Edited transcipt of interview of Bob Stevens, president, chief executive officer and chairman of Lockheed Martin, with Graham Warwick of Flight International.
Bethesda, Maryland. Thursday, December 8, 2005
Q: We're at a critical time in next year's budget process and in this current cycle of defence spending. What's your read on what the near-term and mid-year term future holds for defence spending and for Lockheed Martin?
A: I think we're going to be able to sustain our strategy of disciplined growth. I think our programmes that are being reviewed in the QDR [Quadrennial Defence Review] and in the budget process will be validated. And I think there will be appropriate and adequate funding in support of those programs. That will likely put us on a trajectory of growth in the slightly less than mid-single-digit range for our foreseeable future.
Q: Some say US defence spending is going to come down. Won't your revenues go down as the overall spending goes down?
A: I'm not sure I agree with the fundamental thesis that defence will go down; although I agree that there are lots of observations and no shortage of conjecture. I also think it is important to recognise that about half of the work we do is for defence, which, because I went to business school, tells me half isn't. And our disciplined growth strategy has been targeted at accelerating growth in the non-defence segments of our business.
I think it is a good idea to get ourselves baselined, so from what baseline are we measuring defence? The projections we have in the future year defence programme - admittedly budgets have not been formulated against that future programme and Congress has not acted to authorise and appropriate - show a deceleration in growth which some people construe as defence coming down. But actually on a baseline-to-baseline, period-to-period, that which is in the President's budget request, and the supplemental appropriations that are applied to the cost of war and the cost of operations, actually have shown a fairly significant investment in defence and one that I would describe as growing baseline-to-baseline.
We have fundamentally important commitments that we have made to our customers in our programmes. And I think those programmes constitute a very significant basis upon which future defence capability and national security posture can be based. We don't see a world today where the threats or challenges are diminishing. And investments in security over time have tended to be driven more by uncertainties and threats and risks and ways to manage those risks.
Q: This time a year ago a number of Lockheed Martin programmes came under threat because of Department of Defense (DoD) budget cuts. Was that because Lockheed Martin had experienced issues delivering on those programmes?
A: I don't see that at all. I think the discussions were largely ones of affordability and strength in the portfolio of existing defence capabilities, and ones of exploring a trade space that asked if we had limited resources, what would be the areas that would shape the nature of our future investment. Because when you don’t perform on a programme, it gets terminated. I think everybody understands those rules of engagement. If we have subcontractors who are not performing, we have a responsibility to customers to address that issue. And if termination is an appropriate method, then we're going to undertake that, too. So I don't think our performance was a factor at all.
Q: Do you do think this time around that the performance you have demonstrated on programmes is a factor in whether those programmes go forward?
A: Yes. I think performance is always a vital component of whether or not a programme is going to be satisfactorily evaluated and supported. And it should be. We always approach execution as a fundamental element of strategy. I’ve had some critics, I think appropriately, say execution doesn’t sound very strategic, it sounds more tactical. But in our business we make huge commitments to the national security where an expected capability needs to be in service. And a lot of decisions are made on that availability. So in a real sense it is strategic relative to national security and it is strategic relative to our own ability to manage and lead our business.
Q: If defence funding unfolds as you see it, does that mean that we won’t see another round of industry consolidation? A: It depends on where we want to optimize the industrial base. One of the precursor discussions that needs to occur, frankly, is around demand and supply and funds flow, because I think discussions that say we either want more competition on one hand or we want more consolidation on the other hand occur a little in the abstract. And when that occurs in the abstract, you can get some real imbalances where you have too many sources of supply chasing too few dollars, with marginal firms that are not healthy. They are not reinvesting in innovation. They are not training and developing a superior workforce. They simply can't because they don't have the economic wherewithal. That simply creates the illusion of a lot of competition, but it doesn't really bring to the forefront highly competitive, innovative, 21st Century solutions. We see evidence of that from time to time. But in the short term, I don't see any likelihood that there will be top-line, large-scale systems integrator consolidation.
Q: As the defence side of your business comes under pressure does the company have to go through more internal restructuring and cost-cutting?
A: We changed our philosophy more than five years ago from episodic, reactive, wait-until-something-happens and addressing cost management to a recognition that a contemporary enterprise that is well-led and well-managed is always looking at value. And part of the value is assuring we're funding the innovative engine of this company. Part of the value is making sure we've got leadership in place that really understands 21st Century demands. And certainly part of it is continuous improvement on cost reduction and quality.
Q: Has the strategy of horizontal integration been part of that? And is it giving the results that you wanted?
A: It has been integral to that discussion. When you take down barriers in an enterprise and you bring people together, then you really unlock an enormous level of energy and the ability to take subject matter expertise that is deep in one component of our business, perhaps having an affiliation with one of our customer segments, and make that knowledge and that experience available to other customers and other challenges.
