic for programs248that are intended to improve jointness throughout the force.249    Several years of legislation to reform stove piping has250helped alleviate the issue, and further deregulation in some251areas may be useful, but I would caution against quick252decisions that could undercut the progress we have made. Many253existing statutes and regulation exist because of past failures254by the Department, or poor behavior from industry, and it's255important that we remain uncompromising stewards of taxpayers'256dollars. I would ask for the witness's views on this issue,257also.258    Further, we must remember that our acquisition network is259only as strong as our workforce. To meet growing demands, the260acquisition workforce must grow accordingly to include261contracting officers, subject matter experts, and skilled262technicians in the defense industrial base. In this regard, I'm263concerned that we have already begun to see attacks on the264Department civilian workforce. The Trump administration has265taken pride in the threat to slash the bureaucratic workforce,266arguing a false equivalence between fewer personnel and greater267efficiency.268    Ironically, reducing the acquisition workforce is likely to269increase the contracting timeline and eliminate positions that270support acquisition professionals will inject new inefficiency271into the network. I would appreciate our witness's thoughts on272the interdependencies of the acquisition workforce and their273recommendations to make sure that acquisition workforce is274appropriately sized and trained.275    Finally, I would like to point out that innovation is more276than technology. Improving the Defense Department's innovation277strategies will require more than overhauling systems or278increasing funding. It will require bold thinking by leaders at279every level of the enterprise. I'm reminded of a quote280attributed to Winston Churchill, ``Gentlemen, we have run out281of money, now we have to think.'' Successful innovation282requires creative people to not only adapt to new technologies,283but to adapt processes to new situations where technology is284not yet available. Now, we must think.285    To help us do so, I look forward to hearing from this286insightful panel of experts, and I hope we can work together to287develop a better understanding of how the Department of Defense288can adapt quickly to a changing world. Thank you again to our289witnesses, and I look forward to your testimony. Thank you, Mr.290Chairman.291    Chairman Wicker. Thank you very much, Mr. Reed, and let me292say, we're going to hear from our witnesses now, and we'll have293a round of 5-minute question and answer. I'm going just so that294this Senator will understand and be prepared. I'm going to295yield my 5 minutes to Mr. Sheehy because he has to preside in a296few moments. So, after the opening statements, Mr. Sheehy will297ask questions and they'll be followed by the Ranking Member,298and then we'll go forward with Senator Fischer and on down.299    Mr. Sankar, we're delighted to have you and you are300recognized for as much as 5 minutes.301302    STATEMENT OF SHYAM SANKAR, CHIEF TECHNOLOGY OFFICER AND303        EXECUTIVE VICE PRESIDENT, PALANTIR TECHNOLOGIES304305    Mr. Sankar. Well, thank you, Chairman Wicker, Ranking306Member Reed, Members of the Committee. Thank you for the307opportunity to testify today. Mr. Chairman, I want to commend308you on your proposal. I was fist pumping in the air when I was309reading it, and this is exactly the kind of reform that we need310to win.311    I've spent nearly 2 decades at Palantir fighting the312bureaucracy to deliver cutting edge technology to our war313fighters. My message today is simple; that defense innovation314and procurement are broken at precisely the moment. We need315them to deter and defeat our adversaries, and for reasons that316are profoundly un-American.317    The root of the problem is that the Pentagon is a bad318customer. It's also the only customer. The defense market is319functionally a monopsony where a sole buyer shapes the market320with prescriptive requirements, complex regulations in 5-year321plans worthy of Stalin, the cold war is over, and everyone has322given up on Communism except for Cuba, and seemingly, with the323DOD.324    The monopsony has created a divide between defense and325commercial sectors. I call this the great schism, but you can326think of it like the Berlin Wall. On the commercial side of the327wall, companies are free to compete and to innovate. On the328Defense side, a dwindling number of contractors toil away for329the monopsony. More and more, they resemble state-owned330enterprises instead of the innovative founder-driven companies331that they were once were. The companies fit enough to climb the332wall and defect to the free world did so long ago.333    Mr. Chairman, if we're going to win again, we need to tear334down this wall, and your report helps us do just that. First,335cut the red tape. Defense procurement is constrained by336mountains of regulations that paralyze leaders and punish337creativity. This is not what was intended, but this is reality.338    The road to hell is paved with good intentions. For339example, the DOD 5,000 series, it was 7 pages when David340Packard wrote it in the 1970s. It's now 2,000 pages. That's an34111 percent compounded growth rate. One of the few areas the342Department outperforms the market. Eliminating burdensome343regulation must be a priority because no amount of process can344save us, but it can destroy us.345    Second, unleash innovation. To do that, we need to reverse346this great schism. During the cold war, 6 percent of Defense347spending on major weapons went to defense specialists. Chrysler348made cars and missiles. General Mills made cereal and349torpedoes. That great schism, we need to turn it on its head.350Today, that 6 percent has turned into 86 percent going to351defense specialists. America needs our primes, and that's352precisely why we need to ensure that they are subject to353commercial incentives and to market pressure to keep them fit.354    We can fix this by ending the cost-plus mentality, which355makes us slower, poorer, and dumber. SpaceX reduced launch356costs by 85 percent. That simply isn't possible in a cost-type357domain. We also need to stress a commercial first mindset in358procurement. FASA [Federal Acquisition Streamlining Act] is359already the law of the land. Perhaps we should just enforce it.360    Third, increased competition. Yes, please. But also, we361need to increase competition inside of Government. During the362early cold war, the services competed against each other to363develop the best ballistic missiles. The Navy's Polaris, and364the Air Force's Minuteman ultimately won, but not before the365Regulus, Jupiter, Thor, Atlas, and Titan were developed in some366form.367    Today, the bureaucracy would disparage that that contest as368duplication. I see a competitive market with multiple buyers'369pressured to innovate and no single point of failure for the370Department.371    Fourth, enable decisive action. We are a Nation born of372Founding Fathers. We understand the importance of great373creative leadership. In place of the cargo cult that worship's374process. Let's empower our people. We wouldn't have ICBMs375[Intercontinental Ballistic Missiles] without Schriever, the376nuclear Navy without Rickover, the Apollo program without Gene377Kranz. I challenge you to name a comparable figure overseeing378most major programs today, and it's not for a lack of talent.379But we need to stop rotating people like fungible cogs every 2380or 3 years, and give them the time and the space to create.381    Fifth, modernize the budget process. A budget is a plan,382and right now we are planning to fail. No private company could383survive if it took 2 years to budget for projects internally.384They would be completely outcompeted in the market. The fiscal385OODA [Observe, Orient, Decide, Act] loop is not survivable, and386that's what sets the pace for the industrial base.387    Decision-makers in the building deserve to be treated like388decisionmakers with a pot of money and the discretion to389reprogram rapidly to meet new threats unless we actually do390believe in central planning.391    We shouldn't be under any illusions about how hard these392changes will be. You have to mobilize talent around it and393attack the problem again and again, and that's why I think this394hearing and this proposal is so valuable.395    Mr. Chairman, I look forward to taking your questions.396Thank you.397    [The prepared statement of Mr. Shyam Sankar follows:]398399                 Prepared Statement by Mr. Shyam Sankar400    Chairman Wicker, Ranking Member Reed, distinguished members of the401committee, thank you for the opportunity to testify on one of the most402important topics facing the U.S. Department of Defense and our Nation:403defense innovation and acquisition reform.404    Mr. Chairman, I want to commend your report on this subject,405Restoring Freedom's Forge: American Innovation Unleashed. I also want406to commend your bill, the FoRGED Act. Restoring defense innovation and407fixing our acquisition system will require boldness, vision, and408sustained attention. Your leadership is an important piece of the409puzzle.410    I want to assist your work by sharing insights gleaned from nearly411two decades at Palantir, where I've worked to battle bureaucracy and412deliver innovative technology for our Nation's warfighters.413    My message today is simple: Defense innovation and procurement are414broken. And they are broken at precisely the moment we need them to415deter and defeat our enemies.416    The Members of this Committee scarcely need to be reminded about417the threats we face. President Xi Jinping has instructed the People's418Liberation Army to be ready to invade Taiwan before the decade is419through. Even now, Chinese shipyards are building large transport420vessels that could be used in an amphibious invasion. Russia is421continuing its bloody war of attrition against Ukraine, sustained by422China's seemingly endless industrial base and fanatical North Korean423troops. Iran is licking its wounds and reorganizing its proxy armies to424continue their onslaught against Americans and allies in the region.425Amid these threats, time and complacency are luxuries we cannot afford.426    Our defense industrial base and defense innovation base are wholly427ill-equipped for these challenges. More than ever, the United States428needs mass production and speed to deter conflict. The stockpile is not429the deterrent; the flow of mass production is the deterrent. There is430little evidence our industrial base, as currently constituted, is431delivering this deterrent capability.432    I believe this problem is caused by perverse incentives embedded in433our broken acquisitions process. Put simply, the Pentagon is a434difficult customer. It is also the only customer. The defense market is435functionally a monopsony, where the sole buyer shapes the market with436overly prescriptive requirements, overly complex regulations, and 5-437year plans more reminiscent of the countries we defeated in the last438century than America's free, innovative, capitalist system.439    This monopsony has created a vast gulf or ``Great Schism'' between440the defense sector and the commercial sector. Innovative companies441capable of competing in the larger, more lucrative commercial market442have fled the defense market. Meanwhile, specialist defense contractors443have been cutoff from the refining pressure of the marketplace and have444consequently grown bloated and uncompetitive. Today, most defense445contractors resemble their government customer more closely than the446founder-driven, innovative companies they once were.447    Bridging this divide and introducing greater competition and market448pressure into the defense sector is the first step to sparking defense449innovation and repairing defense acquisitions. These changes must be450accompanied by a change in mindset. We need to overcome the complexity451and bureaucracy of the present system and understand that winning is452the only requirement that matters. If we can drive substantive reforms453of the process and create a bias toward speed and decisive action, then454I am confident the many patriots in government and industry will rise455to meet this moment.456    Appended to this statement is a copy of The Defense Reformation, a457treatise I produced late last year that explores these issues in458greater detail and provides actionable recommendations for reform.459(Please see page 60)460    I am honored that the Committee on Armed Services has invited me to461share my views on these challenges and I look forward to taking your462questions.463464    Chairman Wicker. Thank you very much, Mr. Sankar.465    Mr. Diller, you're recognized.466467    STATEMENT OF NATHAN P. DILLER, CHIEF EXECUTIVE OFFICER468                   DIVERGENT INDUSTRIES INC.469470    Mr. Diller. Chairman Wicker, Ranking Member Reed, and471distinguished Members of the Committee, it is an honor to472discuss defense innovation and acquisition reform with you473today.474    At the core of this discussion, we must focus on ensuring475America's ability to deter aggression and create that476overwhelming strength, while minimizing risk to human life, and477reducing the burden on the taxpayer. Unfortunately, America's478ability to deter is at its lowest point in many, many decades.479    That said, the FoRGED Act coupled with a multitude of other480successes, leaves me more optimistic today that America cannot481only reverse this trend, but actually do it in a way that482creates a renaissance in American manufacturing and actually483unlocks human creativity. But we must act today.484    I think the word forge provides some personal markers for485me. America's manufacturing output tripled that of China during486the time that I was pulling forged plows growing up on a farm.487By the time I flew F-16s dropping forged bombs, we were at488parity. Today as we discussed The FoRGED Act, China more than489doubles our manufacturing output.490    After years in defense innovation and acquisition, I'm491convinced that a nation that does not manufacture technology492cannot maintain a technological and military advantage. This is493what led me to transitioning to Divergent Technologies today494led by Kevin Czinger and his son Lucas, where they are truly495revolutionizing the factory today. Bringing us an ability to496actually turn great ideas into hardware for deterrence.497    Daily, Divergent seemingly transforms a car factory into a498weapons factory. It is operating at production scales,499leveraging 700 patents driven by AI [artificial intelligence].500Right now, we are literally printing our 253 mile an hour501hypercar in the morning and cruise missiles in the afternoon.502This can be done. It is all made in America.503    We're in agreements with most defense primes and many of504our great American startups. Delivering capabilities for air,505land, sea, and space. The capital efficiency that comes from506this agility can reduce taxpayer burden, increase war fighting507capability, and quickly rebuild U.S. global innovation and508manufacturing dominance.509    What acquisition reform is needed to bolster defense510innovation and attract companies like Divergent to create511American military advantage? First, we have to be very clear of512turning America's software advantage into a hardware advantage.513We must foster competition for fully digital and AI-driven514design and production systems so America can build.515    We must scale innovation successes. New acquisition paths516and organizations have created access to mobilize a broad517industrial base with the ability to create a hedge portfolio of518software-driven hardware. But it is not clear that we have the519structure to scale this to success.520    Three, we need to build a civil reserve manufacturing521network so America can build. The factory is the weapon. The522taxpayer buys billions of dollars of weapons every year solely523for war. Why are we not buying some factories as a service?524These factories distributed, could produce parts for legacy525platforms to ensure we can fight tonight, can scale a hedge526portfolio, or produce commercial goods in a way that bolsters527competition, increases our military resiliency and528capabilities, and saves billions of dollars to the taxpayer.529    The term forge is fitting to express the gravity of this530moment. This act of forging is literally defined eras in531civilization going back to the Bronze Age as societies use the532process to turn ideas into hardware. The title FoRGED Act is533appropriately to communicate the emergency situation that we534are in in America today as our eroded capacity of turning ideas535into hardware is creating this national crisis.536    Fortunately, visionaries mobilize a whole-of-nation effort537in World War II. It is time for Freedom's Forge 2.0, and while538we're in emergency State, I am optimistic because I believe the539ingredients are present for a general generational shift in540manufacturing and defense innovation that could be more notable541than going from the Stone Age to the Bronze Age. I'm confident542America will forge that peaceful and prosperous era together.543Ladies and gentlemen, it's time to build.544    [The prepared statement of Mr. Nathan Diller follows:]545546                Prepared Statement by Mr. Nathan Diller547    Chairman Wicker, Ranking Member Reed, and Members of the Committee:548It is an honor to address opportunities and challenges in Defense549Innovation and Acquisition Reform. Today, we might discuss bureaucratic550labyrinths, contracting wizardry, or appropriator obstinance. However,551make no mistake, the purpose of this discussion is to advance America's552ability to create controlled violence that strikes fear in the heart of553the enemy to avoid war, deterring aggression, all while minimizing the554risk to human life and reducing consumption of taxpayer treasure.555Unfortunately, recent examples of enemy aggression, in some cases556protracted aggression, suggests that America's military and industrial557strength to deter and defeat, has grossly eroded, potentially to its558lowest point since World War II. The FoRGED Act could reverse this559trend.560    The term forge has personal meaning to me on my journey in defense561innovation. I grew up on a family farm pulling forged plows at a time562when America's share of manufacturing was triple that of China. By the563time I started dropping forged bombs from my F-16 as fighter pilot, the564United States and China were at parity. As we sit here today565considering the FoRGED Act, China's share of global manufacturing more566than doubles that of the United States. A nation that does not567manufacture technology cannot maintain an enduring lead in that568technology sector. Reversing the decline of American manufacturing to569support national security is what led me to Divergent, where founders570and inventors Kevin and Lukas Czinger have truly revolutionized the571factory.572               mobilizing dual-use manufacturing for dod573    Divergent is doing something that has not been done in decades.574Transforming a car factory into a weapons factory. The difference is575that the agility of their 700 patent AI-driven factory factory of the576future operating at scale today makes this transformation seamless and577it happens daily. The digital design toolset, unmatched metallic 3D578print speed, and fixtureless assembly has been radically reducing579development time, assembly time, weight, part count, labor, tooling,580and cost for the world's top auto manufacturers like Aston Martin,581Bugatti, and McLaren as well as for our own hyper car, the Czinger 21C,582the world's fastest production car on the road with the world's highest583power density engine, all made in America. The agility of this AI584factory is now giving us an opportunity to quickly pivot into aerospace585and defense. Right now, we literally are printing hyper car frames in586the morning and cruise missiles in the afternoon. We are in agreements587with most of the defense primes and many startups, delivering588capabilities for air, land, sea, and space during all phases of the589life cycle (RDT&E, Procurement, Sustainment). The capital efficiency590that comes from this agility can reduce taxpayer burden, increase591warfighting capability, and quickly rebuild U.S. global manufacturing592advantage.593    How can the FoRGED Act unlock capabilities like Divergent's594Adaptive Production System and so many other critical technologies to595regain U.S. national security advantage?596    1.  Turn America's software advantage into a hardware manufacturing597advantage.598    2.  Build on innovation successes to rapidly field a hedge599portfolio of software-driven hardware.600    3.  Use DOD as an incubator to scale a new civil reserve601manufacturing network model.602       use america's software advantage for a hardware advantage603    I have had the chance to work in some of the world's most604innovative organizations: DARPA, Strategic Capabilities Office, Air605Force Rapid Capabilities Office, White House Office of Science and606Technology Policy. I led classified flight test, Joint Staff air and607space requirements, and AFWERX where we funded thousands of startups608with billions of dollars. Throughout my career, I have seen the609military value in adopting commercial technologies at pace. However, I610believe the concept that the U.S. can simply be an ``idea factory''611while outsourcing manufacturing for short-term financial gain has612proved short-sighted. Provisions in the FoRGED Act could reverse that613trend. The United States has purged jobs, eroded our capacity to turn614ideas into hardware and--some might even suggest--undermined the615American spirit of building. We have lost our hardware advantage. One616result of that is an erosion of our military advantage. That could617change if the U.S. can turn our software advantage into a hardware618advantage with a fully digital adaptive production system, driven by619advances in artificial intelligence.620                       scale innovation successes621    To effectively leverage and scale America's innovation ecosystem,622DOD must build on successes in innovation. Work has been done first623through Innovation 1.0 launching the conversation with the624establishment of In-Q-Tel, DIU, and SOFWERX. Innovation 2.0 advanced625thousands of contracts per year with Army Futures, Task Force 59, and626AFWERX. Innovation 3.0, advanced capability with Chairman Calvert's627hedge portfolio, the Office of Strategic Capital, and DIU leveraging628flexible funding traded for transparency, loans for deep tech, and629funding Replicator. Given complexity and cost, scaling quantities of630legacy systems will not be possible in a relevant timeline. The urgency631for deterrence has led some to suggest a need to field small, low-cost632mass, or a hedge force to augment the legacy force. These acquisition633reforms have enabled DOD to mobilize incredible entrepreneurs across634America to build that force, but it still is not clear that DOD has635established the right structure to scale these successes. Talent636management will be critical to the restructuring.637                  civil reserve manufacturing network638    While a hedge portfolio is necessary, if America goes to war639tonight it will fight with the multi-trillion-dollar legacy portfolio640it has purchased over recent decades. Unfortunately, the offshoring of641manufacturing has created a crisis, as many industrial base companies642that were once the backbone of weapons system sustainment--and local643economies--have gone bankrupt leaving the legacy portfolio without644parts. Every year taxpayers buy billions of dollars of weapons that are645only used during war. It seems that there needs to be a clearer646understanding that the factory is the weapon, and if we might need more647factories for sustainment and war we should be buying that capacity648now. However, to be affordable and useful into the future, those649factories must be incredibly agile so they can pivot to different types650of production during different phases. This industrial resiliency and651fiscal responsibility is only possible if we can turn America's652software advantage into a hardware advantage and create an agile civil653reserve manufacturing network of distributed factories. Many provisions654of the FoRGED Act could enable a future with a digital adaptive655production system that, on one hand, is capable of surging to build a656hedge force, sustaining a legacy force, or if peace is secure, produce657commercial goods. This is possible today