Sonalysts: Eyes Only




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.


               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.

House Armed Services Committee
2120 Rayburn House Office Building
Washington, D.C. 20515


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