Because I can assure you, if there is a phenomenon that is occurring technologically, we’ve seen it somewhere before. And the ability to move experienced and talented people into positions to meet customers’ aspirations or help them solve our challenges, or simply to repopulate this enterprise with our own lessons learned, has proved to be a huge lever in adding value to our employees, to customers and, if we get it right, to shareholders because when we are able to add greater value to the customers’ mission, we're able to extract an appropriate amount of financial value and extend that to our shareholders.
I think that is the equation we try to balance through horizontal integration. It is inculcated in our business, and now it actually would feel uncomfortable if we weren’t to collaborate, we weren't to think about continuous cost reduction, and we weren’t to assemble this business model as a whole.
Q: With the US military’s near-term focus on operations, do you still see the desire for net-centricity or have they gone back to guns, bombs and bullets?
A: They are absolutely committed. And every day we see the incredible muscular value of first having information and then, with the right high-quality information, knowing exactly what the options are and how many degrees of freedom we have in preparing a response. What is of interest to us is it is a phenomenon that goes far beyond combat power. It can be applied to logistics and sustainment and follow-on support and recovery operations.
There really is no limit in our thinking about how to continue to drive value and get highly-leveraged responses based on net-enabled, well-informed situational awareness and the appropriate response whether that response is a strike mission or a humanitarian mission. I think our customers realise that. They're driving toward jointness. They're driving toward wise asset utilization. And they appropriately expect more from us in that regard.
Q: So you don't see any danger that the large-scale integration business you have built up gets de-emphasised when the military becomes focused on fighting?
A: The bombs and guns and bullets that are being bought are not dumb. They are net-enabled capabilities in and of themselves. We're talking about providing the military with a toolkit, and those toolkits are so much more enabled because of information technology that we don't have to put someone in harm’s way needlessly because, rather than relying on a unit’s courage, we can now rely on technology to look around the corner and give that unit better situational awareness.
The illustrations of this are just spectacular. We now have precision-guided munitions that have sensors onboard, and we can off-board sensor information from a deployed weapon so that it is streaming back data that can be shared with individuals who have a specific interest in either a geographical area or a mission profile. That is knowledge that hitherto wasn’t available. Net-enabled capabilities allow you to not only get it, but share it, put it into the hands of the people for whom that would have meaning, and allow them to take actions in real time to redeploy assets, redefine the mission, differentially manage a set of outcomes, all of which give an enormous amount of flexibility.
I think everybody who looks at this model has a sense of that flexibility. So if you can take that single example and extend it to broad situational awareness, broad communications, broad command and control, it applies not only to combat power, it applies to hurricane relief. How do you go into an area that has lost its infrastructure and hope to bring some sense? And in bringing that sense, get greater knowledge so that we can respond appropriately to those in need. We can provide the right medical supplies or right recovery or humanitarian aid.
Q: Which goes to what you’re saying about growing in non-defence. You see the same skills and toolkits as reading across?
A: Once you orient yourself away from a more isolated organisational model and toward a network model, and think more about information, you see real opportunities to bridge across what would previously have been stove pipes. This is very timely, because we see a convergence in the demands that are placed on policy planners as to exactly what is national security as compared to homeland security. Or what is law enforcement versus what is military. There is a naturally occurring fusion there. And it is our judgment that the information technology skills that we have, from architectures at the high end to applications at the low end, fit this model of convergence well.
The horizontal integration philosophy that we’ve applied to ourselves as an organisation principle, and as an adaptation mechanism, we coincidentally find applies to many market opportunities, many government agencies. The underlying principles, the underlying skills, the underlying core competencies that we have that have been applied to one market segment fit very nicely with the demands in the other market segment.
Q: Is your non-defence growth organic, through applying your internal skills to new market opportunities, or do you need to add to what you have through acquisitions?
A: We're achieving degrees of disciplined growth and adjacent market expansion organically. We have bid for and won a programme for the National Archives, to provide a new search engine and database. It is a new customer who is the flagship organisation for the United States government in assuring that all the important documentation upon which our nation is founded is protected and preserved in its authentic state. And yet the citizens have complete access to this documentation in its original and authentic form. We believe there are many applications in database management for such techniques to preserve authenticity and improve and ease access to materials.
Quite separately, we won an outsourcing job for the [US] Federal Aviation Administration for the automated flight service stations. This is important because it calls upon our systems integration and information technology skills and it is the first of what we think will be more outsourcing opportunities.
In homeland security, critical infrastructure protection is increasingly a higher priority. We won a job in New York with the Metropolitan Transport Authority to provide a subway security system. Subways are but one node. New York is but one city. We continue to expand the application of our core competencies in the homeland security mission for critical infrastructure protection.