with AI-driven manufacturing.658DOD has an opportunity to lead the way--driving adoption of dual-use659technology and with it a resurgence in US manufacturing, while reducing660taxpayer burden for defense. If we miss this opportunity, however,661there is a very high risk that in less than 4 years China will have662consumed this market in the same way it consumed the global small drone663market and many others. We will all be measured by the effort we took664to avoid that potential tragic future.665                             forging ahead666    The term ``forge'' is fitting to express the gravity of this667moment. The act of forging has literally defined entire eras in668civilization going back to the bronze age, as societies used the669process to turn ideas into hardware, often the hardware necessary to670deter and defeat enemies. To this day, forging remains core to building671weapons of war. It is worth noting that, today, China's share of the672global forging market eclipses that of the United States. The title673FoRGED Act is appropriate to communicate the national security674emergency we face as a result of America's eroded capacity to turn675ideas into hardware. Fortunately, visionaries mobilized a whole-of-676nation effort before we entered World War II. That mobilization led to677victory on the battlefield, and that scale of mobilization is needed678again. The State of manufacturing and national security is troubling,679but I am optimistic because I believe the ingredients are present for a680generational shift in manufacturing and defense innovation that could681be more notable than going from the stone age to the bronze age. I am682confident America will forge that peaceful and prosperous era together.683It starts today!684685    Chairman Wicker. Thank you very, very much, Mr. Diller.686    Mr. Geurts.687688 STATEMENT OF THE HONORABLE JAMES F. GEURTS, FORMER ASSISTANT689  SECRETARY OF THE NAVY, RESEARCH, DEVELOPMENT AND ACQUISITION690691    Mr. Geurts. Chairman Wicker, Ranking Member Reed,692distinguished Members of the Committee, it's good to be back693here with you, again. It's quite an honor to be here for this694discussion. Having spent the last almost 40 years of my career695trying to drive innovation in acquisition as a person in696uniform, as a civilian, as an appointee, and now in the private697sector, it's a subject that's near and dear to my heart, and I698think critically important for our Nation.699    I've had the honor to lead some of the Nation's finest700acquisition teams in time of war and global competition. I've701seen what's possible when there's a clear understanding of702intent, a sense of urgency at all levels of the organization, a703close connection between the acquirer and the operator, a704robust and diverse network of industry partners, transparency705to all the stakeholders, and an empowered and accountable706acquisition workforce.707    Unfortunately, over the last several decades, our ability708to do this at scale across the Department has decayed. The709industrial base that service so well after World War II is not710up to the challenges right now that we need as a nation alone.711The accumulation of decades of statutes, regulations,712processes, special interests, all well-intentioned about which713permeate the bureaucracy, have hobbled our ability to adapt and714change715    The risk-averse culture that that's driven has diffused716accountability across multiple organizations, departments, and717the workforce so that it's unclear who's actually accountable718to deliver, and they are not empowered to actually deliver the719results we need from them.720    The challenges facing the Department and Nation are many.721The Nation needs to be innovative, productive, and agile; while722also ensuring they're relentless stewards of the taxpayer723dollar. Rather than trying to rebuild the industrial base we724once had, I believe we need to focus on building the future725industrial network that we need that gives us the ability to726scale and the ability to be agile in this time of global727competition.728    Harnessing our collective capabilities, talents, and729innovations into such a dynamic and aligned network will help730overcome the limitations, and linear thinking, risk-averse731approaches that have been impairing the Nation's competitive732capability since.733    I'm thankful that this Committee is placing such an734emphasis on this issue and am optimistic with the tenets of the735FoRGED Act. We have a systematic issue and we've got to attack736it systematically. We've tried over the last couple of decades737tweaking, making some changes here, making some changes there.738But if we're really going to act at the scale and with the739speed, we need as a Nation, we need to overhaul both our740approach to the industrial base, focusing on this industrial741network, as well as leveraging a clearly accountable and742empowered acquisition workforce.743    Thanks for the opportunity to appear before you, and I look744forward to your questions.745    [The prepared statement of The Honorable Geurts follows:]746747          Prepared Statement by The Honorable James F. Geurts748    Chairman Wicker, Ranking Member Reed, and distinguished Members of749this Committee, I am honored to appear before you today in this hearing750on defense innovation and acquisition reform.751    Having spent my entire career of nearly 40 years driving innovation752in defense acquisition, whether in uniform, as a government civilian,753as a senate confirmed appointee, or now in the private sector, it's a754subject that is of great importance to me and to the security of our755Nation. I have had the honor to lead some of the Nation's finest756acquisition teams in times of both war and global competition, and I757have seen that it is possible to execute an operationally responsive758acquisition system when there is clear understanding of intent, a sense759of urgency at all levels of the organization, a close connection760between acquirer and operator, a robust and diverse network of industry761partners, transparency to all stakeholders, and an empowered and762accountable acquisition workforce.763    Unfortunately, over the last several decades, our ability to764achieve that level of acquisition performance across the entire765Department has decayed. The industrial base which has served us so well766since WWII is struggling to adapt at scale to the changing global767conditions. The accumulation of decades of statutes, regulations,768processes, special interests, and outdated systems have further hobbled769the ability of the Department to rapidly field new capability at770operationally relevant timelines. The risk averse culture which771permeates much of the existing bureaucracy, with unclear and772overlapping responsibilities across numerous departments and773organizations, clouds accountability and cripples timely and effective774decisionmaking at all levels. It is clear just making piecemeal775incremental changes to the existing system, as we have attempted over776the last several decades, will not be sufficient to achieve the speed777and scale we now need as a Nation.778    The challenges facing the Department of Defense and Nation are779many. The Department needs to be innovative, productive and agile while780also ensuring they are relentless stewards of the taxpayers' money.781Rather than trying to rebuild the defense industrial base America once782had, the Department should forge the future industrial network the783nations needs while at the same time making fundamental changes in how784the government effectively leverages this future industrial network.785Harnessing our collective capabilities, talents, and innovations into786such a dynamic and aligned network will help overcome the limitations787of linear thinking and risk averse approaches that have impaired the788Nation's competitive position in an increasingly challenging world. It789will improve the revitalization of conventional defense-industrial790capacity, while also more fully integrating the creative, productive,791and dual-use commercial capabilities of the broader economies of the792United States and its allies. Attracting and scaling a larger number of793more varied performers into this industrial network will enable the794United States to accelerate growth, dramatically increase agility, and795substantially enhance resiliency. By building a flexible industrial796network more powerful than the sum of its individual parts, the United797States will create a system capable of outperforming more798authoritarian, centrally planned competitors such as China.799    I am thankful for the focus this Committee is placing on this issue800and the hard work underway through initiatives such as the FoRGED Act801to enable substantive positive changes to our current approach.802Recognizing that we have a systemic issue which cannot be fixed through803incremental tweaks, I am optimistic a systematic focus on cutting red804tape, creating competitive pressure, enabling decisive action,805modernizing defense budgeting and unleashing American innovation will806improve the readiness and lethality of the DOD while simultaneously807growing the ability of the industrial network to deliver capability at808scale and with speed. Equally critical, but often forgotten, will be809the need to rapidly implement these measures across the Department,810train the workforce, and incentivize and measure their effective811adoption. Doing so will ensure positive change is solidified,812transforming the historically risk adverse culture into one focused on813delivering speed, scale, and war winning outcomes.814    Thank you for the opportunity to appear before you and I look815forward to answering your questions.816817    Chairman Wicker. Thanks to all three of you. I'm going to818add for the benefit of the listening public and those in the819audience. Typically, in a hearing like this, where there are820three witnesses, the majority suggests two of the witnesses,821the minority suggests one. It would be hard for the listening822public to know which witness today was a majority witness and823which witness was a minority witness. So, I do appreciate your824thoughtful testimony. At this point for it to begin our825questioning, Senator Sheehy, you were recognized for 5 minutes.826    Senator Sheehy. Thank you, Chairman.827    Everything you guys said, of course is, I think, pretty828blatantly accurate for everybody. The word innovation is thrown829around a lot for defense acquisition and systems development. I830don't think we really have an innovation problem. Private831companies innovate. We have all these fusion labs within the832military that innovate actually pretty well. The challenge is833adopting the innovation on a programmatic level and then834fielding it quickly.835    I think, Hondo, when you and I were in together, I served836as a SEAL team leader and we'd have IED threats that would--the837enemy would watch with the binoculars how we would disarm an838IED [improvised explosive device] or what technology we'd use,839and the next day they would change their design. Literally, the840next day. I mean, they go back to their garage, they'd rewire841it, and then come out the next day, and our policies for842fielding equipment to counter those IEDs were stuck at the pace843of our defense acquisition system. We'd send that feedback back844home, and maybe a year or two later, we'd get a new jammer or a845new tactic out and God bless the guys out there doing it which846is me a lot of the time.847    Unfortunately, our ability to innovate, we didn't innovate848at the speed of the threat. We innovated at the speed of849bureaucracy, and we can innovate, but adopting that quickly is850the biggest challenge. So, it's open to anybody, especially851you, Hondo, coming from a career in that acquisition system.852What's the single biggest change we can make as a legislative853body quickly to encourage adoption of the innovation that854already exists?855    Mr. Geurts. Yes, sir. Thank you for the question. I concur.856Many of our roadblocks are self-inflicted and culturally857reinforced, and it's for a lot of different reasons. I think858the number one thing you can do is that you can empower the859program manager and hold them accountable. Right now, program860managers answer to a--you know, dozens and dozens of folks they861have to go get permission to move a dollar to a better862priority. If they see a new technology that comes out, they863have to spend years creating a program to adopt. I think that's864one.865    Then, two, breaking down this barrier so that--listen, we866need defense primes. As Shyam said, we need new entrants, we867need commercial providers. We need program managers that have868the authority to actually pick, have visibility of all those869things, and then rapidly be able to choose the best performer.870    Then, finally, we've got to break down the barrier that871we've created between the person buying the equipment and the872person using the equipment. Again, well-intentioned873headquarters staffs that have accumulated over time, reviewing874that reviewer to doer ratio. So get the doers doing, get them875aligned with the operational needs, give them the flexibility876to make the best decisions and then hold them accountable to877deliver.878    Senator Sheehy. Mr. Sankar, a question for you. I love your879writeup, by the way, agree 100 percent. When I got out, I880actually started a defense company myself. We ended up having881to split the company in two largely for investment purposes,882because what you refer to as, you know, that wall, which is883very accurately portrayed.884    But in addition to the acquisition regulations and the DCAA885accounting requirements and all that, there's also a886restriction, of you can innovate something commercially and to887bring that innovation back in and have a cross-feed valve where888the defense technology benefits from commercial innovation is889almost not allowed. Therefore, we're missing out on a massive890pool of--especially as we move into machine learning models and891AI, we can't benefit from commercial.892    In your experience, how can the DOD better leverage893commercial innovations to make sure that the defense innovation894is adopted at the speed that private sector innovation is?895    Mr. Sankar. Well, thank you. I think Congress and its896wisdom saw this in the 1990s, right? This is why we have the897Federal Acquisition Streamlining Act, which is that the898commercial, you have a much broader market around which you can899amortize your R&D [research and development] in the commercial900world, and you can bring that stuff at a lower risk and with901much greater speed to the DOD.902    We were able to deliver the operation warp speed supply903chain in 2 weeks during Operation War Seed, because actually 2904years before that, we had built very similar solution in oil905and gas. You can't connect those dots prospectively. I didn't906make that investment in oil and gas because I knew it would pay907off when the Nation needed it for a Covid vaccine distribution.908    But really, if you're going after these hard problems, you909can benefit whole-of-nation. At some point in time, every car,910camera, and cereal box that Americans bought actually911subsidized our national security. I think I would attack this912systematically by thinking about what are the barriers that913have meant that we have developed a defense industrial base and914lost our American industrial base.915    Now, I think the real issue here, to your point, we don't916have an innovation problem. You know, innovation doesn't need917capital. America's capital markets are the deepest and richest918in the world. Dare I say, if you're unable to finance your919idea, that probably tells you something about your idea in this920country.921    But innovation does need customers, and so, shortening that922OODA loop, the fiscal OODA loop. I think we'd be better off923spending half the money twice as quickly. It's really time,924speed has a quality all of its own here. That's how we drive up925commercial adoption. It will pull these folks into the926industrial base in a way that we really need.927    Yes, we need to cut the red tape. We need to get rid of928some of these regulations. But I think the biggest barrier is929encouraging adoption, empowering our people. So much of this, I930couldn't agree more with Senator Reed's comments that931technology is--it's not a technology problem. It's actually a932people problem, a leadership problem. You can't chop off a lot933of our regulations. You know, something goes wrong, we come up934with a new rule. We're trying to chop off one end of the935distribution of all the things that can go wrong. You can't do936that without making sure nothing can go right either.937    Chairman Wicker. Thank you, Mr. Sankar. Mr. Reed.938    Senator Reed. Thank you very much, Mr. Chairman.939    Mr. Geurts, we all recognize how critical a workforce is to940get anything done, and this is particularly a case in941acquisition. What's your assessment of the Department's942acquisition workforce today in terms of its capacity and943capability?944    Mr. Geurts. I think it is mixed. We have a very talented945workforce that's been hobbled for a bunch of years. But they're946also not fully informed on the full market that's available to947them. As a Committee here makes all of these, what it looks948like, very value-added changes, we've got to make sure we949handle the implementation step. Because right now we have lots950of great authorities in the Department. We have not implemented951them to their full extent, nor trained the workforce to be able952to leverage them to their full extent.953    So, part in part with change in the authorities and rules954needs to be rapid implementation guidance, and then rapid955training, and then hold everybody accountable after you've done956those two steps.957    Senator Reed. One of the observations that I made,958particularly in regard to submarine construction, is Covid sort959of triggered a premature retirement of a lot of Government960supervisors, workforce acquisition specialists, et cetera.961We're lacking in those people, their experience, frankly, and962it comes down to people, as Mr. Sankar said. Do we have to make963a special effort to rebuild that workforce?964    Mr. Geurts. Sir, I would do two things. One, we've got to965review the reviewer to doer ratio. So we have a lot of the966workforce tied up in multiple levels of review that could be967deployed to help immediately, and get those assets doing work,968not reviewing other people's work they're doing.969    Second, we need to create a training pipeline, which fully970informs them of how commercial markets work, how venture971capital markets work, how traditional manufacturing works, how972new advance manufacturing works. So they're exposed to all of973these opportunities, and then hold them accountable for974creating a strategy that bets leverages all of those975capabilities.976    Senator Reed. Thank you, Mr. Sankar, thank you for your977testimony. One of the approaches we took was trying to attract978the non-traditional defense contractor. That was a term that's979sort of changed over time because now many of these non-980traditional defense contractors are actually defense981contractors. In addition, they also have access to and involved982with governments in many different capacities. Would you983recommend any changes to this approach of the non-traditional984defense contractor?985    Mr. Sankar. Thank you. I think what we seek with non-986traditionals is the same power of the American economy, which987is that people will take their private capital and put it at988risk to build new things and offer it to the Government, not at989the taxpayer's expense. If it works, that's great, and if it990doesn't, no harm to the taxpayer.991    That's what you see with the non-traditionals, that they're992going and raising private capital. They're putting their993balance sheet at risk, they're delivering these innovations. If994I was to contrast that to the traditional market, what the995monopsonist prefers is I will pay you by the hour. I will996control everything you're doing. I will own what you ultimately997create. Then we are surprised that that category of traditional998player isn't investing more in R&D. Well, I think, literally,999we've gotten the industrial base that we've incentivized1000getting. So, my hope is actually we could find more ways of1001turning what we today view as the traditionals into non-1002traditional, that would be the alchemy that really powers our1003national security.1004    Senator Reed. One other aspect. Just observation and we all1005understand that the defense industrial base has shrunk1006dramatically from 20 years ago. A lot of that was through1007mergers, acquisitions. In some cases, looking at a threatening1008young competitive company and buying it for reasons that might1009not be appropriate. How can we sort of stop that?1010    Mr. Sankar. Well, I'm spending my time personally on that.1011So, I think the antidote to the Last Supper, this consolidation1012wave that happened is what we should call a first breakfast.1013How do you know as Palantir has blazed a trail, survive the1014valley of death? I want to now lower the ladder and make it1015possible for many more new entrants to get there.1016    How do I reduce the time it takes to get accreditation? How1017do I enable it to field, yourself, not in an exercise that's1018not real, but in the actual war fighting needs. Get more1019feedback and more scale as a consequence. We need a positive-1020sum mindset here, and the big shrinking that happened during1021the Last Supper encourages a zero-sum thinking, which we need1022to get out of.1023    Senator Reed. Thank you.1024    Chairman Wicker. Thank you very much, Mr. Reed. Before I1025turn to Senator Fischer, Mr. Geurts, this changing the reviewer1026to doer ratio we could do that without a changing the statute,1027could we not?1028    Mr. Geurts. In some cases, yes, in some cases, no. So,1029there are certain parts of the statute that require, you know,1030different offices review things. I think over time, we've let1031the functional side, get the contracting folks have to review1032it independently, independent flight test authority. So many of1033those are internal, but a lot of those are driven by either1034statute or intent from external stakeholders.1035    Chairman Wicker. Thank you very much. Senator Fischer.1036You're recognized.1037    Senator Fischer. Thank you, Mr. Chairman.1038    Mr. Geurts, the impact of CRs on the Department, it's well1039documented whether limiting new starts or the challenges of1040increasing production rates. While CRs [Continuing Resolutions]1041result in concrete negative impacts, the Department has little1042influence over whether a CR actually occurs since1043appropriations are the purview of Congress. Based on your1044experience, are there any specific recommendations you have1045that would enable the Department to continue to make progress1046on certain programs, even through a CR?1047    Mr. Geurts. Thank you. Yes, CRs are very damaging to a1048rapid and agile workforce. One of the reasons is you have to--1049if you're applying an award of contract for the year and now1050the CRs occurring, you're doing it in, 3-month increments or 2-1051month increments, and it ties up both sides. So, I think1052anywhere we can create authorities, if it's small programs, if1053it's programs that we're know----1054    Senator Fischer. Sir, is there any place right now that the1055Department can continue its progress or does it, do you know of1056anything or it's all shut down?1057    Mr. Geurts. It's really challenging because of the1058specificity of the CR and the challenges. I think some of the1059Services have asked for special authorities in areas that are1060very dynamic. I know the Army has asked for authorities to be1061able to rapidly reprogram and be flexible in like electronic1062warfare, and UASs [unmanned aircraft systems], counter-UASs. So1063I think there's areas where it's really a dynamic environment1064that I think we could work together to build a trust to be able1065to have more flexibility in the CR period.1066    Senator Fischer. Okay. Thank you. Mr. Diller, do you have1067anything to add from a private sector perspective on this?1068    Mr. Diller. Yes, Senator, I think there have been some1069notable changes just over starting with the Fiscal Year 20241070Defense Appropriations Bill, that provided some of that agility1071that is key. If we look at how quickly our acquisition model1072works, where we're budgeting, and in instances, it's taking 41073years for something to actually come available.1074    That