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REPARED STATEMENT
LAWRENCE F. CLARK
CHAIRMAN OF THE BOARD
SONALYSTS, INC.
BEFORE THE
HOUSE ARMED SERVICES SUBCOMMITTEE ON
MILITARY RESEARCH AND DEVELOPMENT
UNITED STATES HOUSE OF REPRESENTATIVES
MARCH 12, 2002
Chairman Hunter, Representative
Meehan, and Members of the Subcommittee:
Good afternoon. I appreciate the
opportunity to appear before you today. As the Chairman of the
Board of Sonalysts, Inc., I am here to represent all of our nearly
500 employee-owners.
My testimony this afternoon will
address the truly extraordinary return on investment which the
taxpayers of the United States receive from military research and
development expenditures placed through government contracts with
small, agile, creative corporations. Much of this investment has
already borne fruit, and more of it will do so, in the war against
terrorism and the defense of our homeland.
Overview of Sonalysts
The name “Sonalysts” is derived
from the words “Sonar analysts.” Our work is
primarily at the applications end of the research and development
spectrum, and our employees are virtually all degreed
professionals. Many have advanced degrees. More than half of
them have military experience. Sonalysts’ principal areas of
expertise are modeling and simulation, high technology training,
software applications development, multimedia, and nuclear
engineering.
Our sales last year
were $55 million. In round figures, 60% of sales were with the
Department of Defense, 10% with other federal agencies (mainly the
Department of Energy), and 30% with commercial customers. Our DoD
customers are mostly Navy, but there is also considerable work
with the Air Force and the Army. For the past decade, most of our
work has come from open competition as a “large business” under
Small Business Administration (“SBA”) size classification
standards based upon annual sales. However, we have also received
many Small Business Innovative Research (“SBIR”) contracts over
the years, and we still qualify for them today under the SBA
500-employee standard (although we hope to grow through the limit
soon). In addition, we have from time to time been a
subcontractor to other small businesses on SBIR or other research
and development contracts.
We have operations in
ten states (California, Connecticut, Florida, Georgia, Hawaii,
Maryland, New Jersey, New Mexico, Rhode Island, and Virginia) and
partners -- our term for employees since the corporation is 100%
owned by its Employee Stock Ownership Plan (“ESOP”) -- who live
in four additional states (Colorado, Massachusetts, Pennsylvania,
and South Carolina). We therefore have partners who live or work
in states represented by 19 of the 28 members of the Subcommittee.
History of Sonalysts
The corporation was
founded in Waterford, Connecticut, by David and Muriel Hinkle upon
Dave’s retirement from a career in the Submarine Force in 1973.
Dave had enlisted in the Navy in the late 1940’s and was
subsequently selected for Fleet input to Annapolis, from which he
graduated in 1954. Over the years he became a widely acknowledged
sonar expert, having served in various submarine assignments all
over the world culminating with a highly successful four-year tour
in command of USS PARGO (SSN 650), then one of the newest nuclear
attack submarines on the front lines of the Cold War. From your
work on the Armed Services Committee, you certainly understand the
tremendous contribution the Submarine Force made to our country
during that dangerous time.
In the first years of
Sonalysts’ existence, Dave found customers who needed his
experience and expertise. While he was having the fun, Muriel did
all the hard stuff. She had to master the arduous process of
actually obtaining a government contract, then mostly with the
United States Navy Underwater Sound Laboratory which is today part
of the Naval Undersea Warfare Center. She also dealt extensively
with the Defense Contract Audit Agency, various elements of the
Defense Contract Management Agency, the Defense Security Service,
the Office of Federal Contract Compliance, the Small Business
Administration, and the rest of the various federal activities
that play a role in the procurement process. She was responsible
for payroll, billing, accounts payable, benefits, accounts
receivable, graphics, security, and word processing; as well as
dealing with the banking relationship, the Department of Labor,
the Internal Revenue Service, and several state agencies.
Meanwhile, she was also the mother of three teenage girls. So she
really had her hands full. As a footnote, Dave was attending law
school at night at the University of Connecticut and working for
customers in the day (and on weekends) during the first four
years. A remarkable couple and a remarkable story of
entrepreneurship.
It has been said that
the biggest sources of startup venture capital are MasterCard and
Visa. That was certainly true of Sonalysts. The company’s first
job illustrates the problem well. Dave found a customer with a
need and funding, so they thought they were on their way. But,
without a security clearance the Contracting Officer at the
Underwater Sound Laboratory could not award a contract. And
without a contract, the Defense Security Service could not provide
a security clearance. It took Muriel six months to resolve this
“Catch 22” -- six months of financing the incipient company on
personal savings and credit cards.