Relative to mergers and acquisitions, we’re looking for the opportunity to add to our core competencies, particularly in information technology. We’re looking to serve customers tomorrow that we may not serve today. Over the last four years, we’ve purchased ten companies for about $1.6 billion in cash purchase value. Those companies are contributing revenue and profit and cash in a highly accretive way. I think a balanced approach of organic growth and the opportunity to acquire companies that are consistent with our business model should sustain the disciplined growth trajectory that we have set for ourselves.
Q: How much consolidation of the civil government information technology (IT) industry will the US government allow?
A: Our view of that market is actually a little different than the premise in your question. Our sense is that the civil government information technology market is a bit fragmented. The way we measure fragmentation is does any one company command 50% or 40%? And we think market shares tend to almost be in the single digit. Our company has been recognised for 11 consecutive years as the largest provider of information technology to the US federal government, and we don’t have a lot of market share and there is a lot of competition every day. So I guess our conclusion is we wouldn't start to converge on restraint of trade discussion because of an insufficiency of suppliers in this market space because it seems to be fairly well populated and fairly fragmented today.
Q: You were recently on a trip around Europe. What were the views expressed of Lockheed Martin's performance as a partner and their view of US export restrictions, particularly on the [F-35] Joint Strike Fighter (JSF)?
A: As the incoming chairman and CEO [chief executive officer], I couldn't have asked for a better reception. It was also clear to me that part of the warmth of that reception was built on the notion that we have been good and trusted partners in Europe. The discussions around the relationship with our company, or the relationship with our country, to me sounded appropriately challenging, but not extraordinary. Everybody has a keen interest in understanding contractual terms and conditions, affordability issues, technology release activity.
We are a company that has been very vocal in stating our observations that the world is increasingly connected, that capital flows are global and information flows are global. And that the best security relationships that we have had have been cooperative security relationships. The Joint Strike Fighter happens to be a great illustration of how to evolve business models to be in contemporary step with this foundation of strong partnerships.
Now we can talk with any individual country, of which there are nine partners in the [JSF] programme, about specific items of technology release or transfer or timing. But we have no circumstance on this programme where we have been unable to meet our commitments to date because of the lack of access to technology. The discussions are robust and they should be. It is a measure of the programme’s success that we’re now moving toward discussions of production and sustainment over the lifecycle of the programme, which means countries are going to be firming the number of airplanes they intend to buy and the types of airplanes, how we'll do final assembly, checkout and sustainment, how the global supply chain and logistics management system will work.
That's a very broad body of knowledge to discuss and we should appropriately have really very vigorous value-based discussions about who is best prepared to undertake some of these challenges. I will tell you that our government is in lock step with us. And when we have individuals who express legitimate concerns about where technology release lines are being drawn, we should address those individually and to everybody's satisfaction. And we feel confident that we will be able to do that.
Q: Do you think the international nature of JSF has factored into the DoD’s decisions on the future of the programme?
A: My sense is that they have been very thorough. It’s clearly true that we want partners and we want allies and we want interoperability. And there are benefits from having that. I think anyone making such an assessment would want to take that into consideration because we are not just looking at the next four quarters. We’re looking at the next four decades. And it is exceedingly difficult in a complex world to even look out a decade and try to project with real accuracy where will we and our allies be challenged around the world.
We’re very confident the Joint Strike Fighter is a business model and a programme approach that will optimise on every one of the critical dimensions that not only our partners expect, that we expect, it will be a very high-performance airplane because we’ve aggregated demand and got the best of the global supply chain. It will be the most affordable airplane for that capability that anyone will find anywhere at any time. There simply is not a better model out there today. We’re building the aircraft in a fashion that allows us to introduce spirals over time so that, as new capabilities become available, the aircraft will be user-friendly with respect to installing those. And we’re looking at a global supply chain and sustainment model to make sure that the most economical approach to cost of ownership is embedded in the global mechanism that we have.
I’m very confident in the programme. I think it has been structured well. I think we’ve got good support. And I think the discussions about quantities and timing are absolutely appropriate ones. We’ve seen it in many other programmes over many other years. For example the F-16 programme was originally conceptualised at 900 aircraft. And it is now at 4,420, with prospects for maybe a couple of hundred more.
Q: Do you still think the international environment is one of partnerships rather than any merger or acquisition?
A: It is for us. Our preferred approach to international opportunities is to find partners in whom we share values, who we think we can work well with, where there is good chemistry. Also where there is value added from each of us. We have 300 such partnerships. It has been a very good model for us. I believe it has been very good for our partners. We have in those partnerships provided access to the US market to the satisfaction of our partners. In doing so, we’ve got very effective systems capabilities at affordable prices that are good for our customers here, for the US taxpayer. Equivalently, we expect to have the opportunities to take those very same value-based offerings into other markets with the same benefits for citizens and the same benefits for customers.