certainly is not the case from a private sector. If we1075look at the pace that large language models in artificial1076intelligence have occurred right there. Those budgets were1077being built two to 4 years ago. I would commend the work of the1078appropriators that have looked to see what type of flexibility1079allows the speed of innovation that is actually happening in1080the private sector.1081    It gets to this question of adoption, of innovation, and1082so, I think really great pilots have happened. When we look at1083the ability to scale, it certainly--at some point the measure1084needs to be, how can we get the funding that actually allows1085that production and the movement?1086    I think there's been increased abilities. We look at1087digital approaches to actually creating trust across the1088Potomac River, where the Pentagon and the Congress can actually1089get a higher degree of assurance that the money is being spent1090quickly. This is being piloted right now with DIU [digital1091interface unit] and I think that is going well. It's good for1092industry, it's good for trust across the legislative and1093executive branch.1094    Senator Fischer. Thank you. Mr. Sankar, in your work with1095the Department, what are some of the key factors that limit1096your company's ability to innovate?1097    Mr. Sankar. I think really if you think about our--when we1098first started the business, I thought our competition was going1099to be the primes. That the primes would be threatened by the1100innovation of what we were creating. But actually, the entity1101that was most threatened was the existing program of record.1102So, it's our inability to tolerate heterogeneous innovation1103coming from a number of places.1104    All innovation starts off as something that is heterodox.1105It's going to challenge the status quo; it's going to upset the1106apple cart. So, we need to enable more flowers to bloom, and to1107recognize that innovation is fundamentally messy and chaotic.1108Any attempt to put process around it and make it clean destroys1109the innovation.1110    Senator Fischer. Mr. Geurts, as a former acquisition1111official, what do you think are DODs most promising initiatives1112to be able to take advantage of that commercial innovation?1113    Mr. Geurts. If I look back 10 to 15 years ago, I think1114there was a divide between the commercial industry's interest1115in national security and the Government's trust that they could1116actually deliver something relevant to national security. If1117you look over the last 5 years in particular, that has, that1118element is broken down. So, the conversations are starting to1119occur, the trust is starting to occur, the demonstrated success1120is starting to occur. Now, we have to do that at scale as a1121matter of business, not as an exception.1122    Senator Fischer. Thank you. Thank you, Mr. Chair.1123    Chairman Wicker. Thank you, Senator Fischer. Senator1124Shaheen.1125    Senator Shaheen. Thank you, Mr. Chairman, and thank you to1126each of our witnesses for being here today.1127    I recently took over as the Ranking Member of the Senate1128Foreign Relations Committee, One area that comes up over and1129over again is ensuring that our foreign military sales process1130works not just for us, but for our allies, for our military,1131and for our industries. To ensure that we maximize the1132capabilities of our alliances, we need to focus on being able1133to fight in an interoperable and coordinated way with our1134allies and partners. I assume that you would each agree with1135that. You're nodding.1136    Mr. Geurts, how should industry and Government think about1137and be working to ensure that American businesses can work with1138our counterparts, with our allies in Australia and Japan and1139South Korea, to ensure that systems are built on compatible1140architectures that allow coordination between our forces in1141combat?1142    Mr. Geurts. I think a couple things. One would be anywhere1143we can reduce the FMS [flexible manufacturing system] burden in1144terms of regulation, and statute, and things that make it hard1145to do FMS sales, and things that disincentivize our allies and1146partners wanting to use the FMS system.1147    Second, I think as commercial----1148    Senator Shaheen. Are there specifics that you would point1149to?1150    Mr. Geurts. I think there's been a number of studies on1151areas that we can break down. A lot of it's the review1152timeline. A lot of it's the external authorities. I think1153there's work to be done there. Then, I think as commercial is1154global, there are areas where we can leverage commercial1155capabilities that do span many of our allies and partners that1156are already interoperable from the start and leverage those1157versus trying to back in interoperability from a custom DOD-1158made area. We've got to differentiate it. It's not one or the1159other. We need both.1160    Senator Shaheen. I certainly agree with that. Mr. Diller,1161one of the things that has happened as the result of the war in1162Ukraine is that we've watched how creative the Ukrainians have1163been with many of their responses to that war. Do you think1164that there are lessons that we should be taking from what the1165Ukrainians have been able to do?1166    Mr. Diller. Yes, ma'am. Unfortunately, I don't know that1167our defense primes or our startups responded in the way that we1168necessarily would want to that type of crisis. I do think,1169fundamentally, as has been discussed with my colleagues, this1170is an industrial-based problem in America, not just a defense1171industrial-based problem.1172    So how do we look at taking the next leap that allows the1173factory to be part of that war system, that war fighting1174system? You see agility in Ukraine that you are actually1175getting hardware to evolve at the speed of software.1176    On your previous question about FMS, if we can actually1177have 21st century manufacturing system that is digitally1178driven. It allows us to actually have that factory evolving at1179the pace of the war to close that OODA loop, as it's called,1180and to create both interoperability between nations, and to be1181able to scale and remain agile in warfare.1182    Senator Shaheen. Thank you. Mr. Sankar, I'm a big proponent1183of small business. They create 16 times more patents than large1184businesses. One of the ways that we try and take advantage of1185that innovation is through the Small Business Innovation1186Research (SBIR) Program, which has been very successful. I know1187it's a program that Palantir has worked with extensively.1188    I am very concerned about the order that just came out from1189the acting director of the Office of Management and Budget1190(OMB) that essentially puts on hold any financial assistance1191that's dedicated to any programs like SBIR [Small Business1192Innovation Research]. There are 82 of those programs within the1193Department of Defense. What does it do to the research that's1194going on in our small businesses when there's that kind of a1195halt on the program, and we don't know how long it's going to1196last, and we don't know whether it's going to be forever, or if1197they're going to be able to resume what they're doing?1198    Mr. Sankar. Well, what I can certainly speak to is the1199value of small business. So, if we think about the American1200system. This is about David versus Goliath, and you know, we1201need the small business program to continue to encourage many1202more Davids to get out there. But we should be clear that we1203want David to get big. You know, where, where the small1204business program may be failing our existing entrepreneurs is1205it's just enough to keep them small. A class of indentured1206servants living as small businesses. But that's not what we1207aspire for them. We want the small guy to have an opportunity1208to become the next king.1209    So, if there were ways of continuing to evolve that program1210so that we were holding ourselves collectively more accountable1211to how many of our small businesses were able to get big, how1212many of them are now defining the next frontiers of what we're1213doing in defense innovation, I think the Nation would be much1214better off.1215    Senator Shaheen. I certainly agree with that, and hope that1216we can look at the next stages of the SBIR Program to do that.1217    Chairman Wicker. Thank you, Senator Shaheen. Senator1218Rounds.1219    Senator Rounds. Thank you, Mr. Chairman. First of all, let1220me thank all of you for being here today and helping us in this1221project.1222    Albert Einstein, in a letter to President Roosevelt,1223identified the risk of losing to Nazi Germany with regard to1224the possibility of a nuclear bomb. He talked about the need the1225United States to take lead role and basically begin that1226project. At the same time, once that occurred, the Manhattan1227Project was ordered, we started a process within our industrial1228base and within the scientific community that was unbelievable1229at the time. Part of it had to do with a whole lot of really,1230really bright people talking to one another, both from within1231the Department of Defense, within the National Laboratories as1232they had existed back then, and he universities, but also the1233military, and the political leaders.1234    Today, I guess my question, to begin with, we face a very1235similar situation right now with the implementation of AI, and1236with adversaries who are moving very, very rapidly. This tool1237that we have, this AI tool, the countries that are best able to1238incorporate it and to move it forward as quickly as possible,1239are going to win the race militarily and economically as well.1240    Mr. Geurts, in the time that you were within the Department1241of Defense, how often did you actually have a round table or a1242visit with some of the key thought leaders, industrial base1243leaders, innovators? Did you ever sit down and just have a1244round table with them, or is that restricted?1245    Mr. Geurts. Yes, sir, I did. Both of my time in special ops1246and in the Navy, we would create the forum for those kinds of1247discussions, and I would concur. Having those kinds of1248discussions is fully available within the statute and1249critically important to understanding the opportunities that1250are in front of us and how to leverage the full ecosystem.1251    Senator Rounds. Mr. Sankar, Palantir is recognized as an1252innovative organization, a thought leader, a proven facilitator1253in many cases with regard to AI implementation. How often are1254you invited into the Pentagon to sit down and to visit, to talk1255about how you can coordinate with our purchasing organizers,1256the acquisition people, in terms of actually acquiring the best1257and coordinating it with the weapon systems that we have today?1258    Mr. Sankar. I'd say it's a mixed bag. There are certain1259parts of the community that are very proactive in seeking1260advice and interest from outsiders, actually even seeking help1261and pulling together the right groups of folks who would be1262completely non-traditional and very far away from defense.1263There are others that have a more captive sort of approach to1264this.1265    Senator Rounds. You ever been invited in to sit down and1266talk?1267    Mr. Sankar. A few times I have, yes.1268    Senator Rounds. Mr. Diller?1269    Mr. Diller. If we look at the innovation progress that's1270happened over the last decade or so, you see three different1271eras of this starting with the conversation with the launch of1272DIU. Eventually, though, that conversation needed to move into1273something more meaningful, which I think started where we got1274to contracts, where notable civil reform allowed those1275conversations to happen against sometimes large inertial1276hurdles that thought that conversation couldn't happen.1277    I think we need to get to this third era that actually is1278how do we turn this into capability? How do we actually scale1279to get hardware and software so that this is not an episodic1280conversation, but this is the way we conduct war in America,1281this is how we mobilize America for war. That is still a gap1282that I think is needing to be filled. But I'm optimistic that1283we're on a path building on these successes and these pilots1284that is possible.1285    Senator Rounds. Look, I agree with you that that's the path1286forward. I'm just questioning whether or not our acquisition1287process today will allow that to happen.1288    Mr. Geurts, we have a rapid acquisitions process that some1289of the branches are able to access. Is there any reason why all1290of our acquisitions shouldn't be based upon a rapid1291acquisitions approach?1292    Mr. Geurts. Sure. I couldn't agree more. I get a little1293frustrated when we have the rapid acquisition community and1294then everybody else. We should all be rapid. To your previous1295point, I'm a huge believer in the networks, and we do have a1296culture of lawyers that look to everything bad about having1297conversations versus what's appropriate. I think that's an area1298where we can do much, much better as a community. In fact, we1299have to.1300    Senator Rounds. Mr. Sankar, rapid acquisitions.1301    Mr. Sankar. I could not agree more that everything should1302be rapid. Speed is our greatest strength. The American1303entrepreneurial spirit of, essentially, when everything is on1304the line, we throw away the rule book and we execute.1305    Senator Rounds. Mr. Diller, you agree?1306    Mr. Diller. One hundred percent.1307    Senator Rounds. Thank you. Thank you, Mr. Chairman,1308    Chairman Wicker. Mr. Sankar, if there were a round table1309and your competitors were invited and not you, you'd have a1310problem with that?1311    Mr. Sankar. Well, arguably that's what's happening today. I1312mean, it happens. People need to get the best counsel they can.1313We need to move together. There are going to be lots of1314opportunities to keep competing. What we need to move away from1315is a big monolithic approach where you had one chance to get1316involved to actually every quarter we are adapting new1317technologies, and there's a constant kind of reshuffling of who1318are the performers on the work.1319    Chairman Wicker. Very helpful. Senator Hirono.1320    Senator Hirono. Thank you, Mr. Chairman. Mr. Diller, as one1321of the authors of the recently released Blueprint for1322Breakthroughs in Defense Innovation report, you recommend1323giving the combatant commanders, including INDOPACOM [United1324States Indo Pacific Command], the largest AOR [area of1325responsiblity], specific funding to accelerate the rapid1326fielding of new technologies to solve theater-specific1327problems.1328    What advantages would such a change inject into the defense1329acquisition system, and how would you address concerns from1330those who argue the combatant commanders already have a say in1331how DOD prioritizes and procures emerging technologies?1332    Mr. Diller. Yes, Senator, those recommendations were1333specifically building on the success that Chairman Calvert on1334the House Appropriations Committee championed when he added1335$220 million of colorless funding to ADIU [Advanced Digital1336Interface Unit], agile, and .enterprise fielding capability.1337    There's been incredible success in being able to provide1338that flexibility directly to the combatant command, who right1339now is urgently developing capabilities to ensure the potential13402027 risk, is deterred and to make sure that there is proper1341balance. This was specifically how do we move into 21st century1342acquisitions of making sure that there's a digital thread.1343There's digital accountability between the appropriators,1344making sure that that is tied back into a resourcing approach1345that is institutionalized in the Pentagon and is tied directly1346to that war fighter capability.1347    So, it's not necessarily acquisition, it's not acquisition1348authority, but it is something that's much more stronger than1349just the combatant command, asking to actually have a say of1350where dollars go.1351    Senator Hirono. I think that is an important kind of we1352looking at who gets to make these kinds of decisions and who1353gets to weigh in. I agree with you that I think the combatant1354commanders should have a greater say.1355    For Mr. Geurts, everyone agrees that DODs acquisition1356workforce must manage complex requirements pathways and1357extensive reporting structures, which does create a risk-averse1358culture. It's been acknowledged that the DOD has a risk-averse1359culture. What kind of training or tools do acquisition1360professionals need to better leverage the existing innovative1361procurement pathways like OTA? It's the other transaction1362authorities or the middle tier acquisition pathway. So we've1363tried to create innovative ways for faster acquisition, but not1364if people do not take advantage of these pathways.1365    Mr. Geurts. Yes, Senator. There are plenty of pathways. At1366SOCOM, I think we created 17 different ways to buy things, and1367then we empowered program managers to pick the right one and1368held them accountable to deliver.1369    I think we have to get away from the idea that we're1370efficient if we pick one way to do everything, and then train1371everybody to one standard as opposed to exposing them to all1372the different opportunities and then training them what's the1373right tool to pick for what's the right job. Part of that is1374empowering the program manager so they have the authority to1375pick that tool, and it's not spread out between what legal1376thinks, what contracts thinks, what the operator thinks. I1377think that will go a long way.1378    Senator Hirono. Do the other panelists agree with Mr.1379Geurts' approach?1380    Mr. Sankar. Yes, I do agree. If I was to add one thing on1381top of that is it's really bringing acquisition closer to the1382operators, to the war fighters. There's a way in which, where1383we divide these things up so cleanly and expect that1384acquisition can deliver on its own.1385    Another way of thinking about your question on combat1386commanders is it's the answer to the monopsony. We have 131387SOCOMs, we can introduce a lot more demand signal. We should be1388celebrating the heterogeneity and the needs across our SOCOMs1389rather than having a unitary solution driven by the services1390that that needs to be universal.1391    Senator Hirono. Before I run out of time, I wanted to1392mention the importance of SBIR, and this is a way for us to1393really support and encourage particularly small companies to be1394innovative and creative. We should be supporting it. But now,1395apparently, there's a pause on the, these initiatives, SBIR.1396Mr. Sankar mentioned, I think that you understand the1397importance of SBIR. I'd like to know if the other two panel1398members agree. Mr. Miller?1399    Mr. Diller. Yes, ma'am. I, as the director of AFWERX, I1400issued thousands of them a year. There are reforms that should1401happen, but it has done incredible things to help mobilize the1402American industrial base.1403    Senator Hirono. Mr. Geurts, you agree?1404    Mr. Geurts. Yes, ma'am.1405    Senator Hirono. Thank you.1406    Chairman Wicker. Thank you, Senator Hirono. Senator Ernst.1407    Senator Ernst. Thank you, Mr. Chair, and gentlemen, thank1408you for being here today. I am particularly excited about the1409discussion today, and I hope that we can take this information1410and your thoughts, and actually act on it.1411    So I'll start with you Mr. Diller. I serve as the chair of1412the Senate Committee on Small Business and Entrepreneurship,1413and I'm working on a bill to actually reform SBIR. While it's1414important, I agree, it needs to be reformed. So what I'd like1415to do is revamp phase 3 acquisitions, and a number of the1416efforts you've helped create have been very successful in1417scaling technologies from innovative small businesses to the1418war fighter.1419    Mr. Diller, how can we reform SBIR and expand on this work1420across the DOD innovative ecosystem?1421    Mr. Diller. Yes, ma'am. First, thank you for your1422leadership and being a champion for small businesses. We talk1423about mobilizing America. This particular capability with SBIR1424is key. When we picked it up in AFWERX, it was not a perfect1425program, but it was a tool that we had, and thanks to the help1426here on Capitol Hill, it has been better year after year.1427    I think there are three important things that we need to do1428in the SBIR program. One, I think expanding the number of1429companies who can get in. This frustrates to sometimes the1430venture capitalists because they can't pick easily. But this is1431a venue, the conversation about how do we bring in many1432companies for the conversation. This is the venue for that1433conversation. So, actually, more SBIRs with lower dollar1434amounts initially, but we also need to be very deliberate about1435scaling, and scaling quickly.1436    Those best companies, we need to be better at judicious1437reviewers of which companies to scale. Then building on things1438like the stratify program that can literally take a company1439from a $50,000 program in 1 year to a $50 million program the1440next year through proper due diligence internal to the1441Department of Defense.1442    The last piece of that is that due diligence. Making sure1443that the dollars that are going through the SBIR Program are1444actually going to American companies and are not feeding the1445adversary. That piece is making sure that that is consistent1446and rigorous across the Department with clarity for those1447companies that want to make sure they have clean capital. How1448is that conversation happening? There's more opportunity to1449build the proper relationship with industry to get everyone on1450board with that mobilization.1451    Senator Ernst. That's fantastic, and making sure the1452dollars go to American companies is extremely important as1453well. I have focused on that.1454    Mr. Sankar, as chair of the Senate DOGE Caucus, I couldn't1455agree more with your Defense Reformation paper where you State1456that small business program should not be welfare. I agree1457wholeheartedly. In the past decade, 25 companies they're1458notoriously known in my circles as ``SBIR Mills'' received 181459percent of all award dollars at DOD amounting to about $2.31460billion. That's a $92 million windfall per company in a program1461meant for small businesses.1462    GAO [Government Accountability Office] reports that these1463frequent flyers have lower sales and investments and fewer1464resulting patents. We have a problem here. So, Mr. Sankar, how1465can we eliminate this waste of taxpayer dollars, and reorient1466the SBIR program to its original purpose as a source of merit-1467based seed funding?1468    Mr. Sankar. I could not agree more. That's clearly an abuse1469of the intent here. One thing we could think about is time1470limiting; how long a company is eligible. It's not just about1471the size and staying below some sort of threshold. But look, we1472aspire for this small company to get big, and I don't know if1473the right threshold is 5 years or 10 years, but there's some1474amount of time that we would expect you to have the opportunity1475to get big. We're going to bet on other entrepreneurs in the1476future.1477    The other part is more of a top down. As we measure the1478efficacy of the SBIR Programs, we should really be thinking1479about how many big companies were we able to create. I think1480that will help us have a clear head as we think about the next1481rounds of investments that we're going to make.1482    Senator Ernst. Yes, I agree, and if you go back and you1483look at the companies that are benefiting from these programs1484right now, most of them exist on the East and West Coast. Very1485few of those dollars are actually getting spread into Middle1486America, and I do think that that this will change in the1487future and provide opportunity for more small businesses.1488    Mr. Geurts, I will get back with you on questions for the1489record, but I appreciate your service to our Nation.1490    Mr. Geurts. Thank you, ma'am.1491    Senator Ernst. Thank you. Thank you, Mr. Chair.1492    Chairman Wicker. Thank you very much, Senator Ernst. A few1493of our Members of the Committee have referred to a paper1494written by Mr. Sankar, entitled The Defense Reformation,1495consisting of 19 Pages. Some of them are just title pages, but1496I ask unanimous consent that we enter that into the record1497right after Mr. Sankar's testimony. Without objection, it is so1498ordered.1499    Chairman Wicker. Senator Kaine, you are recognized.1500    Senator Kaine. Thank you, Mr. Chair, and thanks to