The Hinkles were very
careful to hire entrepreneurial individuals, mostly former
submariners, and the company began to grow. In 1985 and 1986
Sonalysts earned the SBA Administrator’s Award for Excellence, and
in 1986 went on to become the SBA Prime Contractor of the Year for
the New York/New England Region and a finalist for the National
Prime Contractor of the Year. Dave and Muriel were among those
honored by President Reagan at a White House reception. In 1984
and 1996 the company received the James S. Cogswell Security Award
for excellence in industrial security from the Defense Security
Service. Sonalysts was a charter member of the Defense Contract
Management Agency (Hartford Office) Honor Roll and received the
award six times. The company has repeatedly been recognized by
the Defense Contract Management Agency for superior subcontracting
performance with small and small disadvantaged businesses. In
1994, Dave and Muriel were finalists in the Entrepreneur of the
Year competition sponsored by Ernst & Young, IBM, Merrill Lynch,
US Trust, and Inc. magazine. Our multimedia team has
received more than 100 Telly awards for non-network video
productions, as well as some 70 awards for animation, audio, and
video production on work done for Time Life. We supported
Paramount Studios on the special sound effects in The Hunt for
Red October, which resulted in an Oscar for them and movie
credit for us. A number of our partners have received Meritorious
Public Service Awards from the Secretary of the Navy, the Chief of
Naval Operations, and Fleet Commanders. These awards are rarely
given and we are very proud of them.
Sonalysts has one of
the oldest Employee Stock Ownership Plans in the country -- Dave
and Muriel are in fact pioneers in the field of employee
ownership, having created the plan in 1979 only a few years after
enactment of the Employee Retirement Income Security Act (“ERISA”).
Today the ESOP value is $39 million on a minority interest basis,
and the corporation would no doubt sell for more than $50 million
considering a control premium. The corporation also has two
other retirement plans -- a 401(k) worth $27 million with
Vanguard and a money purchase pension plan ( the “MPPP”) worth $23
million managed by Fleet Bank. Both of these additional plans are
fully funded in cash and involve no company stock. Over the past
fifteen years $22 million has been paid to 298 individuals for
their ESOP stock accounts, and another $7 million has been paid
out by Fleet Bank for retirement accounts in the MPPP. If the
amounts paid out from the 401(k) were added, the total pension
benefits paid from company-funded sources (that is, excluding
salary deferrals which are the employees’ own money) would
approach $40 million. We are proud of that record.
Since the partners
own the corporation, we all care about it a great deal. In fact,
much of Sonalysts’ success is directly attributable to the fact
that the employees are the owners. We turn out the lights at
night, we replace the empty roll of toilet paper, we come to
business meetings on Saturdays. In general, we take personal
responsibility for the success of the corporation and for each
other. We know that what we do ourselves will create our future.
The retirement plan statistics quoted above provide a wonderful
example. In the aggregate, the partners have generated some $90
million of retirement value for each other in today’s dollars, on
top of the many millions already paid to former partners who have
received their benefits. As Muriel says, “There is no ‘they’ at
Sonalysts -- only ‘we’.”
Examples of Taxpayer Return on Investment
Several examples will help to
illustrate the return on investment that taxpayers have received
from military research and development expenditures with Sonalysts
and, no doubt, with many other companies. The theme that
permeates these examples is that there is a “multiplier” effect
with at least three different types of benefit.
First, obviously, the
government customer received the direct benefit it paid for
because Sonalysts provided the services specified in the
contract. (Of course this has the immediate collateral effect of
producing jobs and tax revenues.) We believe that small companies
often do a better job for customers than large ones because they
are so keenly aware that they have so much at stake. This is
especially true in employee-owned corporations.
Second, the government simultaneously,
and probably without even thinking about it, invested in the
Defense industrial base. That is, through its Cold War Defense
contracts, Sonalysts had developed the organization and assembled
the resources which would enable it to diversify into work with
other government agencies and commercial clients. Such
diversification was clearly going to be necessary with the
impending reduction of the Defense budget -- the end of every
war back to the Royal Navy’s victory at Trafalgar and beyond has
been accompanied by a sigh of relief from the taxpayers, and then
a dramatic reduction in military spending. So at the end of the
Cold War, the “incubator” role of government contracts and the
prudent use of the resulting resources at Sonalysts had produced a
company that, through careful diversification, could remain
available in the Defense industrial base.