Q: Do you feel the European market is yet structured appropriately enough to allow you to do that?
A: I suspect that's going to remain to be seen. I will say that if the response in Europe tends to appear with some consistency to be a closing of the markets or the inaccessibility of the markets, then I think many companies in Europe will have to re-evaluate what are clearly and publicly stated objectives in coming to the US market. I don't think it’s reasonable to envision open access to one segment of the market and closed and prohibited access to another segment of the market. That asymmetry is probably not a sustainable market access model.
Q: Are you concerned that Europe lifting the arms embargo on China would cause existing programmes some problems?
A: Well, we’ve asked respectfully our European partners and representatives of European governments to evaluate these judgments with real care. And I don’t think we've seen anything that causes us to diminish the requests that we have had to take careful consideration of the discussion about normalising defence trade with China.
Q. Lockheed Martin has not been alone in struggling to get its space business onto a sound financial footing. How is that progressing and what is happening with approval of the United Launch Alliance joint venture with Boeing?
A: I think this is a fairly good illustration of how much competition versus how much consolidation are we talking about? I mentioned we need to add some other discussion areas like supply and demand and funds flow. In our Atlas launch vehicle we have an superb high-performance family of vehicles - I think now we’ve launched 77 consecutive Atlas vehicles without a flight anomaly - and yet in the premise of your question you commented on the financial stress associated with that business because there has not been enough demand that can take such a high-quality source of supply and make a high-performance financial model.
When we look at the commercial business, we find ourselves in the replenishment cycle for commercial satellites, but without the prospect of a lot of near-term growth along that replenishment cycle. And as my space colleagues have reminded me often over time, if you are not building satellites, there’s a strong probability you won’t be launching them. With stability in the commercial market, then we turn to our US government launches, of which there is a relatively predictable estimate. And we’ve tried to size our business to perform effectively in that market segment.
As for the United Launch Alliance, we think that the underlying conditions that caused us and Boeing to move forward to our government customers, recognizing the value in the assured access philosophy of reliably getting into space, and the fundamental value has not diminished one bit. We think that the benefit of the United Launch Alliance will be to lower the cost on a recurring basis with confidence without diminishing the quality and without having to step back from the assured access benefit of having redundancy in the launch vehicle should an anomaly occur.
We continually assess the environment around which we've made this proposal. And every time we look at the environment, we think the fundamental underlying conditions that led to our judgment of real value to our customers and value to our companies is sustained every time we analyse this. I’ve not seen any change in the environment that would tell me that this is anything other than a balanced, wise, appropriate response to meet assured access responsibilities, affordability, and good quality.
Q: The US Army issued a stop-work order on the Aerial Common Sensor development programme because the chosen platform was unable to carry the payload. Where do things now stand?
A: We've given the Army a current assessment, factual and clear. And created as many options and alternatives to meet mission requirements with flexibility but, again, clarity. They will undertake that decision. The outcomes can range from doing something to simply not proceeding with the programme and terminating it.
Q: Do you, as Lockheed Martin, bear some responsibility for where you got to on this programme?
A: I personally believe that I do, and I’ll tell you why. Because we encourage a discussion in this company about where we should appropriately set the standards for our behaviour and our performance. And I think there are many objectively verifiable measures of merit that would suggest we are a very high performance, well qualified systems integrator in very demanding markets and very demanding technical applications. I believe that - and I want to set the bar even higher. I'm not satisfied with the range of outcomes here. I believe, as the accountable executive for this organisation, I need to fulfil my responsibility and accountability. And when I’m dissatisfied with an outcome, I don't know how to sidestep that.
Q: Looking forward, aeronautics and space business long term becomes a smaller part of your business; one report says from 50% down to 25%. Is that correct?
A: Yes. I don't know if those are exactly the numbers - the 25% - that I would use. But I think it is helpful to remember that, in the last five years, we doubled our aeronautics business. I would like to sit here and tell you today we’re going to double it again in the next five years. But actually it doesn’t look at all likely that will happen. We expect, however, to continue to execute and perform well and have a healthy and highly vital aeronautics business.
What I also expect to do in the implementation of the disciplined growth strategy is to continue, in the portfolio context, to grow other parts of this business. And it troubles me not at all, nor does it trouble any of my colleagues, that proportionally one component of the business contributes some variable amount to sales or profit or cash as long as we’re showing progressive improvement across all aspects of our business, that we’re delivering against our customer commitments, that we are fulfilling their expectations.
In fulfilling those expectations, we have to be able to extract enough value financially to adequately compensate the investors of capital to this company. And in doing that, if we can create a stimulating and vibrant environment for our employees so that they can meet their personal and professional aspirations, we'll have a very sound and very successful business model as we look forward. That’s the goal and that’s the objective. That’s the course we’re committed to.
Source: Flight International