our1501witnesses. I appreciate this hearing. I think it's really1502important that we dig into this.1503    If I could, Mr. Chairman, I'd like to recommend, as we're1504looking at this topic, that we also think about a hearing on1505workforce, because I think acquisition reform is needed. I1506think a lot of our challenges are also around inadequate1507workforce in the defense industrial base. I'd love to have a1508committee hearing on that topic as well. This is something Mr.1509Geurts and I have talked about before.1510    Mr. Diller, you mentioned DIU, the Defense Innovation Unit,1511and I want to ask you, and then the others, if you care to1512comment. How would you assess? I've been impressed with their1513mission, and I've been impressed with some of what they've1514done, but I haven't been involved with it in a day-to-day way.1515Maybe you-all have. How would you assess both the performance1516of DIU, but maybe more importantly, the promise of DIU?1517    Mr. Diller. Certainly, from a performance perspective, this1518is a startup inside a very, very complex bureaucracy. For1519years, those startups internal to the bureaucracy largely get1520eaten by the bureaucracy. You can look at the rate of hiring to1521actually be able to build the organization. Even when the top1522leadership in the Pentagon says go higher, the frozen middle1523certainly makes that a challenge. I saw the same thing when I1524was in AFWERX.1525    So given those headwinds that they must address, I think it1526provides--they've been making great progress. There have been1527great companies that are getting built because of the1528collaboration. Real contracts are now turning into capability1529that is actually deterring an adversary.1530    Senator Kaine. What advice would you give to the Pentagon1531today about DIU and the way they should sort of position DIU1532within the DOD?1533    Mr. Diller. I think the NDAA that had been passed over the1534last couple of years of elevating specifically--the challenge1535that we've had with innovation in the past is when these new1536technologies come to the forefront. It does not necessarily fit1537in with our traditional program executive officers. It doesn't1538necessarily fit in with our training and adoption pipelines.1539Many times, it doesn't necessarily have an obvious fit in one1540of the services, and this is nothing pejorative to the service.1541It's just new, and we don't have a home for it.1542    So, DIU is fit that place of actually identifying joint1543capabilities to support the joint war fighter. I think that1544elevation as it is being reported directly to the Secretary of1545Defense, so that the conversation with great companies in this1546ecosystem can be free and open, so that it is encouraging1547actual use of existing authorities. Right? Is a culture change1548that is using existing authorities to create the speed so that1549we can actually move in in a relevant pace?1550    I think that structure is there. There's a lot still to1551build out in that structure. DIU is the small acquisition piece1552of this. There's an adoption piece on the back end that might1553not quite be there, and there's some questions of what specific1554problems are these organizations solving that doesn't fit into1555the beginning either. So, there's room.1556    Senator Kaine. Let me switch gears. A lot of the testimony1557this morning has been about encouraging innovation and emerging1558technologies that, as you say, might not fit directly within1559the silo mentality. I want to talk about acquisition innovation1560in an ongoing area that we've had a lot of problems in that1561shipbuilding and subs.1562    We had to put $5.7 billion at the end of the year into the1563Virginia-class sub program to try to move it more into on-time,1564on-budget. That was after we did a supplemental bill in April,1565putting money into the program on top of the base budget. Mr.1566Geurts and I have dealt with this. What would be a way to think1567of acquisition reform in the context of like ship and sub1568building? How should we look at different contract vehicles?1569What would your thoughts be on that?1570    Mr. Geurts. Yes, sir. I think we should look at innovation1571acquisition reform in all phases. There's great technology. We1572spend over $10 billion a year on ship repair. There's state of1573art technology that could enhance that today, reduce those1574bills, get throughput up.1575    I go back to this. We need a network of performers. We need1576a big ship building--you know, capital-intensive shipyards, but1577we need to have them connected to a whole network. Whether it's1578commercial service providers that's got digital data, whether1579it's Nate's rapid manufacturing and adaptable things. That's a1580piece I think we're missing.1581    We have these kinds of pockets of old legacy things, new1582commercial things we haven't yet tied that together into a1583well-performing network where people can come in and out of1584that network as their performance merits.1585    Senator Kaine. Others have thoughts on shipbuilding in1586particular in my last 17 seconds?1587    Mr. Diller. Just briefly, if you go look at----1588    Mr. Geurts. Take the whole 30 seconds. I'm1589    Mr. Diller. We are living in an industrial age that does1590not match the talent pool that we have out there. We really1591must think about what the next leap is in manufacturing.1592    Senator King. So back to the workforce question. I1593appreciate that. Thank you, Mr. Chair.1594    Chairman Wicker. Thank you very much, Senator King. Senator1595Budd.1596    Senator Budd. Mr. Geurts, thanks for your service at the1597SOCOM. So, what are some of the takeaways that you've had from1598SOCOMs approach to rapid acquisition? Do you think it's1599realistic to apply those lessons learned to military services?1600    Mr. Geurts. Absolutely. I think a couple of those key1601things are rapid decisionmaking, creating venues to get exposed1602to all the technical capabilities and performance that are out1603there, like soft works. I think it is having the trust of1604Congress and the relationship to be flexible. I think it's1605empowering the program executive officers to manage a1606portfolio, not manage individual programs.1607    Senator Budd. Appreciate that. Mr. Sankar, Mr. Diller. Mr.1608Sankar, we'll start with you first. So, what's been your1609company's experience having navigated the Pentagon's accounting1610and invoicing standards regulatory requirements terms of1611payment, all that. How has that affected your ability to do1612business with the DOD, and you said you've been there, I1613believe, a couple of decades, Mr. Sankar, so maybe in the early1614days as a smaller company, maybe much more intimidating at that1615point. So, if you want to go back in history a little bit, what1616was it like as a startup trying to do business with DOD?1617    Mr. Sankar. It was quite complicated. I can't tell you the1618number of times we submitted invoices and somehow didn't fill1619out the right tick box somewhere. That meant the invoices would1620get kicked back. People always say you can count on the1621government to pay its bills. I think you can in the end, but1622perhaps not always on time, just given how byzantine the1623process is.1624    So, I think it's not commercial. That's kind of the reality1625of it. We should be thinking about where the divergence from1626commercial standards helps the taxpayer, helps the Government,1627and where is a vestige of how we've built the system over time.1628I think it does act as a deterrent and to new entrants coming1629in.1630    Senator Budd. So, as for the small business folks that are1631out there listening, what would payment terms be like for a1632small business perhaps in the early days? What would be1633expected?1634    Mr. Sankar. Well, everything is paid in arrears, of course.1635So, you can't structure it any other way. Maybe the payment1636terms are quite reasonable, net 30, something like this.1637    Senator Budd. Then what's the difference between that and1638reality?1639    Mr. Sankar. You could probably add a couple months on that.1640    Senator Budd. Ouch. Well, I'm glad you survived. Mr.1641Diller?1642    Mr. Diller. Sure. We have one contract right now with the1643Government that is a cost accounting. If we can avoid it, we1644will not do that again. It does not serve--I don't think the1645Government well for this type of work, and it certainly does1646not serve the small business well. Going back to this question1647of the reviewer versus the doer, we still have failed to get1648the Department of Defense into the 21st century to digitize the1649reviewer part at a pace of relevance so that there can be more1650doers.1651    That work still is lacking significantly. It's slowing down1652the Government. It is creating waste, and it is keeping us from1653getting the best technologies in the hands of our war fighter.1654    Senator Budd. Thank you. Mr. Geurts, acquisition1655professionals, they often cite the high costs, the robust1656penalties, and disincentives to taking programmatic risks. I1657think it results in a culture of compliance over innovation.1658You've mentioned that a little bit this morning.1659    So, in contrast, in the non-DOD world, many industry-1660leading companies, they celebrate failure and they adopt an1661iterative approach to learning quickly. How might program1662managers be able to achieve rapid iteration while minimizing1663the risks of failure?1664    It seems to me, if you want to address the cultural issue1665here, and I don't know if it's a class or a--I've heard1666somebody ask, what tools do you need? I think it's more than1667that.1668    Mr. Geurts. I think it's a cultural issue. So, if you agree1669or disagree, please weigh in on that a little bit, too. It is1670absolutely a cultural issue. There's training you can do to1671expose people to the tools.1672    Senator Budd. Yes.1673    Mr. Geurts. But if they're in the wrong culture, they won't1674take advantage of the tools. I think it goes back to being1675outcome-focused, having unity of command, who's in charge, and1676then holding that person accountable. In the SOCOM world, there1677was more of that than there was, and there was flexibility.1678    You can create strategies where you'll have rivalries and1679multiple performers because you can act very efficiently. Then1680if a company performs well and has a product, the operator1681wants you buy more of them. If they don't, you buy less and go1682to a different product. That doesn't align well with a1683centrally planned, you know, 30 percent of our program elements1684are less than $10 million a year where you send 47,000 pages of1685budget documentations, and then you get hauled up in front of a1686staffer if you make a decision that's the right decision, but1687doesn't align with that bureaucracy. We've got to get to a1688better spot in that regard.1689    Senator Budd. Thank you.1690    Chairman Wicker. Thank you, Senator Budd. Senator King.1691    Senator King. Thank you, Mr. Chairman. I'd like to go back1692to Senator Reed's opening statement at the end where he talked1693about Churchill and the necessity of thinking fast. The first1694step, it seems to me in this process is to have a better focus1695on what we need in the future and not what we needed in the1696past.1697    The prime examples to me are hypersonics and directed1698energy. The ground-based interceptor program. Those missiles up1699in Alaska that are designed to hit a bullet with a bullet are1700$70 million apiece. By the way, I got that number from an AI1701app on my phone. But the point is, we have been fighting the1702last war. Instead of talking about directed energy, which costs170350 cents a shot rather than $70 million the focus has been on1704missiles and missiles. And by the way, those missiles won't do1705anything with hypersonics. That's another technology that we1706were late on.1707    So, this process has to start with acquiring the right1708things. New technologies win wars. Genghis Khan conquered the1709world because of the invention of the stirrup. The Battle of1710Agincourt was won by the longbow. World War I, the tank, World1711War II, the atomic weapon. So I think this discussion has to1712start before we get to all the processes that we're going after1713the right products.1714    Mr. Sankar, do you have any thoughts on that?1715    Mr. Sankar. Yes, I do. I love the tank example in1716particular because it was the Royal Navy that built the tank.1717It was widely----1718    Senator King. They were called tanks because the code name1719was tankers for the Eastern front or something like that.1720    Mr. Sankar. I think this shows you, I think, even before1721the tank, there was the land boat, which Churchill--you know,1722this seems to be a hearing about Churchill in many ways. But1723the reason I think that's really important is it was a1724heterodox approach. If you had asked the British Army to think1725of what they were going to need to win World War I, they1726would've been wrong. In fact, they were wrong.1727    Senator King. They would have said more troops and deeper1728trenches.1729    Mr. Sankar. We have to recognize that the innovation to1730fight and win the next war will come from the edges of our1731military. The people who are closest to those problems. It's1732very unlikely to come from this city.1733    Senator King. We wouldn't have had a nuclear navy, but for1734Admiral Rickover.1735    Mr. Sankar. As Zumwalt said, the Navy had three enemies;1736the Soviet Union, the Air Force, and Hyman Rickover. So he was1737not widely loved, but I think we need more tolerance for the1738heretics, because these heretics end up being our heroes.1739    Senator King. Well, I hope that--and I don't know how you1740inject creativity into the process. Mr. Geurts, do you have any1741thoughts on that?1742    Mr. Geurts. I also think, sir, that we need to invest in1743the capacity to act quickly. So back to Mr. Diller's comment,1744even if we plan much better, if we don't have the industrial1745network that can react quickly, then we're going to--if we have1746to wait to create that to decide the perfect thing we want. So,1747I'm also a fan of the plan for the unplanned, create the1748capacity to rebuild. We've lost the middle of our industrial1749base. We've got very big performers, a lot of little small1750performers, and that's where I think the commercial marketplace1751venture scaling into that middle becomes really important.1752    Senator King. Speaking of acting quickly, this is a chart1753that derived from our dear departed Chairman, Jim Inhofe. It1754compares the time it takes from concept to a new product1755starting back in 1945. The dark line is military aircraft. The1756light blue line is a commercial aircraft, and the red line is1757an automobile.1758    So back around in the 1960s and 1970s, those three things1759took about the same time to get to prototype and actually1760going. But something happened, and now, a military aircraft is1761like 25 or 30 years from concept to development. Commercial1762aircraft much, much faster, and an automobile has gone down.1763So, I believe that a lot of this is because of the bureaucratic1764things that we've been talking about today, the impediments to1765actually getting some of these products to market.1766    The other thing that bothers me is the proclivity of the1767Pentagon to have its own product. It can't buy something off1768the shelf. Senator Tillis used to bring the spec for the1769handgun which was I don't know how many thousand pages. Instead1770of going to commercially available handgun, all of that would1771require--requirements creep as another problem. The definition1772of requirements and then requirements keep stacking up. Mr.1773Diller, do you have any thoughts on those ideas?1774    Mr. Diller. Sure. The Air Force has emptied the museums and1775the boneyards for C130 hub caps. This took us days to build. It1776will take months to get it certified. It finally was to fly. It1777took months to certify. Nothing changed. The data was available1778on day one. The hardware was available on day one. It did not1779change. We have to change the pace of adoption. We must1780digitize our industrial base. We must digitize our bureaucracy.1781    Senator King. With your indulgence, Mr. Chairman, one of1782the problems is the risk-averse, which has been discussed. As1783I've observed the development of hypersonics, for example, the1784Chinese seem willing to fail. They do tests and fail. We have1785to have every test work, and that has dramatically, in my view,1786slowed down our development of some of these important1787technologies. Mr. Sankar, you're nodding your head. Is that1788correct?1789    Mr. Sankar. I mean, just like the Starship. Elon learns1790more from the Starship breaking up than he does from an1791inherently waiting and slowing down to get the right perfect1792launch one time around.1793    You know, the value, the rate of learning. The first1794derivable learning is our competitive weapon. It's how quickly1795we are adapting, not what are we capable of doing today. It's1796how much are we changing tomorrow? I could not agree more.1797    Senator King. Thank you. Thank you, Mr. Chairman.1798    Chairman Wicker. Well, thank you very much. Now, before I1799recognize Senator Banks, I think we need to add to the record a1800smaller copy of that chart.1801    Senator King. I'll provide it to the Committee.1802    [The information referred to follows:]18031804Commercial vs. military time-to-market trends1805[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]18061807    Chairman Wicker. Provide it. I find it very interesting,1808and also, Mr. Diller, if you don't mind, Senator Banks, what is1809the object that you just picked up? Tell us a little more about1810that.1811    Mr. Diller. So, Senator Wicker, going to your first point.1812If America goes to war tonight, we will go to war with the1813multi-trillion-dollar legacy force that we have today. When we1814talk about innovation, while there are great third offsets,1815hedge forces, replicators of autonomous robots, we must make1816sure that innovation is supporting the multi-trillion dollar1817force that we have today.1818    The C-130, as the Air Forces said, did not have a supply1819chain for hubcaps. They had emptied the museums; they had1820emptied the boneyards. This is available to be 3D printed,1821literally designed by Kevin Czinger and his team at Divergent1822Technologies, and he did it in days digitally designed. You1823know, there was a degree of data available that is1824unprecedented with legacy approaches.1825    But the challenge of getting this adopted into the DOD1826bureaucracy is one that--it goes back to this risk aversion; it1827goes back to how do we digitize this entire system? How do we1828use digital engineering and digital manufacturing because this1829saves the taxpayer billions of dollars, and it allows aircraft1830that are available today in a legacy force to fly tonight. Many1831of them cannot do that today because of the horrific, horrific1832debt that we have at our depots and in our sustainment1833enterprise. This means innovation. It is there and available.1834    Chairman Wicker. Be a little more specific about what the1835holdup is.1836    Mr. Diller. The holdup is the risk-aversion. Look, there1837are things that fail. It goes through our airworthiness1838processes as you look at this, right? In some instances, there1839are some parts that if they fail, it is a loss of human life.1840How is it that we make sure that we're using digital approaches1841to identify where are those safety critical things? How do I1842consume data in a 21st century manner that is a digitized touch1843to that engineering design, that is taking a degree of data,1844when we are certifying cars parts for Aston Martin, Bugatti,1845McLaren, we are doing that with data sets that are1846unprecedented and unconsumable today by the Department of1847Defense.1848    Those companies, the highest brand name companies in the1849world, would not be offering those safety critical parts on1850their vehicles if they did not have assurance of those data1851sets.1852    When we look at the Department of Defense, that's going to1853take years unless there is encouragement, and thanks to your1854team, this initial language started with the 25 NDAA, we must1855build on it. We must drive that adoption. There are incredible1856innovators in the Department of the Air Force that want to do1857this, but it is going to take a nudge to actually digitize and1858to make sure that that massive risk aversion is saving dollars1859for the taxpayer and providing war fighting capability.1860    Chairman Wicker. Thank you very much. Senator Banks, you've1861been indulgent, and the chair will be indulgent with you on1862your questions.1863    [Laughter.]1864    Senator Banks. Thank you, Mr. Chairman.1865    Mr. Sankar, what kind of a difference would it make if we1866gave the combatant commands their own acquisition authority?1867    Mr. Sankar. I think it is the single biggest difference1868that we can make here. You know, the Department of Defense is1869the only institution I know of that divides up supply and1870demand. The integration of supply and demand is the beating1871heart of any company, that consensus driving process.1872    The COCOMs handle the demand, real world events, the1873services, man train equipped, they provide the supply. That1874would work if we really thought every COCOM and all needs were1875perfectly knowable and unitary across space and time here. But1876actually, all of our advantage comes from the fact that we1877might need slightly different things and the signal for where1878that comes from is the combatant commander.1879    So how do we give the people closest to the fight, the1880ability to express a little bit of competitive demand signal?1881Ninety percent of what you want is probably coming from the1882services, but that 10 percent gap is what's going to make or1883break us in that fight.1884    How do we give them a little bit of budget, a little bit of1885authority and ability to break the monopsony and introduce1886something like a free market where there's multiple demand1887signals coming?1888    If we go back to world war, like how did we have a world1889where every service was competing to build an ICBM? Well, maybe1890a COCOM commander should decide whether the Navy or the Air1891Force has the better idea and concept for their specific force1892employment or the emergent needs that they're actually seeing.1893I think that competition will get us all to be better.1894    Senator Banks. It seems like common sense. Why aren't we1895doing that already?1896    Mr. Sankar. I think having the luxury of having won the1897cold war, is we view that as duplication. We view that as1898wasteful. Why can't we just pick the right answer upfront? I1899think our system is exquisitely designed to solve all problems1900that can be solved, deductively, top down, we can think our way1901through it.1902    But the promise of America, is that there's so much1903messiness, it's all inductive, and our system is very, very1904bad. It's poorly set up currently. To find the things you got1905to reason your way through. You got to experience it, roll up1906your sleeves, get dirty and realize new insights as a1907consequence of doing that. I think we solve that by giving a1908little bit of strategic autonomy to the COCOM commanders to buy1909what they need and to build what they need.1910    Senator Banks. So, play that out. How would the services1911and the defense agencies react if they had to compete with1912another buyer?1913    Mr. Sankar. Well, I think, you know, like most people don't1914really like competition. Of course, a part of that's going to1915be a threat. But I think if you get past the initial1916hysteresis, you'll have the next step from that is, okay, well,1917how do I actually change what I'm building so that the COCOM1918commander wants what I'm building? That's where we're going to1919start to get the leverage from that.1920    I can think about it as this is also the idea around1921competing programs and competing program managers that I saw in1922the FoRGE deck, where if we have--what is the incentive for a1923program manager to adopt new commercial approaches that1924actually disrupts their existing program? So, I think today's1925incentive with a unitary effort is deny, deny, deny, pretend it1926doesn't exist, block it. Versus actually I'm competing against1927another great American one corridor down. I want to be the1928first person to adopt the disruptive technology so that I can1929win.1930    Senator Banks. Do you have a good example where the1931combatant