This is a very important point. In
1984 Sonalysts won the Cogswell Award from the Defense Security
Service for superior performance in the security field. At that
time there were 15,000 cleared facilities in the country. When we
won it again in 1996, there were only 11,000 such facilities --
more than one-fourth of them had been closed! So some of the
government’s Cold War investment is gone, but a great deal of it
remains. Because of Sonalysts’ agility and creativity, we and
others like us were able to diversify to a degree. Therefore we
are available today in the war on terrorism and for homeland
security. We will continue to be here in the future when the
country needs us, as it will, in ways yet to unfold. As Dave
Hinkle says, “We did not diversify to get out of Defense; we
diversified to keep the team together so we could stay in
Defense.”
Third, some of the
diversification has resulted in commercial products that are
themselves useful to the government currently. In that case, the
government receives the benefits of the investment made by the
commercial customers or by Sonalysts.
These three prongs provide an
exceptionally powerful return to taxpayers. Most businesses
struggle to identify investments that have multiple payback
possibilities. And they do not often find such opportunities.
Here, your work just naturally creates them for our country.
Military Simulation and Modeling Is
Transformed into Computer Games and Then Returns to Military Use
I have circulated three computer
games for the Subcommittee’s review. This is their story.
Sonalysts has been the primary
support contractor to the Naval Undersea Warfare Center (“NUWC”)
for submarine combat simulation for 25 years using the Naval
Engagement Model (SIM II) and various other software tools. These
efforts have involved analysis of many potential new sensors,
weapons, and platforms in a wide variety of combat scenarios.
Virtually every significant submarine procurement decision in the
past 25 years, as well as a number of surface ship and Coast Guard
ones, has been analyzed by Sonalysts for NUWC. These have
included such programs as the Mark 48 Advanced Capability
(“ADCAP”) torpedo, an extensive group of potential sonars, the
alternatives which led to development of the SEAWOLF and VIRGINA
class SSN’s, the recent SSGN conversion program, and many others.
This work requires a team with expertise in submarine combat,
modeling and simulation, software development, configuration
management, and operations research.
In 1995, we realized that all of
that expertise, together with our multimedia capability, would
enable us to make a compelling submarine computer game. What we
lacked was the very important distribution element. So we
approached Electronic Arts, the world’s largest game publisher.
The result was that they funded us as an advance against royalties
to develop 688(I) Hunter Killer. That game was introduced
in 1997 and it has been the best selling submarine game yet; to
date there have been more than 400,000 copies sold. It was named
the “Best Combat Simulation of the Year” for 1997 by PC Gamer
magazine, and it was named the “World’s Most Intellectually
Challenging Game” by The Guinness Book of Records in 1999
and 2000.
So the game has been a big
commercial success. Without any plan to do so, it has also been
of significant military value. Every submarine in the Fleet has a
copy, and we have received numerous reports of its utility in
training new sailors. We were also paid by the Chief of Naval
Education and Training to develop a modified version for training
use. Submarine combat tactics are very complex, and this game has
produced a highly effective training tool for the Navy. And, the
Navy did not make the substantial seven-figure investment
required -- that was done by Electronic Arts.
Our second game is named Fleet
Command. It was introduced in 1999. It also has sold more
than 400,000 units and has received numerous kudos in the gaming
press. It is used at the Naval Academy, out of the box, to teach
tactical thinking to midshipmen. It has also been taken to sea by
a Battle Group staff for use as a planning tool. Both of those
uses have cost less than $50 per copy -- not even in the tenth
digit of round-off in the Defense budget. The Chief of Naval
Operations’ Strategic Studies Group paid us to make some
classified adaptations so that the game could be used for
evaluation of net-centric warfare. Again, the Navy piggy-backed
on a seven-figure investment by Electronic Arts to obtain a
valuable product at a fraction of the cost to create it.
Moreover, I do not believe that either the government or a large
contractor would ever have created the game. So without the
agility and creativity of a small business, this capability would
not exist.
Again, this game has been a
commercial success. And, again, it has applications for military
use that were not foreseen and which cost the military far less
than it would have taken to create it. As an aside, the computer
graphics from the game have also been used by major network news
operations on three different occasions to illustrate naval combat
operations when real footage was not yet available. These
included NBC News during Operation DESERT FOX, ABC News “Good
Morning America” during the initial operations in Kosovo, and ABC
News this past Fall during the beginning of Operation ENDURING
FREEDOM. So the American people had the opportunity to see the
types of things that were happening without jeopardizing the
security of on-going operations or distracting key Navy leaders at
a critical operational moment.
Fleet Command has been
connected to your work in another way. Last year we won a Phase
II SBIR to team with another small business, MÄK Technologies,
that had developed a training game named MAGTF XXI for the
Marine Corps under its own SBIR. The concept is to marry Fleet
Command with MAGTF XXI to produce an expeditionary
warfare training tool that will address the entire array of issues
involved in amphibious assault operations. This is a substantial
undertaking, but it would clearly be of great value for the
Navy-Marine Corps Team to have such an integrated training and
planning tool on a PC. Future plans are to integrate this
training simulation into the Battle Force Tactical Training (“BFTT”)
Program to support expeditionary warfare forces. It also could
well become a commercial product.