command's, lack of acquisition authority caused1932delays, or even hurt the mission?1933    Mr. Sankar. Well, I think you could look at the success of1934Project Maven, which really didn't come from the services. You1935know, people love to derive OSD level efforts as bureaucratic1936or not sustainable. But that innovation really came from the193718th Airborne. It came from CENTCOM. It came from EUCOM, it1938came from the Afghan NEO. It came from the emerging demand1939signal in the world, the crisis that had to be responded to,1940the learning that could only happen there, folded in1941capabilities that ultimately scaled to the Force.1942    Senator Banks. Mr. Geurts, program managers in the private1943sector are obviously paid more than Government employees. They1944also get bonuses and stock options for good performance. But in1945DOD, the uniform military personnel and civilians managing our1946critical weapons programs get paid the same whether they1947deliver or not. Do you think the limited pay for performance1948system that the DOD has tried, has worked?1949    Mr. Geurts. My experience both personally and1950professionally, is it's not a pay issue. The high majority of1951program managers want to deliver an operationally relevant1952capability for the war fighter. They are just mired in a bunch1953of distractions, a bunch of outside stakeholders. Many more1954people can say no than can say yes, and so, they spend 901955percent of their time managing your bureaucracy, not managing1956the effort.1957    Then I think the other piece is we've got to also get to1958the point to be innovative, you have to start things quickly,1959we also have to be able to kill things quickly. For lots of1960different reasons and I think that's one of the challenges. If1961you give COCOMs acquisition authority, we'll start a lot of1962things. But if we can't kill the things that aren't performing1963for whatever reason, then you won't have a highly functioning1964adaptive system.1965    Senator Banks. Well put. I yield back.1966    Chairman Wicker. Thank you very much. Senator Cramer.1967    Senator Cramer. Thank you, Chairman Wicker, Senator Reed,1968thank all three of you for being here.1969    I've stayed the whole time because this, frankly, this is1970why I'm here--is what you're talking about. I'm not sure of all1971the solutions, but so far, I like what I'm hearing. This is1972exactly why by the way, Senator Kelly and I stood up the1973Defense Modernization Caucus. So, thank you for your comments1974today.1975    I'm going to go a completely different direction than I was1976planning to, or that my staff was planning me to. I was1977thinking back to my first days in the Senate. It was at that1978time when DOD was looking for somebody to win a contract for1979cloud computing, and the Jedi, remember the Jedi competition? I1980remember they chose Microsoft and Amazon early 2019 to compete,1981late in 2019, they awarded Microsoft. What resulted in that1982was, of course an immediate protest.1983    Then they went on a while longer, flipped the script,1984chose, Amazon, then Microsoft protested, and then NSA [National1985Security Agency] took over. Anyway, about 5 years later, we1986finally have companies doing cloud computing. I was very1987frustrated by the ability for a company who didn't win the1988contract, regardless who the company is, to protest the company1989who did, and then hold up modernization by 5 years. Now a lot1990of things were happening in the meantime.1991    But then we fast forward to today, where we read about now1992what I believe to be the most innovative agency within the DOD,1993the Space Development Agency. Which has been under attacks1994since the day we stood it up by, swamp creatures and legacy1995space operators and legacy acquisition of procurement1996officials, and a protest that I almost guarantee you, will slow1997up the proliferated war fighter space architecture. Which is1998the worst thing that could happen.1999    It's even led as, you know, to a PIA claim that looks more2000political than it does real to me, quite honestly. I would just2001like each of your comments or opinions about the protest2002regime, and whether there's more that can be done there. Don't2003get me wrong, competition requires the ability to challenge,2004but it shouldn't provide the opportunity to make the country2005less safe. I'll just start with you Mr. Geurts, we can just go2006down from there.2007    Mr. Geurts. Yes, sure. I do agree there needs to be an2008avenue, but that avenue over time has gotten abused. One thing2009I suggested early on, was you get one bite at the apple; you2010could protest the GAO or court of Federal claims you couldn't2011protest twice. I also think there should be some look at2012behavior over time and some disincentive for what I would call2013chronic protesting, particular by incumbents.2014    Mr. Sankar. I agree. It's also been abused that I think2015it's a hard problem for the reasons that you've already2016articulated. But I think one way that we could really buy this2017down is by doing more bakeoffs, more things in parallel,2018getting more things fielded, because anyone can win a fiction2019writing contest. It has no correlation to your ability to2020perform.2021    But when we have the satellites in space, we'll be able to2022tell one way or another, maybe we'll decide, actually, we2023should have 50-50. Maybe we should have multiple performers.2024Maybe we're working bad decisions because we're evaluating you2025through a fiction writing contest instead of empirically in the2026field.2027    Senator Cramer. I thought, by the way, the examples one of2028you used a little bit ago, Elon Musk learning more from blowing2029up. I was at the Starship launch with President Trump, and it2030was very confusing for several of the business people there to2031hear Elon speak so positively about the booster that didn't2032come back, and they had to put in the water and like, but we2033learned so much.2034    That's a tough culture in our business and in government2035but it's one we have to foster. Mr. Diller, your comments on2036the protest.2037    Mr. Diller. Sure. It gets to that risk. I went to the2038French test pilot school and the speed that my 5-year-old was2039able to learn French compared to me, he didn't care. Right. He2040did not have this risk averse culture. It's the same with Elon2041Musk. When we look at these protests, if we take this approach2042or chairman of the joint chiefs of staff use this phrase,2043'acquire to require?, and it's exactly what Sean was saying,2044how do we slowly build trust? Because it's at the core, it's a2045trust issue. If we actually work together at the beginning in2046ways that OTs allow us to, that trust can be billed.2047    Chairman Wicker. Thank you very much, Senator Cramer. Mr.2048Sankar, before I go to Senator Warren, do we have the statutory2049authority in place to have the type of bake off that you2050described?2051    [Laughter.]2052    Mr. Sankar. We absolutely do, and we have participated in2053just those sorts of down select processes.2054    Chairman Wicker. Okay. So it's just a matter of the, folks2055in charge doing that. Senator Warren2056    Senator Warren. Thank you, Mr. Chairman, and thank you for2057holding this hearing. DOD buys a lot of stuff from defense2058contractors and to protect the military and taxpayers, it's2059long been the law that defense contractors must give DOD2060contracting officers certified cost and pricing data, to help2061verify that a price that's being charged is fair and2062reasonable.2063    One of the big exceptions to this though, is for2064'commercial goods and services? based on the principle that the2065market will make sure it's a fair price. If you could buy it on2066Amazon, that's a fair price. You don't have to go into all the2067background on how you got there. I get that, and I am all for2068commercial buying.2069    But the fact is, this is turned into a massive loophole2070where big defense contractors withhold data, even though2071there's no market and DOD effectively, the only customer,2072doesn't have this information so that these giant companies can2073price gouge the military.2074    So I want to give you an example here. For years, the Army2075was buying Chinook helicopter engines from Honeywell, and2076Honeywell successfully lobbied Congress so its engines would be2077treated as commercial, and Honeywell wouldn't have to turn over2078the certified cost and pricing data. Now, Mr. Sankar, you're2079the CTO of Palantir, a billion-dollar tech company that2080contracts with DOD. Once Honeywell got the engine moved to a2081commercial engine, what do you think happened to the price?2082    Mr. Sankar. I'm not familiar, Senator.2083    Senator Warren. Well, it went up, not down by a hundred2084percent, and that's the problem we've got here. Too often, DOD2085is outgunned when it is negotiating with these giant defense2086contractors, which is exactly why it needs the cost and pricing2087data to avoid being ripped off. Now, Mr. Sankar, your company2088Palantir, is looking to create a consortium with another2089defense tax company Anduril, is that right?2090    Mr. Sankar. Yes.2091    Senator Warren. To jointly bid for something called `other2092transactions agreements', or since we have to give everything2093initials OTAs, where the Government also waives taxpayer2094protections on how to get pricing information. I'm sure it's2095not your intent to team up with another organization in order2096to price gouge the military. So, this next question should2097probably be easy here.2098    DODs Inspector General recommended requiring bid2099contractors to alert military contracting offices when the2100price of a good or service goes up by 25 percent. In other2101words, move it up so other people--and can get eyes on it. Mr.2102Sankar, do you agree with the IG's [Inspector General's]2103recommendation?2104    Mr. Sankar. I do agree. I think the price signal is part of2105the competitive market and encouraging more entrants and2106capital to efficiently be allocated to improve things.2107    Senator Warren. Excellent, and will Palantir agree to do2108that voluntarily?2109    Mr. Sankar. I would defer to my team here, but I don't2110think we would've any conceptual disagreement with that2111approach. Okay.2112    Senator Warren. So, can I treat that as a yes?2113    Mr. Sankar. I would defer to my team.2114    Senator Warren. Well, I want to be clear here, because----2115    Mr. Sankar. As the CTO [Chief Technology Officer] we don't2116speak on the business side.2117    Senator Warren. We only know about most of these2118overcharges because of the work that the Department of Defense2119Inspector General has done. This is the person who President2120Trump just illegally fired on Friday night, along with at least212116 other IGs. I am deeply concerned that this Administration is2122removing exactly the cops on the beat, that we need to identify2123waste and to prevent these kinds of increases.2124    Mr. Sankar, do you think it helps or hurts national2125security to have Senate confirmed watchdog who can be there on2126pricing questions like this to call balls and strikes?2127    Mr. Sankar. As a technologist, what I can speak to is, when2128you look at Intel in the late 1960s, 96 percent of the market2129for integrated circuits was the Apollo program and the DOD, but2130Bob Noyce says the co-founder of Intel, the co-inventor of the2131transistor, always envisioned a bigger commercial market. Our2132ability to deliver a salt breaker and ultimately have an2133asymmetric threat against Soviets----2134    Senator Warren. I'm sorry, can you relate that to the2135question I just asked?2136    Mr. Sankar. Yes, I promise it'll get there. Our ability to2137deliver a salt breaker was because actually he could create2138integrated circuits that were thousands of times cheaper than2139when we were building Apollo. That was only possible because he2140had an eye toward the commercial market.2141    I completely agree that if you have a fake commercial item2142that doesn't actually have commercial applicability, if the2143company is not able to leverage a diversified R&D base that2144goes beyond the government, that that is the promise that2145should lead to price performance improvements for the2146Government, then you're not getting the value of the commercial2147item.2148    But when we look at space, for example, I grew up in the2149shadow of the Space Coast. The cost to get a kilogram into2150orbit for the shuttle was $50,000 a kilogram. So the cost with2151Starship heavy reuse will be 10 bucks. So,2152    Senator Warren. Mr. Sankar, I very much appreciate that2153you're trying to push here on cost, I am too. The question I2154had asked you is whether or not we need IGs, who are the2155whistleblowers, who say people are cheating on the cost, for2156example, on the definition of commercial, are somebody who can2157help us bring these costs down.2158    Pentagon is spending $440 billion this year on contracts.2159It's important for us to get better procedures in place to get2160some eyes on what they're doing, and IGs help us do that. Thank2161you.2162    Chairman Wicker. Thank you very much, Senator. Perhaps Mr.2163Sankar would like to respond on the record to that last matter.2164With regard to deferring to your team, once you've had a chance2165to do that, perhaps, Mr. Sankar, you could supplement your2166question on the record along with other things.2167    Chairman Wicker. Senator Schmitt.2168    Senator Schmitt. Thank you, Mr. Chairman.2169    I'll start where Mr. Sankar left off and ask a question,2170and all three of you feel free to chime in. I also serve on the2171Commerce Committee, and to my surprise, in my first year, I was2172named the ranking member of the Space and Science Subcommittee.2173I would not have put that on my Bingo card in coming into the2174Senate in my first 2 years. But I found it fascinating because2175of the innovation that's happening in space, driven by the2176commercial private sector, right?2177    One of the things that we were able to do was to extend the2178learning period which is kind of essentially allowing these2179companies to innovate and any regulations that would come2180really sort of follow the path of what has worked.2181    So not to artificially constrain the innovation on the2182front end with a bunch of bureaucrats who are just sort of2183making it up, not really knowing where the rules of the road2184really should be. I'm wondering is there a scenario or how2185would we construct something similar? I mean, we're all getting2186at this challenge of innovation, and how do you unlock it in2187what seems to be a Pentagon that has just sort of been captured2188by centralized planning.2189    I mean, I think our great advantage against Communist China2190is our ability to innovate, they're really good at copying.2191We're really good at innovating, but if we hamstring our2192ability to innovate, we lose our advantage, right?2193    So, this example of a learning period as it relates to2194commercial space, what would be a version in your mind that,2195that we could sort of replicate in the NDAA?2196    Mr. Sankar. Well, I think the commercial SpaceX is a great2197example where SpaceX wasn't given the monopoly. They had to2198earn it. We had multiple competing approaches to get to space,2199and they thought that they could do that at a price performance2200level, no one else could. That's clearly been proven to be2201true. I think if we applied that more generally, which is like2202the inductive bottoms up innovation is the American spirit,2203that is our competitive advantage. How do we get more shots on2204goal for all the efforts we're going to? Less certainty in the2205top-down centralized planning, more space to have new2206performers, new entrants, present the heterodox ideas.2207    I think for that to really take hold, you either need to2208have competitive program offices within the services or you2209need to empower the COCOMs to create that sort of demand signal2210that varies, that pushes the adoption of innovation.2211    If I look at our own company, the history, all of our2212adoption came from the field. It came from Iraq; it came from2213Afghanistan. It didn't come from the program offices. It2214actually came despite the program offices. They were resistant2215to this as something that was going to screw up their cost2216schedule performance.2217    I think the kiss of death would be trying to create some2218sort of smooth process to go from new ideas that are innovative2219to scaling them. I promise you that is always going to be hard,2220that is always going to be messy, it's going to be2221interpersonally friction full. If we wrap that in process, we2222will kill it and smother it. But if we enable ourselves to lean2223into that friction, we will be able to field the cutting-edge2224technologies we need.2225    Senator Schmitt. So, in addition--I want the other, two to2226chime in too. In our meeting, prior to this hearing, we talked2227a little bit about having the competition among services is an2228idea. Combatant commanders having some flexibility to adjust so2229whether it's sort of a separate pot of money dedicated for2230that, we've talked about in this committee about having a2231separate pot for smaller players, the disruptors, who might2232come into the marketplace, what other concrete ideas exist?2233    I guess, because I won't have time to ask the second2234question, but in the context of, if we were at war right now,2235like, let's say we're at war with China tomorrow. What would we2236do differently? What would we do differently that we're not2237doing now?2238    Mr. Geurts. Yes. Just quickly and happy to do a followup,2239but I think we leveraged the full, I go back to this industrial2240network. We have tremendous commercial capacity we aren't2241tapping into and leveraging. We have to rebuild manufacturing,2242but not rebuild what we used to have, rebuild it with modern2243technology that's flexible. We have to think about, let's take2244contested logistics, leveraging electric vehicles, things that2245already exist, rather than trying to recreate this giant2246purpose-built force, become really fast adopters, integrators,2247and not try and be the inventors of everything.2248    There's plenty of invention around. We need to be super-2249fast at importing it, integrating it, and then getting it into2250the hands of our women and men in service.2251    Mr. Diller. I think there are models that exist. They have2252been practiced over the last few years. They were not scaled. I2253don't know that we have the structure to actually scale those2254currently. We have done incredible work; the Department should2255be commended on incredible work of these multiple pilot2256projects. Eventually, that must turn into, without becoming2257overly bureaucratic, right? This is the risk, build on those2258successes of reaching out to thousands of companies.2259    Speed is everything. How do you scale them in a relevant2260timeline? It's possible. It does require some flexibility. It2261requires transparency from the Department that's going to2262create the trust for speed. Thank you.2263    Chairman Wicker. Thank you, Senator Schmidt. Mr. Sankar,2264I'm so glad Senator Schmidt asked that question. If we found2265ourselves at war immediately, go ahead and be the third2266response to that question.2267    Mr. Sankar. I think we would lean in heavily into the2268primacy of people. Do you have the right person in charge of2269these programs? You'd stop rotating them immediately. You'd go2270deep on focus. You'd probably do a lot more with vertical2271integration of the capabilities, not reliant on thin horizontal2272supply chains.2273    But I think we would organize around the most credible2274people and humans we have and limit the number of programs we2275have, concentrate our arrows behind those things. Today, we2276kind of have this bingo card approach to rotating our general2277officers around making sure in the spirit of jointness, that2278they have this array of experiences. I think that probably2279helps you in peace time, but I think it strictly hurts you.2280    You haven't even been in the role long enough to learn from2281the mistakes you've made. You don't even know their mistakes2282yet. It takes a long time for these programs to get to the2283point where you're up the learning curve. I don't think you2284could just randomly replace Elon or Glenn Shotwell and expect2285these rockets to keep working. They have accumulated this2286knowledge over 20 plus years of building them.2287    Chairman Wicker. Are we in peace time now?2288    Mr. Sankar. In my opinion? No. but I think we got to get2289the whole country to realize that.2290    Chairman Wicker. Thank you very much. Senator Rosen.2291    Senator Rosen. Well, thank you, Chairman Wicker and of2292course, Ranking Member Reed. Really an important hearing. I'd2293like to thank each of you for being here to and testifying2294today. I want to build upon a little bit about what Senator2295Warren brought up on competitive pricing, because consolidation2296of our defense industrial base is concerning, to say the least.2297Because since the 1990s, the number of U.S. aerospace and2298defense prime contractors have shrunk from 51 down to 5, 51 to22995.2300    As a result, the Department of Defense is increasingly2301dependent on a small number of contractors for critical defense2302capabilities. This constrains us in many ways and I hope for a2303bigger conversation on the value of early stage research and2304what it can teach us. You've been speaking to that, but that's2305a much larger conversation we can't have in 5 minutes.2306    Mr. Diller, how should DOD help support advanced2307technology?2308    Our small businesses that do that, especially those who2309struggle to find private capital, we want them to be more2310attractive for investments so they can survive the infamous2311valley of death stage, accomplish technology transition, and2312become part of our defense industrial base.2313    For Secretary Geurts, I'm going to ask you a followup. For2314those defense-focused small businesses who can't find the2315private capital, they don't make it across the valley of death.2316How might public private partnerships incentivize domestic2317investors to help support them? So, Mr. Diller and then Mr.2318Geurts?2319    Mr. Diller. Yes, ma'am. Thank you. When we launched what we2320called AFWERX 2.0 in 2020, we created this process called2321AFWERX Prime Process. You can say what you want the particular2322marketing around that. But what it did is, it recognized that2323there are many technologies, emerging technologies, that DOD2324can actually become an incredible incubator to: one, reduce the2325technical risk, two, reduce the regulatory risk, and three,2326reduce the re adoption risk.2327    We were able in a few instances to actually, I think2328establish a dual set of technologies to some degree, an actual2329market in America, because of that approach. Because very2330quickly, some of those companies at the beginning came in on a2331$50,000 small business contract that we've been talking about,2332but were given authorities to turn that $50,000 contract into a2333$50 million contract over the course of a year.2334    So speed is everything. Getting the Department to2335understand the critical nature of speed, and as we are in a2336wartime footing, that is yet ever more critical. Those things2337have been piloted. There have been initial moves by the2338Department to create the flexible funding to actually get them2339to scale. We must double down and make sure that that success2340can scale.2341    Senator Rosen. Mr. Geurts, what do we do if they don't make2342it across? How do we incentivize these public-private2343partnerships----2344    Mr. Geurts. I think we need to be careful that I don't2345think every company is going to make it across. We want to make2346sure we don't over rotate the other way, so that if you don't2347have a product that meets a need at a price that's affordable2348and reasonable, then you may not make it across.2349    Where I do think we have to focus more is how to quickly2350scale the products and services that we need, and in many2351cases, these small businesses have a piece of the solution, but2352aren't the whole solution. That's where I think there's2353opportunity to create a network where either they get together2354or they band together with either commercial or another company2355that can help get them across.2356    Senator Rosen. You can connect them; they can potentiate2357their value together. Well, I want to keep a little bit on this2358potentiation, because technology supply