Sub Command is our third
game, introduced last Fall as a sequel to the first game. It is
outselling both of the first two for the same time period. A few
weeks ago we showed it to the Commodore responsible for Submarine
Force-wide tactical development to demonstrate two specific
potential training capabilities -- high density contact
management training (which could be done right out of the box) and
submarine fire control party team training (which would require a
small additional development cost). These are both very important
training issues, and both are hard to address if the only
opportunities are “on the job.” The Commodore immediately
understood the potential value of our concepts, and we believe
that the Submarine Force is likely to pursue them. We also have
several other potential training enhancements to the game on our
drawing boards.
In recent discussions
with the Federal Emergency Management Agency (“FEMA”) Training
Directorate, another potential use of the PC games emerged. We
explained that it would be feasible to extract the "Mission
Editor" code and adapt it for emergency consequence management
team training simulation to support FEMA. Thus, FEMA would be
able to leverage the investment already made to build a tool for
decision-maker training. As a result of the positive response, we
have submitted an unsolicited proposal for a demonstration project
to FEMA.
It is worthy of note that Sub
Command has a scenario named “Get Bin Laden.” It involves
cruise missile launch from the Arabian Sea into terrorist camps in
Afghanistan. We had already developed the scenario before
September 11, but it seems so much more compelling now.
Military Training Is Transformed into Commercial
Multimedia and Then Returns to Military Use
Military life is filled with
training -- day after day, year after year -- preparing for
the conflict that every soldier, sailor, airman, and marine hopes
will never come. As time goes by, new recruits and young officers
enter the service, undergo training, join their first operational
units and then, in most cases, return home to find civilian jobs
or go to school. If the military is fortunate enough to retain
them, they rotate to new assignments where they must again undergo
training to assume increased responsibility. In a recent
interview on morning television, the Commanding Officer of the USS
THEODORE ROOSEVELT (CVN 71) stated that the average age of his
crew is nineteen. And there they were, on average less than two
years out of high school, fighting the war against terrorists in
Afghanistan. I would venture to say that if you returned to that
ship five years from now, the entire crew would have rotated and
there would not be one single sailor still remaining who is aboard
today.
The services are very good at
training on existing equipment and procedures. Indeed, in almost
every respect they are superior to the training departments in
corporations because they have a bigger problem and because
training is so central to their organizational success -- in
many ways training is the “bottom line” for the military. But for
new equipment and new tactical developments, the services
naturally lack institutional experience. So it has long been
necessary for the research and development community to do the
first wave of training, and often the second wave too, on new
systems and new tactics. Thus, training has always been a major
line of business for Sonalysts. Initially our training contracts
were primarily for writing course materials and instructor
guides, as well as written material in the form of tactical
memoranda (TACMEMO’s) and Naval Warfare Publications. We still do
some of that, but the times have changed as technology marches
forward. For example, today TACMEMO’s may well be written with
hypertext links and multimedia formats, all of it accessible on
classified computer networks. So our business has grown to
include significant research and development in the training
field.
More than twenty
years ago the Submarine Force had a serious training problem
involving Cold War sonar operations. Extensive efforts to educate
submariners with TACMEMO’s had repeatedly failed to resolve this
issue. Sonalysts received a contract to develop a video tape to
demonstrate the manual procedures that had to be coordinated with
subtle visual cues on the sonar screen and faint audio signals
over a set of earphones. And it worked -- sonar operator
performance improved dramatically. That was our first video
training tape, primitive by today’s standards, and the first of
many multimedia training products that we have developed.
Late in the Cold War, Paramount
Pictures approached the Pentagon for cooperation and assistance on
a submarine movie. The Submarine Directorate in the Pentagon,
aware that we had done a number of video training tapes and “knew
all about that film and video stuff” as well as being subject
matter experts in submarine operations, told Paramount to come see
us. We helped with some technical advice but primarily with
special sound effects. When the only Oscar they won was for
special sound effects, we decided that some of our diversification
efforts should include the entertainment industry.
We pushed hard to
improve our multimedia capabilities, expanding on the video
knowledge we had gained from Navy training to develop such work as
commercial programs for ESPN and the New England Sports Network,
as well as an extensive, award-winning series of 34 Time Life
Medical videos. I have circulated to the Subcommittee a few
examples of this high quality work.
One story illustrates
how far we have come. Twenty years ago we had put a music
background on the Cold War sonar video tape described above. But
the customer told us to remove it because “Navy training videos do
not have music, it’s too distracting.” Well, not so long ago we
found ourselves sitting across the table from an Army Colonel on
the Joint Staff who was our customer for a highly classified
video. He told us to make it “Spielbergesque, with lots of
animation and big music.” The Colonel did not want this for
frivolous reasons. Rather, he had learned that effective training
for people who have grown up with sophisticated television
programs, computer graphics, the internet, and so on requires high
quality production values. As an aside relating to Spielberg, we
hosted part of the production of his movie Amistad in one
our sound stages a few years ago.
Had we not started
with Navy training tapes and then refined our capability in the
commercial world, we would not have had the opportunity to do the
work for the Joint Staff. Similarly, we would not have been
selected to prepare some of the Navy’s presentation materials for
the recent Quadrennial Defense Review.
Recent developments in the world
of training technology have been the emergence of interactive
computer based training and adaptive learning. During Operation
DESERT STORM, the Navy discovered that its AN/SPY-1 radar
operators were experiencing tremendous difficulty operating this
sophisticated radar in the high clutter environment of the Persian
Gulf. Shortly afterwards, Sonalysts received a contract from the
Navy’s Aegis Training and Readiness Center to apply our PC
simulation-based intelligent tutoring technology to improve Aegis
radar operator training. This was highly successful -- more
hands-on instruction per student was provided, school through-put
was increased with no additional instructor time required, and the
Navy avoided some $60 million of equipment cost that would
otherwise have been required. It is worth noting that skills we
learned doing this work were applied later to the development of
the computer game Fleet Command. It is also worth noting
that the same interactive adaptive training capability has been
applied to work with the Army (Field Artillery School use for the
Multiple Launch Rocket System (“MLRS”) Virtual Sand Table) and the
Air Force (SBIR for satellite operations training). In the case
of the MLRS Virtual Sand Table, an evaluation by the Army Research
Institute reported a 35 per cent improvement in learning
effectiveness compared with traditional training.
Meanwhile,
distributed learning was developing as the internet emerged and
became widely available. Sonalysts has been among the first
companies to assist major corporations with large scale
distributed learning. For example, several years ago we built
“Planet OTIS,” an interactive intranet site providing training for
Otis Elevator’s maintenance, sales, and support staff world-wide.
The complexity imposed by thousands of employees, customers, and
vendors in many different countries, time zones, and languages is
staggering. Our partners doing this work learned their network
support, programming, and interactive training skills working for
the Navy. Then they applied those skills to the problems of
commercial customers.
To complete the
circle, the Navy now receives the benefit at the Naval Submarine
School. First, we helped the School develop the distributed
learning environment for their new advanced electronic
classrooms. Then we employed our adaptive interactive multimedia
instruction (“IMI”) technology in a pilot course on sonar
fundamentals. The pilot course produced a measurable and
significant improvement in mastery of the subject matter compared
with traditional classroom techniques, and it demonstrated that
significant cost savings would be available over a period of
time.
We are now engaged in
a Phase I SBIR project that seeks to seamlessly integrate our
simulation-based intelligent tutoring and adaptive IMI
technologies into a single training architecture. This advanced
technology will support DoD training requirements in years to
come.
The story here is the same as it
was with respect to computer games. The taxpayers have received
quite a return on their investment.
Command and Control Software Is Transformed in
to wXstation® Airline Dispatch and Then Returns to Military and
Other Government Use
During the Cold War, we supported
the Naval Undersea Warfare Center in the development of highly
sophisticated command and control software applications. One of
those was a submarine search planning tool. Anti-submarine
warfare is very difficult -- stealth is the fundamental combat
advantage of a submarine, so it stands to reason that finding
submarines is difficult. First, there is a big data fusion
problem -- how old and how reliable are all of the various
data? Then there are the characteristics of the environment. The
physics of sound transmission in water is very complex. The
software we developed was very sophisticated -- more than one
million lines of UNIX code, sophisticated data fusion and database
management requirements, extensive use of probability theory, and
application of complex operations analysis techniques were all
involved. And the program had to operate as an adjunct to the
existing combat system at sea as well as having linkage to
shore-based systems. Some of this work was funded under the SBIR
program.
As the Cold War was coming to a
conclusion, one of our partners who was also a private pilot
realized that there were other potential applications for the
program. He began to experiment with adding weather features.
During the initial air drops of supplies into Bosnia in the early
1990’s, he happened to be in Naples, Italy with a demonstration
copy of the new code. Before we knew what was going on, he had
been sent to the European Command Headquarters in Stuttgart and
they told him that he could not take the computer home. He had
developed a more sophisticated weather and flight tracking
presentation, even in his demonstration version, than anything
else available in the European Command. A short trip turned into
a six-week, sixteen hour a day job.