dependent a fragile2359global supply chain from critical minerals to semiconductors.2360Nevada, of course, my home State, we mine lithium, magnesium,2361and other critical minerals.2362    Well, we have a role to play in these technologies too, but2363only if we make a concerted effort to strategically leverage2364our resources, leverage our advantages to overcome our global2365supply chain challenges. So again, Secretary Geurts, what2366specific strategies can the U.S. employ to mitigate these2367vulnerabilities, investing in domestic industry to help it2368strengthen our supply chain resilience?2369    Mr. Geurts. Yes, I'm really optimistic on the focus of not2370only owning our supply chain, but adding multiple sources of2371supply to build resilience, and I think, you know, 5 years ago,2372that wasn't part of the conversation. It's part of every2373conversation now, and looking at all the resources we have, and2374then how do we incentivize that is going to be critically2375important. Whether it's the rare earth and minerals all the way2376to being able to remanufacture a part that's been out of2377production for 30 years.2378    Senator Rosen. Thank you, and I'll submit this question for2379the record, but as the only former software developer here in2380the U.S. Senate, I want to talk a little bit about high quality2381systems and software and how we prioritize across the2382enterprise DODs management of technical debt, which cost of2383choosing speed over quality, and when we develop software2384systems. I'll submit that for the record for you. Thank you.2385    Chairman Wicker. Thank you, Senator Rosen. Senator Scott.2386    Senator Scott. Thank you, Chairman. Thank you for holding2387this hearing. Mr. Geurts, when I was in business, I had a2388written purpose for everything we spent money on. When I went2389to Wall Street to raise money, they wanted to get a return on2390their investment. When I became Governor of Florida, there's23914,000 lines to the budget, what we did was we had a written2392purpose for every line. If they didn't meet the purpose, we2393didn't continue to fund them. Is that how DOD works?2394    Mr. Geurts. I would say yes and no. I would say there's a2395written purpose in about a stack of budget docs this thick,2396where there's a purpose against every budget line. Are those2397looked across and are they scrubbed the way they need to be?2398No. Is return on investment looked at as close as it needs to2399be? No, and are we good at stopping things we started, we're2400horrible at that. That's one of our biggest inhibitors to2401innovation, is we can't stop things that aren't adding value to2402fund things that we need to be working on.2403    Senator Scott. Can you give me an example where it didn't2404hit a purpose and there was some accountability? Like, did they2405stop a program? Did somebody lose their job? Can you gimme one2406example of, you know, there was a written purpose for2407something, it didn't happen, and some where there was change2408made?2409    Mr. Geurts. Not sure I have a clear example of that as much2410as many times we are issued sometimes through congressional2411budget changes, activities to go work on that were not in our2412original plan. Some of that can be value added. Some of that2413may not be value added. I can't give an example of where there2414was a purpose for funding that and somebody didn't execute the2415purpose. You could argue whether the purpose was the right2416purpose but I can't give an example.2417    Senator Scott. So you don't have an example where anybody2418was ever held accountable for not fulfilling their purpose?2419    Mr. Geurts. Well, I think there's plenty of examples of2420that. You can look at what I did as a Navy secretary and the2421Ford Program manager.2422    Senator Scott. So, what happened? Did somebody get fired?2423    Mr. Geurts. Yes, he did.2424    Senator Scott. Why? What didn't he do?2425    Mr. Geurts. Didn't execute the outcomes I expected as a2426program manager.2427    Senator Scott. Good. Mr. Sankar, Mr. Dillard, do you guys2428like to compete?2429    Mr. Sankar. I love it.2430    Senator Scott. How about you?2431    Mr. Diller. Absolutely.2432    Senator Scott. Okay. So, to compete, does it make you2433better?2434    Mr. Sankar. One hundred percent. Without exception.2435    Senator Scott. So, have you lost?2436    Mr. Sankar. Yes.2437    Mr. Diller. Often.2438    Senator Scott. Okay, and when you did, what'd you do?2439    Mr. Sankar. Get better.2440    Mr. Diller. Try harder.2441    Senator Scott. Okay. So do you feel like that's the way DOD2442operates, where they're out trying to get people to go compete,2443to find out the best product service, things like that?2444    Mr. Sankar. I think it attempts to, but sometimes the2445nature of the competition can be a fiction writing contest,2446like an RFP. Sometimes the competition is so constrained and2447not real world enough that it doesn't provide a long enough2448runway. Sometimes the competitions are just too short, where2449actually what you want is, you want to be able to get a bunch2450of people in continuous competition that just because you're2451winning today, I want to have an incentive to invest my private2452capital into R&D and show up next month with a better2453mousetrap, and try to win with that, and show up the month2454after that and do that again.2455    Senator Scott. Are you rewarded for that?2456    Mr. Sankar. Spiritually, right now we are, but I think2457we're at the beginning of a broader transition with DOD. Where2458I think that can result in the sort of rewards that make this2459sustainable.2460    Senator Scott. Okay. For both of you, if you had three2461things you're going to do to, to force big change at DOD, what2462would you do?2463    Mr. Sankar. I feel like I'm starting to sound like a broken2464record, but my two core suggestions, the first would be have2465competing programs. Do not give a program a monopoly on a2466certain capability area. Let multiple departments,2467organizations, units, programs within the government compete2468with each other. That's why SpaceX is so innovative right now,2469is because it is a food fight between various different2470agencies. We should embrace that when we were winning that's2471what it looked like.2472    The second one is, push more authority to the combatant2473commanders to decide what they need. Use that to drive signal2474and reformation to the services and the Department broadly.2475    Senator Scott. Mr. Diller.2476    Mr. Diller. Digitize. The future is digital, and we are not2477there yet. Second, be clear that there are different types of2478portfolios that attract different types of companies that need2479a different culture, and make sure that there is a path of2480doing that.2481    Last, make sure that we actually have the ability to2482manufacture in America. DOD could be the catalyst to actually2483shift American manufacturing. Manufacturing is not a DOD2484problem; this is an American problem. It must be solved to2485avoid the crisis that we have in building, turning ideas into2486hardware.2487    Senator Scott. Thank you, Chairman.2488    Chairman Wicker. Very good. Senator Scott. Senator Kelly.2489    Senator Kelly. Thank you, Mr. Chairman. Thank you, all of2490you for being here today. As the Ranking Member of the Airland2491Subcommittee and the co-chair of the Defense Modernization2492Caucus, along with Senator Cramer, I'm focused on maintaining2493our competitive edge over our adversaries. To achieve this,2494we've got to ensure that our military is not only equipped with2495cutting edge technology, but also as the infrastructure to2496remain effective in contested environments, where supply chains2497and sustainment could be disruptive.2498    I don't know if the three of you saw an order from OMB from2499the White House last night or yesterday, an expansive order2500with repercussions across the country. It's unprecedented in2501this order and I'll explain here in a second where I think the2502defense impact could be. But this is cutting, pausing Medicaid2503health plans, Pell Grants, Meals for Kids, nutrition programs2504for pregnant mothers, programs to help homeless veterans.2505    It appears that it also may freeze Federal funding and2506grants for Department of Defense Research in manufacturing2507technology and other small business innovation programs.2508    So, I want to ask each of you, starting with Mr. Geurts,2509have you looked at this memo that was issued last night? Are2510you concerned that a blanket freezing of these funds--how would2511it impact our readiness and ability to compete with China and2512other adversaries? I want to start with Mr. Geurts.2513    Mr. Geurts. Sir, I have not seen the exact memo you2514referenced. But more globally, one of the challenges with the2515DOD as a customer is there's lack of trust that they'll be2516there and they will start, stop, start, stop. I think that2517could send a bad signal to business, and then also, if we stop2518a bunch of research and are not staying on the technical edge,2519that could be detrimental to the force.2520    Senator Kelly. Mr. Sankar, for Palantir specifically, let's2521just say in a couple days, you find out that that contract2522payment that you were about to receive, you're not going to2523receive it, and you're not going to receive it next month or2524the month after that. Could you talk specifically about how it2525would impact your company?2526    Mr. Sankar. I think you can imagine that it causes quite a2527bit of heartburn, particularly for services already rendered.2528But it's a difficult environment.2529    Senator Kelly. Where are your employees?2530    Mr. Sankar. All over.2531    Senator Kelly. All over how many?2532    Mr. Sankar. Four thousand total.2533    Senator Kelly. If you didn't get paid by the Federal2534Government for the next 3 months, how many of them do you think2535you'd have to lay off?2536    Mr. Sankar. I would rather not think about it.2537    Senator Kelly. You'd rather not think about it. Okay. Mr.2538Diller, for Divergent, what would be the impacts if your2539Federal dollars contract payments were to stop?2540    Mr. Diller. As a dual use company that really is just2541starting into the defense space, certainly, it would deter us2542from continuing that. I think, you know, we've seen this over2543the years, and this is one of the many things that creates risk2544for companies. In some instances when I was a director of2545AFWERX, you simply could not convince some commercial companies2546to go do business with the Department of Defense. So obviously,2547trust is key on these things, and understanding continuity of2548agreements made is important.2549    Senator Kelly. Yes. So you're going to find out in the next2550probably 24 hours if it's going to impact you and your company2551and your employees and people who live in those communities.2552But this is an unprecedented overreach from the White House,2553with a directive from OMB to freeze programs that folks on this2554Committee, in the U.S. Senate authorized money to be2555appropriated for very specific programs.2556    Programs--I'll get back to, that help homeless vets,2557nutrition programs for moms, but also programs that affect our2558safety, our readiness, and our troops to make sure that they2559have the combat power that they need to win, win in a very2560tough environment.2561    So I'm very concerned about this action that the White2562House took without, I guess they notified us. They say it goes2563into effect at 5 p.m., I suggest when you get back to your2564companies that you take a close look and see what the impact is2565going to be to you and your employees and our readiness. Thank2566you, Mr. Chairman.2567    Chairman Wicker. Thank you. Senator Kelly. Senator2568Sullivan.2569    Senator Sullivan. Thank you, Mr. Chairman. I'll comment on2570followup on Senator Rosen comment about critical minerals, I'll2571actually comment on a really good executive order. The critical2572mineral issue, is the good news is Biden's out Trumps in,2573especially for my State. We have incredible resources of2574critical minerals for our military.2575    Joe Biden spent 4 years shutting down Alaska because2576radical environmental groups said, don't mine in Alaska, get it2577from China. So that's what we did for 4 years, and Donald Trump2578is changing that on day one.2579    Senator Rosen asked about critical minerals, the good news,2580the most important news for critical minerals for America is,2581Biden's gone and Trump's in. That is really good for the people2582in my State who have been sanctioned more than fricking Iran2583and Venezuela by the last Administration.2584    But let me, I'm venting here a little bit, Mr. Chairman.2585Sorry. Let me get to the point of the hearing. Thank you for2586holding this hearing. This is really something all three of2587you're going to have experience on. So I really want to get a2588sense of it. Mr. Sankar, you might remember at the lunch that2589you and I were at recently, where Admiral Paparo was talking2590about contracting officers who are in the middle of their2591careers, don't want to rock the boat. This idea of a frozen2592middle in the Pentagon.2593    We all love our military, I think Mr. Diller, you actually2594served as a contracting officer, acquisition officer. What are2595some of the ways that we can best incentivize contracting2596officers in the Pentagon to take risks on newer companies as2597opposed to always default to Lockheed and Raytheon and, you2598know, take the easy route.2599    Because I think the culture in the Pentagon is one thing we2600got to work on, and you all have experience on that so I'd love2601to get your sense quickly, because I have some other questions,2602but culture contracting officers, how do we incentivize risk2603taking without people being scared in the big bureaucracy of2604the Pentagon? Go ahead. All three of you take a crack at it.2605    Mr. Sankar. I'll offer a thought here. First is get them2606out of the Pentagon. Maybe we need to have our contracting2607officers or acquisition folks forward deployed closer to where2608the problems are, understanding the ways viscerally, there's a2609reason SpaceX locates their R&D engineers on the production2610floor. That is a heterodox approach that we certainly would not2611see in the defense industrial base. But that's where you2612observe the problems, you change your design, you're able to2613close those loops very quickly.2614    Chairman Wicker. We could do that now. Could we?2615    Mr. Sankar. We could. The second part is, have another2616American, one corridor down that they're competing against.2617Yes, you know, that the risk of disrupting your schedule is2618outweighed by the fact that that person's going to win, and2619you're going to lose that.2620    Senator Sullivan. I love that idea. Anyone else, Mr.2621Diller?2622    Mr. Diller. Incentivize speed. In AFWERX, we went from no2623contracting shop, and we deliberately were saying we are2624establishing a different culture. There are people in the2625Department of Defense, I would say most of them actually, that2626want to move at speed. As Mr. Geurts mentioned, this is not2627necessarily about money. It is a mission that they actually2628want to engage in.2629    When leadership actually takes on the risk themselves and2630unlocks the people working for them, you can attract incredible2631contracting officers. There are so many of them out there, and2632they're ready to move with speed to buy the right things.2633    Senator Sullivan. But they need to be told from the top-2634down percent, Hey, it's okay to contract with this up and2635coming upstart versus the big guy who's going to take 15 years2636to get his product out. Correct? Yes.2637    Mr. Geurts. Yes, sir. One, you got to get them aligned with2638the program manager so that they're not on an island of their2639own. Then that team puts together the strategy and is held2640accountable for looking across the entire thing. The second2641thing, which the--is helping, the burden we put on a contract2642officer to award a contract, the number of things they have to2643sign, the number of certifications is ungodly. Yes, and so,2644this Committee could really help by scrubbing a bunch of that2645underbrush----2646    Senator Sullivan. Is that not in statute, is it?2647    Mr. Geurts. Yes, sir. I mean its statute, which then we2648propagate in implementation and processes, and then well----2649    Senator Sullivan. Maybe for the record, if you have some2650ideas on that real quick, I want to just ask one final2651question.2652    Mr. Sankar, you did a great job on your Defense Reformation2653piece published in October, but there's and I love the idea of2654competition between programs. But how do you envision the2655acquisition system working when the services have a lot of,2656you're very focused on the combatant commands, and I get that,2657that makes a lot of sense, but the services also have a lot of2658skin in the game and is there a challenge that if you're moving2659it to combatant commands, the services are going to be, hey,2660that's my piece of the territory. What do we need to do and how2661do you make them work together better?2662    Mr. Sankar. Well, I think if we thought about it at the2663margin, a little bit of overlap is actually what gets them to2664rise to the occasion.2665    Senator Sullivan. That's your competition thesis.2666    Mr. Sankar. Yes, and so I think, you know, I'm not sure2667you'd say Air Force, please go build me an aircraft carrier,2668you know, but it's really like, where are we on the margin? One2669example, when we were trying to build JADC2, we have Overmatch,2670we have a BMS and we had Project convergence, but each of those2671was just trying to build software or JADC2 within their2672service, which you could argue is a little bit of a2673contradiction on the concept of JADC2 to begin with.2674    Maybe a more productive frame would've been, each of them2675is actually seeking to field software and capabilities to the2676combatant commanders across components, across services, and2677that's going to create the productive tension to win. That2678would also force interoperability, it would force a lot of the2679things that we aspire for. It would be MOA in practice instead2680of MOA on paper, and so I think we forget that first you have2681to be effective before you can focus on efficiency.2682    Chairman Wicker. Members can supplement their answers.2683Thank you. Thank you very much. Senator Slotkin.2684    Senator Slotkin. Thank you, Chairman. Thank you for holding2685this hearing. I was glad that our first official hearing beyond2686a confirmation hearing was on something where we should have2687very bipartisan approach to this issue. I'm a former CIA2688[Central Intelligence Agency] officer and Pentagon official, so2689I feel like I saw a lot of this up close.2690    I think the most important stat for me that I think about,2691that I measure our success or failure at is someone told me2692that to go for the Chinese Government, to go from concept to2693fielding a program in their military is a 1-year string. For2694the United States, it's a 3-year string, right? I can't imagine2695all the man hours in between those, those 3 years.2696    To me, I mean, we hope we never have a conflict with China2697or anybody else, but we have to have the speed of2698decisionmaking to change on a dime.2699    I have seen in three tours in Iraq, particularly with some2700special authorities the special forces have, to really innovate2701in the field. The most exciting stuff I've ever seen was just2702where the flash to bang was like, boom, we got a problem, we2703have authority to go do it, let's go do it.2704    So I would describe, I did 6 years on the House Armed2705Services Committee, that our Committee in a bipartisan way was2706ready to hurl authorities at the Pentagon if we thought it2707would actually help move things.2708    You have an open you know, sort of door, I think with2709Democrats and Republicans. I have come to believe that culture2710is critical. The idea that a mid-level contracting officer is2711going to break out and do something new when they're not2712getting their pressure in a chain of command organization is2713like saying that, Senator Wicker's mid-level staff should be2714doing something on his behalf. At the end of the day, the buck2715stops with him.2716    So I think a Reform-minded Secretary of Defense, again, I'm2717not talking about party, is the most important thing to taking2718this on and prioritizing it. I hope that the Secretary of2719Defense again, gets through what I see as really sort of side2720issues and gets back as he says, he wants to, war fighting.2721Which is the speed of decisionmaking and taking a home hold of2722that acquisition system and changing it.2723    But to me, this is about culture, and until we get that2724right, we're just going to be spinning our wheels. I would also2725note that you guys in the private sector, you get to gamble2726with your shareholders or with your investors', money, gambling2727with taxpayer dollars is just a higher threshold, right? It's2728going to be a higher threshold. It's never going to be like the2729private sector. We all complain when the F-35 goes over budget2730and all these things because they're wasting taxpayer dollars.2731    So there's a conundrum there that doesn't make DOD perfect2732as an analogy for the private sector. But we're in violent2733agreement that we need to do something to speed things up. I2734just think it has to be top down. I hope we can push that2735agenda in a bipartisan way together.2736    In the meantime, I do have to say, following on what2737Senator Kelly just said, Senator Wicker, we have a2738constitutional issue going on right now, where this body has2739appropriated money for defense programs and a million other2740things. The Trump administration has come in and contravened2741your own and all of our guidance on programs in the past, I'm2742not talking about programs in the future, every president gets2743to decide how they want to create programs that they want to2744implement.2745    But for things that have already been appropriated, right2746now, the military health system as, research projects are all2747on hold. Talk about servicemembers safety and health, funding2748for the Fisher House, wounded Warriors on hold, all Army2749contracts on hold. Okay. I don't see how this isn't just purely2750throwing the baby out with the bath water.2751    I get that Mr. Trump is going to make change. I won on the2752same ballot as Mr. Trump. I understand that, but this is to me2753breaking the constitutional rules that we have set up here. So,2754I would assume we're going to see some serious action from this2755body, I hope, on a bipartisan basis.2756    I've filibustered my entire time but all this to say Mr.2757Chairman, you have a friend in this cause. I want to make it a2758top-down cause so we actually move the needle, otherwise, we're2759just giving scraps at the margins for contract officers who are2760going to do what their boss says, If their boss demands action.2761I'll leave it at that.2762    Chairman Wicker. Thank you, Senator Slotkin. Let me just2763respond very briefly. I think all three of these witnesses have2764not had a chance to read the memo to which you and Senator2765Kelly referred and questions are being asked around Capitol2766Hill at this very moment about that and they'll be more2767visiting about that issue.2768    So it is almost the end of the first round, and I'm the2769last questioner. Let me ask a thing or two.2770    Mr. Sankar, you said the stockpile is not the deterrent,2771the flow of mass production is the deterrent, and Mr. Diller,2772you say the factory is the weapon, and if we need more2773factories for sustainment and war, we should be buying that2774capacity. Now you're both saying the same thing there, are you2775not nodding?2776    Now, Mr. Diller, when you say we should be buying that2777capacity now, you're not talking about ownership of the2778factory, are you?2779    Mr. Diller. No, Senator. But what I'm suggesting is that2780today we have a crisis in sustainment. There is an instance2781because of the--both from a national industrial based2782perspective and because of some of the challenges in defense2783innovation, we have locked our depots and our sustainment out2784of being able to actually create the parts that are needed2785today to fill the multi-trillion-dollar portfolio we have.2786Those depots could actually field today, factories as a2787service, that would have incredible agility to ensure that the2788legacy force that we must have, that we've invested trillions2789of dollars in, is ready to fight tonight. That needs to be a2790wildly agile factory as a service.2791    That same factory, as honorable Geurts had mentioned,2792becomes this network then, so that small companies are able to2793go build entirely new things. If we call these hedge2794portfolios, right? The autonomous light, a charitable mass, the2795agility of these factories that are available in an entirely2796new step of American manufacturing, that is possible today.2797    Our depots could be an incubator for that type of thing to2798actually go through digital certification processes for tools2799like this to be able to save the taxpayer dollars, to be able2800to drive information.2801    Chairman Wicker. As Mr. Diller holds up the hubcap.2802    Mr. Diller. Yes, sir. Yes.2803    Chairman Wicker. Now, Mr. Geurts, shall we make it2804unanimous on that point?2805    Mr. Geurts. Yes, sir, and I'd also add we are really2806enthusiastic about prototyping and we're completely2807underperforming in production. We are actually not producing2808much new capability, and in the cases in replicator we have, we2809may spin up a production and then shut it down 6 months later.2810So I do think a focus on production, both in terms of capacity,2811how to network that production, how to digitize that production2812and get to producing more and getting our iteration speed up,2813would do two things.2814    One, it would allow us to grow this manufacturing capacity.2815That in itself is deterrence. Second, it would allow us to2816field new things to the field versus just doing one-off2817prototypes and doing one-sie two-sies.2818    Chairman Wicker. Mr. Sankar, in your white paper, you say2819on page 9, that our centralized predictive program budgeting2820management and oversight process values time spent rather than2821time saved. Will you elaborate on that? And then we'll let our2822other two witnesses give their views,2823    Mr. Sankar. The way that we want to provide resource is2824based on how expensive is it to do something. But that is a2825complete disincentive for reimagining things. My critique2826around production versus stockpile is really that we do not2827have the necessary incentive to design for manufacturability.2828    You know, we are so proud of the exquisite weapon that we2829made as a prototype to honor this point here, but we didn't2830think through, can I make 10,000 of these? How long will it2831take, if it takes 2 years to build a single munition, that's2832not going to scare sheep, so really, we need to be thinking2833about manufacturability from the very beginning here.2834    That I think then leads us to thinking about entirely2835different classes of weapon systems and different ways of2836organizing ourselves and our industrial base to go accomplish2837that.2838    Chairman Wicker. Mr. Hondo Geurts, time spent versus time2839saved.2840    Mr. Geurts. I would agree with that. I do think we have to2841differentiate the market. So the DOD buys a lot of stuff. We2842need lots of different ways to do things, not try and pick one2843that's, you know, we'll do everything well. I think that's an2844opportunity. I think the second piece is, we need to get to2845continuous competition on many of our products, so that we can2846bring in new entrants and continually drive the system.2847    Because right now, because of the time to budget for a2848program and the rigidity of all the planning, it's kind of a2849big bang theory. We have one big contract award, and then2850you're stuck with that for 15 or 20 years versus what I would2851say, continuous competition, which then incentivizes all the2852kind of behaviors we're looking for.2853    Chairman Wicker. Mr. Diller, anything to add?2854    Mr. Diller. The technology is there. It is available to2855rapidly transform our Department of Defense today. It's2856adoption, adoption, adoption. We have to engage with this2857bureaucracy, accelerate this at bureaucracy, so that we are2858actually mobilizing that entire industrial base because it is2859urgent. This is a critical time and I am very, very optimistic2860that America is going to be able to build together.2861    Chairman Wicker. Thank you very much. Senator Slotkin, do2862you have other questions? I do. We'll begin round two, and its2863only Senator Wicker participating.2864    Gentlemen, Mr. Sankar thinks it's a shame that companies2865that used to make other products, non-defense related, are no2866longer in that business, only 6 percent. Chrysler used to make2867cars and missiles. Ford made cars and satellites. General Mills2868made cereal and artillery and guidance systems. Does he have a2869point there, Mr. Geurts?2870    Mr. Geurts. Absolutely. The second I would add to that is2871that we've also systematically lost the middle of our2872industrial base. This is where I think a lot of the venture2873backed companies, we need to scale him quickly so that we've2874got companies that are agile enough to move quickly, right? But2875big enough to move at scale, and that's one of the things I2876think as we build this industrial network of the future, we've2877got to build back the middle of the industrial base.2878    Chairman Wicker. Mr. Sankar, there's a reason that2879happened, and can it be reversed?2880    Mr. Sankar. Yes, it can be reversed. I think we have to2881remember the industrial base we had today; we think of it as2882Northrop Grumman, but it was Jack Northrop. It was Leroy2883Grumman, it was Glen Martin, not Lockheed Martin. You had these2884difficult founders. We would recognize them as Elon Musk type2885personalities who were interested in doing something big.2886    It was not about this quarter's results. It was actually,2887they were dual purpose, not just dual use. You know, it wasn't2888about the cereal. It was everything I learned building2889machinery to process cereal, I could turn into artillery to2890defend the Nation.2891    We have those founders back, $120 billion of private2892capital has been deployed into national security companies.2893That's funding founders. It's funding the Palmer Luckys of the2894world, the Sang brothers of the world. We need to empower them.2895I think that's how we get back this long-term commitment to the2896problems and challenges our Nation actually face, the2897reindustrialization of the Nation.2898    We can't have an anodyne view of capital. Europe has2899created zero companies worth a hundred billion dollars or more2900in the last 50 years. We created all of our trillion-dollar2901companies in America in the last 50 years, with founders.2902    Chairman Wicker. Is that a mindset or a statute that needs2903to be changed?2904    Mr. Sankar. I think it's a mindset. It's, recognizing that2905within our buyers in the Pentagon as well. Why did these people2906leave the industrial base? As much as we want to point at the2907Last Supper, as the moment, it actually, those conversations2908started in the boardrooms of America in the 1970s and the29091980s.2910    What was slowly building up, is where I started with my2911oral, is that the Pentagon is a bad customer. It doesn't2912actually--if you just look at it purely financially, it makes2913more sense for Ball to sell aluminum cans than to build2914satellite buses. As a monopsonist, the Pentagon needs to look2915at that and say, how do we fix that? I want Ball building2916satellite buses. I want the American industrial base, not a2917group of yes men in the defense industrial base who have2918permuted their businesses to serve just me.2919    Chairman Wicker. On that issue, Mr. Diller, do you wish to2920weigh in?2921    Mr. Diller. Certainly, look for all the pejorative things2922that we've said about the Department of Defense. It has done2923incredible things, and it has actually an opportunity to do2924something that I don't know that any other institution can. It2925has created incredible things. I was a program manager in the2926global positioning system. It drove adoption of one of the most2927incredible networks in the world.2928    There are instances where DOD has been the catalyst for2929wild change. With all the great things that we've said about2930commercial, you cannot look at a downward trend for many2931decades now, of the loss of not defense industrial2932manufacturing, but of American industrial manufacturing.2933    Now, Chairman, is the time for DOD to be that catalyst2934again. It is possible to do exactly what Shyam has said.2935Divergent is today manufacturing cars. We are today printing2936missiles. We are today printing satellite buses in the same2937exact factory floor.2938    If we look to a future that is going to actually counter an2939adversary, there are people who dislike change. There are three2940groups of people that very much dislike change. One, they're2941the bureaucrats. They like to continue doing what they have2942done in the past. I would say industry to some degree, doesn't2943like change, because we have built ourselves on legacy2944approaches to manufacturing. They, look at this and they don't2945want the uncertainty.2946    The last group that doesn't like change is the enemy. The2947enemy hates change. If we want to deter, we must be agile. We2948must force the bureaucracy to be agile. We must force the2949industry to be agile. That can happen today, but America cannot2950afford $200 million facilitation cost for every new munitions2951factory, especially when it's a legacy munitions factory.2952    It is possible today to create a network of 21st century2953AI-driven industry 5.0, pick your buzzword, but it does not2954look like anything that has ever been manufactured in the2955history. It is a step change. It literally is going from the2956stone age to the bronze age. It could happen today. It's the2957only way that you can afford real deterrence. Where you have a2958dual use factory, you have dual use capabilities that come out2959of that factory. You have dual use capital that is coming from2960an incredible source of American strength, and most2961importantly, it is dual use talent.2962    We can't talk about a workforce problem; we're telling our2963sons and daughters to go back and pound rivets and weld in the2964same way that their great grandparents did. Children have grown2965up playing Lego robotics, playing in AI [artificial2966intelligence]. That is not what our factories look like today.2967    It could be, this Committee could be the catalyst for that2968change, and is the only way that we are going to create real2969deterrence in a timely manner that must happen for America to2970remain in its lead. Both from a manufacturing perspective, from2971an economic perspective, from a technological perspective, and2972from a military perspective.2973    Chairman Wicker. By the same token, Mr. Diller, we hate it2974when our enemies engage in change.2975    Mr. Diller. One hundred percent.2976    Chairman Wicker. Yes, absolutely. Well, a couple more2977questions and you've been most helpful to us. Mr. Geurts, let's2978talk about the requirements process. Does it often overly2979specify solution that then gets turned over to industry? Should2980programs be able to develop multiple capabilities within a2981requirements portfolio broadening the scope of the acquisition2982management?2983    Mr. Geurts. Yes, sir. I think we need to transform our2984thinking into--we've got a problem statements, not requirement2985statements. Then you empower a portfolio acquisition executive2986to go tackle those problems with close association to their2987operator.2988    Back to your previous question, we have program managers2989that want to go out and meet need, right? They want to go drive2990change. They have not been incentivized or rewarded for moving2991outside the system. With the top cover of this Committee is2992putting forth in the FoRGE Act, with those actions, I think2993you'll see that culture Senator Slotkin talked about. That's2994what we've got to go off and attack.2995    Chairman Wicker. Thank you, and, finally, Mr. Sankar, do2996you sometimes find yourself competing not with other2997businesses, but with the Government itself?2998    Mr. Sankar. I would say quite often. More often do we find2999ourselves competing with the Government than with other3000industries. Sometimes that takes the form of FFRDCs, where they3001have a privileged position. You could say there's maybe even a3002conflict of interest where they're deciding what needs to be3003built and then specifying how it's going to be built in a way3004that is structurally anti-commercial.3005    I'd say the very beginning of our company, we were a threat3006to certain programs of record. The way that they were doing it.3007I don't think the industrial players were resisting us so much3008as the acquisition community was resisting us, despite the3009signal from the war fighter. I think we solved these problems3010by embracing the fact that there were going to be heterogeneous3011approaches. There was going to be constant new technology3012insertion, and that actually you as a program of record, don't3013have a monopoly. There's someone, a corridor down who could3014move faster on this new capability, and that provides you the3015incentive to move faster.3016    Chairman Wicker. Thank you, gentlemen. This has been one of3017the most informative, 2\1/2\ hours that I've ever had as a3018Member of this Committee. Also, I'm proud of the Members of3019this Committee, and I hope you are. There's a lot of talent and3020a lot of brain power and a lot of thought that has gone into3021this hearing, and I appreciate the participation. We had a 1003022percent attendance today, and I appreciate that.3023    Now, let me check and see if I need to make an announcement3024with regard to the record remaining open or anything of that3025nature. There will be questions for record, and we'll notify3026the witnesses as to the time constraints, and with that, the3027hearing is adjourned.3028    [Whereupon, at 12 p.m., the Committee adjourned.]30293030    [Questions for the record with answers supplied follow:]30313032               Questions Submitted by Senator Tom Cotton3033                           acquisition reform3034    1. Senator Cotton. Mr. Sankar, what Department of Defense (DOD)3035regulations or processes have you seen block nontraditional contractors3036from engaging with DOD?3037    Mr. Sankar. The defense procurement process is a byzantine system3038that intimidates nontraditional contractors and imposes immense3039administrative burdens on them. A major problem is DOD's reluctance to3040purchase commercial items, which it is required to prioritize over3041custom products under the Federal Acquisitions Streamlining Act of 19943042. DOD acting more like a commercial customer would go a long way to3043attracting commercial vendors. A related problem is the proliferation3044of requirements for contracted items, which dictate what contractors3045must build instead of letting contractors use their considerable domain3046expertise to determine how best to build the item in question.3047Inability to quickly attain security clearances and access SCIFs and3048classified networks is another hurdle. Delays in receiving payment can3049damage nontraditional contractors, particularly small businesses that3050often live hand to mouth. Finally, CPFF contracts reward companies or3051overruns, while boxing out risk takers that are willing to bet on their3052solutions via FFP.3053                   leveraging artificial intelligence3054    2. Senator Cotton. Mr. Sankar, how can DOD leverage battlefield3055data acquired through artificial intelligence (AI) tools, like those3056provided by Palantir, to improve its acquisition processes?3057    Mr. Sankar. The proliferation of sensors on the battlefield has3058created a goldmine of data that DOD could use to improve its3059acquisition processes. In particular, data about the accuracy,3060lethality, and reliability of weapons systems could be used to drive3061timely shifts in procurement toward weapons that perform well and away3062from weapons that perform poorly. Such data could also inform, in real3063time, the design and manufacture of weapons systems and munitions by3064suggesting design improvements and enabling rapid iteration to stay3065ahead of enemy countermeasures. AI tools equipped with this data can3066effectively create an integrated view from the foxhole to the factory3067floor, giving decisionmakers in DOD and warfighters in the field3068greater awareness, for example, of which munitions are most effective,3069how many are being expended, how many are in the stockpile, and how3070quickly they are being produced. Decisionmakers could then use this3071system to remove blockers and mobilize resources to the highest-value3072use.3073                                 china3074    3. Senator Cotton. Mr. Sankar, the current administration has3075committed to investing in American jobs and industry to grow our3076defense industrial base. How can DOD ensure that American technology3077does not end up in China?3078    Mr. Sankar. DOD must modernize its IT infrastructure to prevent3079espionage and technology transfer to China and other hostile State3080actors. The DOD is a patchwork of different systems, with varying3081levels of security and sophistication. Rectifying this serious problem,3082and ensuring IT modernization is a priority not just in government but3083in the DIB and DIB sub-base, is essential so that hackers and spies3084cannot exploit weak links to access government networks. Relatedly, DOD3085must modernize its personnel processes so that individuals with3086extraordinary abilities in software engineering and cybersecurity are3087aggressively recruited, hired, and retained.3088                            private capital3089    4. Senator Cotton. Mr. Sankar, we know that one of the reasons we3090risk falling behind China is its ability to leverage all areas of3091domestic spending to meet its defense needs. Given this, can you3092explain the importance of private capital in driving innovation at DOD?3093    Mr. Sankar. China's Military-Civil Fusion strategy allows it to tap3094the considerable resources and talents of its commercial companies for3095defense purposes. The United States, by contrast, does not adequately3096integrate commercial companies into the DIB.3097    Private capital is a force multiplier that the United States can3098use to facilitate R&D and innovation in defense technology. Palantir3099alone has invested over $2 billion in our platform to provide the best3100suite of software for our clients, including DOD. The platform we've3101developed today would not be what it is if we relied on incremental3102upgrades via CPFF contracts and IRAD. We invested where we saw gaps,3103before those gaps were readily apparent to the rest of DOD, because of3104our conviction that such investment creates the best software.3105    Right now, DOD often pays for R&D performed by traditional3106contractors. This cost-reimbursed independent R&D is a poor use of3107scarce public funds, because it creates little incentive for the3108recipients to conserve money or innovate. If their experiments fail,3109they do not pay the cost--the taxpayer does. Private capital is a3110better source for R&D because it aligns the incentives of funders and3111researchers.31123113    5. Senator Cotton. Mr. Sankar, why does private capital drive3114innovation in a way that money spent by Congress does not?3115    Mr. Sankar. Generally speaking, a company that invests its own3116money in R&D will be more motivated to ensure its experiments succeed3117than a company performing R&D with public funds. Private R&D also gives3118companies maximum control of their technology roadmap, which is3119critical to success in the commercial market. Intel's Bob Noyce, for3120instance, rejected most government-funded R&D precisely so he could3121stay in control of Intel's technology roadmap. This decision was far3122sighted and allowed Intel to be the dominant chipmaker for both3123commercial and defense applications in the 20th century.31243125    6. Senator Cotton. Mr. Sankar, what policies can DOD implement to3126attract private capital to the defense space?3127    Mr. Sankar. The most important thing DOD can do to attract private3128capital is to ensure private funders and companies can achieve an3129adequate return on their investment when performing work for DOD. Cost-3130plus contracting is an impediment to this goal. Venture-backed3131companies, in particular, cannot succeed in a cost-plus domain; they3132need outsized returns, justified by outsized growth and innovation.3133Cost-plus contracts cannot provide such returns by definition. Shifting3134to fixed-fee and other alternative models that reward innovation is3135essential to getting sustained commitments of private capital in the3136defense space.3137    Second, DOD must make it easier for new entrants to obtain3138clearances, SCIFs, and network access. Right now the process for3139obtaining such things is opaque and time consuming. This process serves3140as a barrier to entry for new entrants and an undeserved boon for3141incumbents. If you want to attract private capital and commercial3142companies, the process for doing business with DOD must be intuitive3143and inviting.3144                               __________3145              Questions Submitted by Senator Dan Sullivan3146           firm fixed price vs. cost plus contracts software3147    7. Senator Sullivan. Mr. Sankar, can you please explain why firm3148fixed price contracts are better than cost-plus contracts for software3149acquisition with special emphasis on the economics behind it?3150    Mr. Sankar. The business model of a technology company is to invest3151R&D dollars to produce new and innovative products, such as software.3152These R&D costs are amortized across a large number of customers to3153create affordability and scale. The customer benefits by paying a small3154fraction of the actual cost of development and operations rather than3155covering the company's entire development costs. The company benefits3156from economies of scale and higher margins as its user base expands,3157allowing the company to re-invest in R&D.3158    Cost-plus contracts make it impossible for technology companies to3159establish this virtuous cycle. No matter how large their user base,3160their profit margin is fixed. This ends up limiting the companies'3161ability and incentive to reinvest in R&D to drive future innovation. It3162also harms the customer (in this case, the government and by extension3163the taxpayer) by eliminating incentives for cost control.3164      incentivizing contract officers in the department of defense3165    8. Senator Sullivan. Mr. Sankar, can you please explain at least3166two ways in which you believe we can better incentivize contracting3167officers at the Pentagon to take risks and shorten procurement3168timelines to help companies avoid the ``valley of death'' where they3169run out of money while waiting on the process to play out?3170    Mr. Sankar. First, we should encourage competition within3171government so that contracting officers have a visible and immediate3172incentive to move faster, procure a better product, and beat their3173competitor down the hall. Giving combatant commands a purchasing budget3174would be one way to introduce healthy competition; creating multiple,3175competing program offices for each capability would be another way.3176    Second, we need to reorient small business programs like SBIR so3177they are judged by how many of their small businesses get big, not how3178many get follow-on funding in perpetuity.3179    getting ahead of technology evolution with slow planning cycles3180    9. Senator Sullivan. Mr. Sankar, right now, our planning cycles for3181acquisition programs run roughly 2 years, with DOD likely already3182beginning to plan for fiscal year 2027. However, the speed of3183innovation in the world has contracted significantly. For example, just3184a week before your hearing, we thought China was 2 or 3 years behind us3185in AI development, and now many are questioning that assumption given3186the evolution of the AI app Deepseek.3187    By the time DOD has planned years ahead, found the money in the3188budget to fund a program, and fielded the program, the technology used3189for that program could be years or even decades behind the latest and3190greatest.3191    Can you talk about how DOD's long lead times differ from the3192planning and budgeting cycles you've seen in the private sector?3193    Mr. Sankar. Planning and budgeting cycles in the private sector3194have gotten much shorter and faster in response to competitive pressure3195in the market. Most companies do not act in terms of one-or 2-year3196budgets, they act from quarter to quarter, by