Sonalysts then began to invest in
a robust version of this system and the product we call wXstation
was born. (Of course, we had to remove the elements of the code
that related to classified submarine operations.) We took the new
version to United Airlines, and we learned that what we did on one
computer screen in a UNIX Windows environment took United four or
five computers and lacked visual presentation of flight
information. United soon became our first airline customer, and
ultimately developed a very large computer network using our
software in their meteorology department, their dispatch center,
and in their backup/training facility. Today we have customers
all over the world -- Kuala Lumpur International Airport,
Eurowings, Saudia Airlines, Korean Airlines, Southwest Airlines,
and many others.
One of the customers is the Joint
Special Operations Command (“JSOC”) at Fort Bragg. Our wXstation
software is being used by the Special Forces in the war in
Afghanistan. It is also being used by the National Data Buoy
Center of the Department of Commerce. Several years ago we
participated as a subcontractor on a very large bid to the Federal
Aviation Administration. Our part of the proposal was the weather
software, and it was evaluated as the technically superior
solution. Although the team lost on price due to the prime’s
overall bid, the taxpayers got the benefit of price competition
for government work and of being able to choose among alternative
technical solutions to an important, complicated problem.
Once again, the
taxpayers invested in the Defense industrial base. Then Sonalysts’
diversification efforts brought a product to the commercial
marketplace, with the costs to develop and enhance this new
capability borne by commercial customers. Now the government is
benefiting from the emergent product. We believe this represents
a substantial return on investment to the taxpayers.
The data fusion capability of our
software is very impressive. We are currently considering the
possibility that it would be applicable to one aspect of the early
warning indication system for terrorist attacks. We have also bid
on a contract with the International Atomic Energy Agency in
Vienna for non-proliferation monitoring work that would involve
the data fusion and communications capabilities of the wXstation
product. Even if neither of these potential uses works out, it is
of great value to the taxpayers that there exist such possible
spin-off uses of their original investment.
Naval Nuclear Propulsion Experience Is
Transformed into Commercial and Other Government Use
Sonalysts has
employed more than two hundred former nuclear trained officers and
enlisted personnel. It is clear to us that the technical
expertise and engineering discipline paid for by the taxpayers
through their funding of the Naval Nuclear Power Program has been
a wise investment.
Following the energy crisis of the early 1970’s and the subsequent
reactor accident at Three Mile Island, Sonalysts’ partners began
working for the Nuclear Regulatory Commission (“NRC”). We also
worked with several electric utilities and with state and local
governments to help improve the safety of nuclear power plants.
Over the years, Sonalysts’ partners have worked at every
commercial nuclear power plant in the United States, conducting
safety inspections, administering nuclear fundamentals exams, or
helping to structure and conduct training programs. Most of this
work was for the NRC. We are proud of the fact that before any
nuclear reactor operator in this country was certified, he or she
took a nuclear fundamentals examination that Sonalysts prepared.
As time went by we expanded the nuclear engineering work to
include support for various nuclear weapons related programs at
Department of Energy sites throughout the country. We have an
office dedicated to support of the Los Alamos National Laboratory
in New Mexico.
After the Cold War, Sonalysts received contracts from the Pacific
Northwest National Laboratory funded with international aid money
in the budget of the Department of State. The work was to provide
operational safety and quality assurance training under the Lisbon
Accord at nuclear power plants throughout the republics of the
former Soviet Union and former Warsaw Pact nations. This work has
been extremely well received and has resulted not only in a visit
to Sonalysts by the Deputy Minister of Energy from Russia, but
also in a number of our partners spending so much time out of the
country that they now speak fluent Russian. It is remarkable to
think that nuclear trained sailors who once manned the ballistic
missile submarines targeting Russia are today going to some of the
former target locations to help improve their safety. Several of
our partners have been to Chernobyl repeatedly to help resolve
operational issues. What an unexpected return on investment for
the taxpayers.
Overseas nuclear safety and security work has expanded to include
work for the International Atomic Energy Agency under contract to
the Brookhaven National Laboratory in support of various nuclear
nonproliferation programs.
The return on investment to the taxpayers for that original
training in the Naval Nuclear Power Program and some Cold War
contracts now includes improved safety and security of Russian
power plants, improved environmental conditions in Eastern Europe,
reduced threat of proliferation, and improved relations with our
former adversaries at a person-to-person as well as a national
level. When we were in the Navy we could hardly have imagined
these developments, or this kind of return on investment.
Naval War College War Gaming Is Transformed into
Corporate Gaming and Then Further to Corporate War Gaming
For twenty years Sonalysts has
been a major war gaming support contractor for the Naval War
College, probably the premier institution of its type in the
world. Our core team has supported more than 500 war games, and
we have many more partners who have participated in various
additional games.
War gaming is a very
powerful technique for exploring the future, assessing risk,
identifying problem areas, training leaders to make decisions
under uncertainty, and developing plans. Some of you may be aware
of a letter that Admiral Nimitz wrote shortly after World War II
to the new President of the Naval War College in which he stated
that everything encountered in the Pacific War had been war gamed
in Newport during the 1930’s:
“The war with Japan had been enacted
in the game rooms at the War College by so many people and in so
many different ways that nothing that happened during the war was
surprise -- absolutely nothing except the kamikaze tactics
toward the end of the war. We had not visualized these.”
The failure to
foresee the kamikaze attacks was certainly unfortunate -- we
lost some 52 ships and 5,000 sailors during the final months of
the war. My late father-in-law served as a hospital corpsman in
USS HORNET, where he ministered as best he could to shipmates
dying in his arms from the kamikazes. It is unnerving to consider
this today since the United States has now been exposed to eerily
similar attacks on its own soil. Still, the record of war gaming
was outstanding. During the twenty-three year interwar period
aviation had come of age, experiments with aircraft carriers had
borne fruit, the submarine had become a formidable weapon for the
United States, amphibious warfare concepts had been developed by
the Navy and Marine Corps, protection of the Panama Canal had
become important, and the logistical implications of fighting a
war over the half of the globe which is 90% water were first
contemplated. Despite all of that, and more, the only item not
considered was the kamikaze -- truly an amazing record for war
gaming. The Cold War and post-Cold War record is even better,
although much of the story cannot yet be told in public.
During the 1990’s, a
number of federal agencies that had participated in war games in
Newport began to use war gaming techniques for their own purposes,
both military and civilian. Our agency customers for
non-traditional games have included:
·
the Federal Deposit Insurance Corporation for a Y2K game
·
the Federal Emergency Management Agency for among other
things, earthquake response, Y2K, and terrorist attack response
games
·
the Coast Guard for a massive oil spill response game
·
the Navy for a series over many years of technology
initiatives games
·
the DoD and other federal agencies for drug interdiction
games
·
the Defense Threat Reduction Agency for weapons of mass
destruction games
Just since September
11, 2001, Sonalysts has worked on a new series of defense support
operations games in connection with homeland security analysis at
the Naval War College. There has also been work involving the New
York City Police Department and the State of Rhode Island.
During the past
several years, Sonalysts has expanded its war gaming clientele to
include corporate customers, among them:
·
a major entertainment corporation for a strategic planning
game
·
a major insurance company as part of an executive training
package
·
a major retail firm with labor relations concerns
·
a community hospital as part of a management training
program
·
a college for an MBA program game
·
a trade organization reviewing applications of artificial
intelligence
Early in 2001, well
before September 11, the company designed and created a corporate
war gaming facility in Newport, Rhode Island, in order to further
develop the corporate sector’s use of the war gaming technique.
The facility includes a computerized large plenary room, breakout
rooms, and administrative spaces. DoD has certified the facility
for classified use, so corporate clients can certainly be
confident that their proprietary information will be properly
protected.
Sonalysts has organic subject matter
expertise in most of the following areas which might arise in a
war game, depending upon the scenario, the schedule, the budget,
and so on. In addition, the company has relationships with
numerous individuals and organizations which augment our own
expertise in these areas.
·
biological warfare
·
chemical warfare
·
nuclear proliferation
·
reactor plant safety and disaster preparedness
·
bio-medical science
·
water and electric utility operations
·
homeland security and defense support operations
·
physical security
·
intelligence
·
cyber-security
·
personnel reliability
·
military force protection
·
facility threat assessment
·
weather analysis (including airline dispatch operations)
·
distributed learning
·
modeling and simulation
·
computer game development
·
computer visualization
·
crisis communications
·
complex data fusion
·
business resumption / continuity issues relating to complex
computer systems
·
web delivery of information
·
customs and immigration practices and issues
·
disaster insurance underwriting and risk management
·
broadcast news / press relations
·
corporate management
Sonalysts has
recently entered into a strategic alliance with one of the largest
risk management firms in the world. The purpose of the alliance
is to apply war gaming techniques to corporate problems, the
biggest of which at the moment is anti-terrorism. We are also
allied with Brookhaven National Laboratory for use of war gaming
as a tool to help examine the response to potential proliferation
of weapons of mass destruction in a civilian context.
Sonalysts has thus
taken military war gaming techniques and applied them to civilian
agency and commercial customer problems. Now many businesses find
themselves “at war” in the traditional sense because they may be
the targets of violent terrorist attack. So the subject matter of
the corporate games will often resemble a war game in
addition to using the techniques of war gaming.