necessity. Technology has3197accelerated the pace of change and made it possible to reprogram funds3198to meet opportunities with astonishing rapidity. The government's3199planning and budget cycle is excessive by comparison. No company could3200survive if it took 2 years to POM budget for projects internally, yet3201that is the norm in government.32023203    10. Senator Sullivan. Mr. Sankar, what is the private sector doing3204to keep up with the pace of technology change in terms of how companies3205organize themselves and what does DOD have to do to emulate those3206cycles?3207    Mr. Sankar. Increasingly, companies are recognizing the importance3208of founders, or leaders with considerable control over the company's3209technology roadmap and direction. The DOD must identify ``founder-3210like'' figures and give them meaningful, long-term ownership of3211important programs, instead of cycling program managers every few3212years. DOD must also empower the subordinates under these leaders so3213they, too, act as ``founders'' on a smaller scale within their domain.3214Risk taking and initiative should be encouraged rather than forbidden3215or punished. Speed and agility in procurement are the only ways to3216prevent obsolescence.3217                       flexible budgeting cycles3218    11. Senator Sullivan. Mr. Sankar, do you believe that creating a3219system for agile budgeting whereby budget line items are consolidated3220into capabilities portfolios and the Department of Defense has the3221ability to shift funds around within a capability portfolio to support3222separate capabilities is the right way to gain flexibility in3223budgeting? Please explain.3224    Mr. Sankar. Yes, I think that would be an improvement on the3225current, inflexible system. Funds should be tied to capabilities3226instead of discrete projects and reprogrammed within those categories3227as projects succeed or fail. PPBE favors incumbency, even for programs3228that manifestly are not working. Flexibility and competition are3229essential to fixing this problem.32303231    12. Senator Sullivan. Mr. Sankar, how would you change the current3232way we budget for software cycles in DOD to aid in faster software3233development?3234    Mr. Sankar. First, the government must appropriately value3235software. The DOD currently spends less than 1 percent of its budget on3236software, including AI. The United States has a massive qualitative3237edge in software that DOD simply is not tapping. Beyond dollars spent,3238DOD needs to stop budgeting based on billable hours and engineer head3239count and start budgeting for capability. At its best, software3240eliminates complexity and integrates systems with a minimum of3241manpower. DOD should alter its purchasing practices for software to3242play to the unique strengths of the technology.3243                         stockpiling technology3244    13. Mr. Sankar, do you believe that the U.S. Government should3245consider stockpiling high-end graphics processing units (GPU) in the3246short to medium term until chip fabrication and GPU assembly can be3247done here in country? Please explain.3248    Mr. Sankar. The U.S. Government should consider stockpiling many3249things, including GPUs, but should exercise caution before doing so.3250Stockpiles are not the deterrent. Industrial capacity--the ability to3251make materiel in sufficient quantities on a relevant timeline--is the3252deterrent. DOD's first priority must be increasing industrial capacity,3253including surge capacity. This is perhaps especially true for3254microelectronics that quickly become obsolete. A stockpile of such3255microelectronics would depreciate in value quickly, and could be put to3256better use (whether in business or government) during their lifespan.3257DOD must consider these factors when determining what to stockpile, and3258in what quantities.32593260    14. Senator Sullivan. Mr. Sankar, other than munitions or weapons3261systems, are there any particular technology you believe the United3262States should consider stockpiling that allow for design and3263construction of higher end technology in the United States?3264    Mr. Sankar. Denied, Degraded, Intermittent or limited communication3265environment hardware is critical to prepare for potential conflict with3266near peer or peer adversaries. We should be investing in this type of3267hardware to host software in the event our SIPR/NIPR/JWICS environments3268aren't available due to interference.3269                                training3270    15. Senator Sullivan. Mr. Sankar, what skill sets do you think we3271should most be incentivizing or prioritizing for people to learn to3272reinvigorate the defense industrial base?3273    Mr. Sankar. DOD and DIB personnel should be strongly encouraged to3274learn the fundamentals of coding so that they understand the full3275extent and limits of what software can accomplish. Software plays a3276central role in cutting-edge industrial production, helping manage3277supply chains, reduce down time, and increase throughput. Knowing3278whether a feature request will take 1 hour, 1 day, 1 week, or 1 year to3279implement is critical. Software in the right hands is a weapon, so our3280warfighters, particularly officers, should train on it just like they3281do their rifles. Expertise is not necessary, nor would attaining it3282likely be a good use of scarce time. But learning the fundamentals of3283the craft would make DOD personnel more effective.3284    The acquisition workforce should also be encouraged to learn about3285the economics and business models of the companies with which they3286interact. Learning, for example, why markets value commercial3287technology companies more highly than traditional defense companies, or3288why commercial technology companies command high margins by delivering3289outsized value to their customers, could make the acquisition workforce3290more amenable to working with nontraditional contractors.3291                               __________3292                Questions Submitted by Senator Ted Budd3293  barriers to small businesses working with the department of defense3294    16. Senator Budd. Mr. Sankar, how was Palantir able to make it3295across the ``valley of death'' and what specific recommendations would3296you have for small businesses seeking to do the same?3297    Mr. Sankar. Palantir crossed the Valley of Death in part by3298creating a commercial business that ensured we were not wholly reliant3299on government customers to stay alive. That commercial business started3300small in 2010, but grew into roughly half our business today. I3301encourage small businesses to adopt a similar, hybrid model. Creating3302commercially viable products is a sign that a company is on the right3303track, and provides revenue to help the company scale as it learns how3304to do business with the government. DOD policy should encourage3305startups to establish a presence in the commercial market.33063307    17. Senator Budd. Mr. Sankar, once a small business bids on its3308first contract with the Department of Defense, what is DOD's3309notification process to the small business?3310    Mr. Sankar. When small businesses submit bids, DOD acknowledges3311receipt, evaluates the contractor and its bid, and, when the evaluation3312concludes, announces the award. This process is simple on paper but3313painful in practice. The evaluation process can last anywhere from a3314few months to well over a year, during which time the company is3315trapped in bureaucratic limbo. Often, companies are not adequately3316notified of business opportunities, compliance requirements, and3317obstacles to winning a given contract. Deals do not take this long to3318execute in the private sector. If they did, many companies would fail.3319Deals shouldn't take this long in government, either, if we want small3320business contractors to succeed. Deregulation, digitization, and3321simplification of requirements are necessary to solve this problem.33223323    18. Senator Budd. Mr. Sankar, how can DOD modernize, digitize, and3324leverage artificial intelligence to improve DOD's notification process3325to businesses on contract, contract awards, and payment status?3326    Mr. Sankar. DOD can use AI as a sherpa for small businesses so they3327can navigate the incredible complexity of government programs, systems,3328and requirements. To do this, DOD should create a unified repository of3329relevant data for small businesses, connecting stovepiped government3330systems and programs. Working within this data base, an LLM (or LLMs)3331can automate workflows, identify blockers, and keep small businesses3332informed about opportunities and requirements. Just as small businesses3333have human points of contact at DOD, they should have access to a suite3334of AI tools that unearth opportunities, demystify complexity, and help3335them achieve compliance and mission success.3336                               __________3337             Questions Submitted by Senator Mazie K. Hirono3338                          fast follower model3339    19. Senator Hirono. Mr. Sankar, the 2022 National Defense Strategy3340stated that DOD will be a ``fast follower'' where market forces are3341driving the commercialization of military-relevant technology. In a3342rapidly changing market environment, how can DOD more effectively act3343as a ``fast follower'' to leverage commercial innovation while still3344meeting unique and often complex military requirements?3345    Mr. Sankar. DOD can act as a ``fast follower'' by increasing its3346purchasing of commercial technology, instead of defaulting to custom3347products with onerous requirements. DOD can perform an important3348function by issuing a steady and credible demand signal to industry3349about the types of systems it is looking to buy. Industry will respond3350to such signals, potentially in surprising and novel ways that DOD3351would never have specified in a requirements document. In furtherance3352of this goal, DOD should rely more heavily on Other Transaction3353Agreements (OTAs) and Commercial Solutions Openings (CSOs), which are3354more rapid, flexible, and friendly to nontraditional contractors than3355typical contracting vehicles.33563357    20. Senator Hirono. Mr. Sankar, what role does industry play in3358supporting DOD in meeting these requirements?3359    Mr. Sankar. Industry can support DOD's ``fast follower'' mission by3360serving as a font of specialized knowledge and private risk capital. If3361DOD indicates the types of systems it is willing and ready to buy,3362using streamlined methods like OTAs and CSOs, commercial industry will3363respond with privately funded R&D and proposals to win those contracts.3364Commercial companies have the added advantage of moving quickly, as3365speed is a precondition of success if not survival in the commercial3366market.3367                     allies/partners and innovation3368    21. Senator Hirono. Mr. Sankar, the Department of Defense's 20243369National Defense Industrial Strategy states DOD ``must work with allies3370and partners . . . to boost defense production, innovation, and overall3371capability.'' How should DOD be optimizing its own procurement and3372acquisition reform to improve our ability to scale and field3373capabilities with our allies and partners, particularly in the Indo-3374Pacific?3375    Mr. Sankar. Coordination starts with communication. DOD should3376invest in tools to facilitate communication and data sharing with3377allies and partners in the Indo-Pacific. These systems must be secure,3378interoperable, and capable of functioning in DDIL environments. The3379United States should also reform its stringent ITAR requirements to3380make it easier for U.S. defense companies to rapidly equip allies and3381partners in the Indo-Pacific.3382    Security partnerships focusing on technological exchange and3383manufacturing hold great promise in facilitating greater coordination3384between the United States and pivotal allies. AUKUS's Pillar 2, for3385instance, focuses on advanced capabilities and DIB coordination, and3386could generate productive cooperation between high-technology firms in3387the United States, United Kingdom, and Australia if it is given3388adequate attention and funding.3389                   industry and indo-pacific strategy3390    22. Mr. Sankar, as outlined in the last National Defense Strategy,3391maintaining a free and open Indo-Pacific requires strategic investments3392in advanced capabilities that deter aggression and pursue regional3393security and stability.'How can U.S. industry better align with DOD's3394strategic goals to ensure technological superiority in the Indo-3395Pacific, and what DOD policies do you think would encourage deeper3396industry engagement?3397    Mr. Sankar. DOD should invest far more in advanced capabilities3398like AI, which currently account for a fraction of a percent of the3399overall DOD budget. It should also expand the use of alternative3400acquisitions processes, which give DOD greater flexibility and freedom3401to acquire technology that is advancing at a faster clip than the3402traditional PPBE process can accommodate. Finally and perhaps most3403important, DOD needs to deliver a clear signal about what advanced3404capabilities it wishes to purchase, and follow through on those3405commitments. Industry can contribute to this effort by investing3406private capital in R&D of capabilities that respond to DOD's guidance.3407                fair federal contracting for commercial3408    23. Senator Hirono. Mr. Sankar, Federal contracting practices have3409implications not only for how efficiently agencies are spending3410taxpayer dollars but also for how the United States can acquire3411cutting-edge technologies, maintain a healthy industrial base, and3412address national security objectives. DOD is responsible for3413negotiating the best deal for the Government when contracting for goods3414and services. How do we know DOD is getting the best price when3415contracting with nontraditional contractors?3416    Mr. Sankar. Because commercial companies are exempt from the3417requirement to provide certified cost and pricing data, DOD must assess3418alternative metrics to determine if they are paying a fair price for3419commercial items. For example, the government can identify identical or3420comparable products sold to commercial customers and assess the price3421paid for such products. Government can also determine whether3422commercial contractors are delivering products at commercial scale and3423speed, which of course is the point of doing business with such3424contractors. Finally, the government can assess the performance of3425commercial products and user satisfaction to determine if the price3426paid is worth the value received.34273428    24. Senator Hirono. Mr. Sankar, would this sector be willing to3429share with DOD cost data and certify your costs are current, accurate,3430and complete?3431    Mr. Sankar. Palantir is not required to have, and does not have, a3432cost-accounting system that would allow us to adhere to this request.3433As a commercial company, Palantir is exempt in accordance with FAR343415.403-1(b)(3).3435                               __________3436            Questions Submitted by Senator Elizabeth Warren3437                              overpayments3438    25. Senator Warren. Mr. Sankar, in order to avoid paying3439unreasonable prices, an October Department of Defense Inspector General3440report recommended the Air Force require companies to notify3441contracting officers ``of price increases of 25 percent or higher than3442the proposed price.'' Do you agree with this recommendation?3443    Mr. Sankar. Yes. It is difficult to think of a scenario where a3444commercial company could increase pricing 25 percent without an3445increase in contract scope or a dramatic change in market conditions3446that warranted an equitable adjustment.34473448    26. Senator Warren. Mr. Sankar, if you do not agree with that3449recommendation, do you think companies should be required to notify3450contracting officers of price increases that are 100 percent or higher3451than the proposed price?3452    Mr. Sankar. Yes.34533454    27. Senator Warren. Mr. Sankar, should companies doing business3455with the Government be able to provide certified cost and pricing data3456to justify to the Department of Defense price increases that are3457significantly higher than the proposed price?3458    Mr. Sankar. Companies should be able to provide some form of3459justification for cost and pricing, but the systems that support the3460ability to produce certified cost and pricing data are not typically3461present in the commercial marketplace and providing such data is not3462possible or appropriate for every contract. If a company bids FFP, for3463instance, it should be prepared to honor its bid. The risk is on the3464vendor in FFP, and while vendors may submit requests for equitable3465adjustment, those requests must be reviewed by the government and3466deemed reasonable to be approved. If they are not reasonable, the3467government should not pay for overages in an FFP arrangement.34683469    28. Senator Warren. Mr. Sankar, you said that you ``don't think we3470would have any conceptual disagreement'' with Palantir voluntarily3471disclosing to Department of Defense contracting officers when there's a3472price increase of 25 percent or higher than the proposed price. Will3473Palantir voluntarily disclose this information for any contract or3474agreement it receives from DOD? Please expand on your answer.3475    Mr. Sankar. Palantir will always adhere to all DOD requirements,3476including any requirement to report price increases above a certain3477threshold. However, as a matter of fairness, we cannot agree to3478unilaterally disclose sensitive financial information that our3479competitors for government work do not disclose. Reporting of this3480information by a single or several firms, but not all firms, would give3481DOD contracting officers an incomplete and skewed picture of industry3482performance.34833484    29. Senator Warren. Mr. Sankar, what performance metrics and3485oversight measures should the Department of Defense have in place to3486assess the performance of nontraditional contractors?3487    Mr. Sankar. The relevant metric for nontraditional contractors is3488whether they deliver promised goods and services on a fast enough3489timeline to serve the warfighter. DOD's contracting problems stem, in3490large part, from a lack of emphasis on speed. Centering oversight and3491performance metrics around speed, both to deliver and update products,3492is therefore essential to reform.3493    Another highly relevant metric is user experience and satisfaction.3494Some of DOD's highest profile custom-development failures, like DCGS-A,3495continued for years despite widespread user dissatisfaction and a clear3496preference for commercial alternatives (in this case, Palantir). DOD3497should create a feedback loop that takes into account the views of3498users, who are best positioned to provide relevant information about3499the success or failure of various offerings.35003501    30. Senator Warren. Mr. Sankar, you suggested that cost-plus3502contracts make the Nation ``dumber, slower, and poorer''. Will Palantir3503and Divergent Technologies commit not to use cost-plus contracts?3504    Mr. Sankar. Yes. We've been committed to this for more than two3505decades. It's our ethos.3506                            right-to-repair3507    31. Senator Warren. Mr. Sankar, do you believe providing DOD with3508technical data rights needed to repair products and services could3509advance the military's readiness?3510    Mr. Sankar. Yes. As a SaaS software company at our core, this3511doesn't apply to the vast majority of our work. However, as we take the3512lead in software primed hardware procurements, we do think technical3513data rights are critical to reduce the total cost of ownership for our3514hardware and weapon systems.35153516    32. Senator Warren. Mr. Sankar, do you believe providing DOD with3517technical data rights needed to repair products and services could help3518reduce sustainment costs?3519    Mr. Sankar. Yes.35203521    33. Senator Warren. Mr. Sankar, will your company commit to3522delivering technical data rights to the military when the contract3523requires or allows it?3524    Mr. Sankar. Yes.35253526    34. Senator Warren. Mr. Sankar, what do you believe is the best3527method for servicemembers to repair or conduct modifications on a3528product or service when in a contested logistics environment?3529    Mr. Sankar. In contested logistics environments, particularly in3530the heat of battle, servicemembers should be empowered to repair and3531modify their equipment quickly, efficiently, and, when necessary,3532independently. ``Right to repair'' does not apply neatly to SaaS, given3533the nature of software and how it is modified and distributed, but3534Palantir is committed to giving warfighters the tools and flexibility3535they need to succeed, including in DDIL and contested environments.35363537    35. Senator Warren. Mr. Sankar, if DOD had the technical data3538rights to repair or conduct modifications on a product or service when3539servicemembers are in a contested logistics environment, could that3540make it easier and less costly for DOD to repair or modify its3541equipment and services?3542    Mr. Sankar. Potentially yes, though I will refrain from speculating3543on a question that principally concerns hardware and is of limited3544applicability to software, which is Palantir's business and area of3545expertise.3546                      other transaction agreements3547    36. Senator Warren. Mr. Sankar, under what circumstances would your3548companies seek to contract with DOD using Other Transaction Agreements3549(OTAs) rather than a typical procurement contract?3550    Mr. Sankar. Palantir will contract with DOD using Other Transaction3551Agreements (OTAs) in any case where DOD deems them to be the3552appropriate contracting vehicle.35533554    37. Senator Warren. Mr. Sankar, please provide a full list of all3555OTAs your company has entered into with DOD in the last 10 years. For3556each OTA, please provide the purpose of the agreement, the estimated3557cost to DOD provided by your company at the initiation of the3558agreement, and the actual cost to DOD at the completion of the3559agreement. Please also provide the text of any provisions related to3560intellectual property rights included in each OTA.3561    Mr. Sankar. A full list of Palantir's publicly available OTA awards3562is available in real time on https://www.defense.gov/News/Contracts/.35633564    38. Senator Warren. Mr. Sankar, last year Palantir received a $1783565million OTA with the Army for the next phase of its Tactical3566Intelligence Targeting Access Node (TITAN) ground station program.3567Could this agreement have been reached using DOD's typical procurement3568processes, rather than an OTA?3569    Mr. Sankar. It is possible that this agreement could have been3570reached using typical procurement processes, but it certainly would3571have required more time and pain. Typical procurement processes are3572only possible for commercial technology providers like Palantir if they3573do not include requirements (such as the requirement to have a cost3574accounting system for eligibility) that are incompatible with our3575business model.35763577    39. Senator Warren. Mr. Sankar, last month Palantir announced the3578formation of a consortium with Anduril and other technology companies3579to jointly bid for DOD contracts. What protections is Palantir putting3580in place to ensure that the arrangement does not violate Federal3581antitrust law, including the Sherman Act?3582    Mr. Sankar. All of Palantir's partnerships undergo a thorough3583review for a number for factors, including potential antitrust3584violations. Palantir's announcement of an intention to partner with3585Anduril when appropriate based on the opportunity does not constrain3586the market or competition in any way.35873588    40. Senator Warren. Mr. Sankar, will companies that are not members3589of the consortium have the opportunity to see requirements for upcoming3590consortium projects Palantir participates in?3591    Mr. Sankar. Neither Palantir nor this consortium have any control3592or power over the dissemination of requirements by the Government.35933594    41. Senator Warren. Mr. Sankar, will the products developed by3595Palantir's consortium limit the ability of other technology companies3596to interoperate with DOD systems?3597    Mr. Sankar. No.35983599                            APPENDIX36003601[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]36023603                                 [all]