In fact, tomorrow we will begin a
corporate war game for a client which operates a very large
entertainment venue. The focus of the game is to help them
understand the implications of the terrorist threat from chemical
or biological agents. All of the most senior leaders of the
client will be focused for two days on these issues. Of course,
we think this is good business. But we also think it is a public
service and a return on investment to the taxpayers who indirectly
created this capability through years and years of funding to the
Naval War College.
Without meaning to be
pretentious, I think it is fair to state that our war gamers and
many other experts (including many people in the government, at
universities, and in other corporations) in various disciplines
associated with the war on terrorism are a national treasure.
That human capital was created over many years as a result of
taxpayer investments -- it simply would not have happened
without government involvement. The capability would also be
considerably less robust if it were not for the existence of
entrepreneurship in small, agile, creative companies. I cannot
think of a better example of the wisdom of Dave Hinkle’s statement
cited previously, “Sonalysts did not diversify to get out of
Defense; we diversified to keep the team together so we could stay
in Defense.”
The Role of Employee Ownership
We believe that employee
ownership has been a critical element in the success of
Sonalysts. Although Enron and Global Crossing -- both huge
public companies -- have been dominating the headlines with
negative news, there is another, better story to be told. In
thousands and thousands of small, privately owned companies the
driving force for success in business and retirement security has
been the culture of employee ownership. I hope that you will
remember our story when you consider possible changes in the
pension laws. Although the Ways and Means Committee and the
Education and Workforce Committee have jurisdiction over these
matters, the issues are of such general significance that they
will inevitably have far reaching consequences. These include
effects on your work.
A concept that has
been proposed in some of the bills is that company stock in ESOPs
should be limited by accelerating employee diversification options
to a point decades before retirement or by capping the amount of
stock in an employee’s ESOP account. If these measures were to
become law, they would damage Sonalysts and thousands of other
small private companies. This is because the only buyer for the
stock of a non-public ESOP company is the company itself.
Accordingly, resources would have to be re-directed to purchase
the stock years earlier than planned rather than to grow the
business. In addition, the stock price would fall significantly
and immediately because of the imposition of a huge contingent
liability, and then it would fall even more over the long run
because of the reduced investment capacity of the firm. What this
means for your work is that the capital available for investment
and for maintenance of our position in the Defense industrial base
would be seriously eroded. For our partners, it would mean a
reduced ESOP pension and diminished retirement security --
exactly the opposite of what the proponents of these
measure intend to bring about.
The Hippocratic Oath
contains a truth which transcends the practice of medicine --
“First, do no harm.” We hope that the Congress will not damage
the very powerful engine for growth, national security, and
retirement security that private company employee ownership
represents. We ask you to support the approach taken in the
Portman-Cardin Bill and to encourage your colleagues on the
appropriate committees to do so as well. This measure would
exempt private ESOP companies -- those with no market for their
shares other than the company’s own cash flow -- from rules that
might make sense for public companies where the broad, liquid
equities markets are available to provide this capital. We hope
that you will remember that Dave and Muriel’s entrepreneurship has
created over $90 million of wealth in retirement plan money, more
than half of it outside of company stock, for nearly 500
people. And nearly $40 million more has already been paid out to
former partners. Surely encouragement of this kind of
entrepreneurship is in the national interest.
Conclusion
We at Sonalysts believe that the
military research and development expenditures which you authorize
on behalf of the taxpayers represent a tremendously valuable
investment. The Cold War research and development expenditures
probably stand next to the GI Bill and the Marshall Plan as the
most important long-term investments in national strength that the
country has ever made. Those two programs are well known for
having produced extraordinary human capital at home and
economically strong allies overseas. Our country would today be
far less safe and less prosperous without those investments. In
fact, we might well have lost the Cold War without them.
Your support for
research and development similarly produces agile, creative small
businesses which then provide jobs, tax revenues, services of
immediate need to the government, insurance for the future of the
Defense industrial base, and commercial products and services with
military or other government applications. The war on terrorism
and homeland defense are already benefiting from these efforts.
We believe that the most
important roles in research and development appropriately reside
with very large organizations like the government itself in its
various laboratories, in universities, and in huge
technology-oriented corporations. However, we also believe that
there are a number of things of great value to the taxpayers which
none of those kinds of organizations is likely to be able to
produce, or to produce as effectively as agile, creative, small,
entrepreneurial businesses. And we believe that employee
ownership has been instrumental in Sonalysts’ success.
Mr. Chairman, thank you again for
the opportunity to explain to the Subcommittee what we have done
and to provide our view of what might perhaps be the valuable
lessons to extract from Sonalysts’ experience. I would be pleased
to answer any questions. |
