GRUNDMAN: Good. Good, let’s check. Yeah, afternoon. Good afternoon, and welcome to the Atlantic Council. Thanks very much for coming.

I’m Steve Grundman, the Lund fellow for emerging defense challenges here at the council. I’m the producer of this Captains of Industry series. Our purpose this afternoon is to hear from Mike Petters, the president and chief executive officer of Huntington Ingalls Industries, who will make and address entitled Playing the Long Game. Following Mike’s prepared remarks, I will join him on the platform to lead a discussion and then moderate questions from the audience.

Before we cast off into the substance of this afternoon’s event, I have a couple of administrative notes. First, the entire event is public, on the record, and we are live streaming it over our Web site. So if I call upon you during the Q&A portion to ask a question, please wait for the microphone — wait for one of our staff members to bring you the microphone — and identify yourself and your affiliation clearly before asking your question. Second, we are Tweeting this event at the #accoi and can even receive questions over that channel that you may want me to — on your behalf if you’re out in the Tweetersphere, Twittersphere — convey to him, which my staff will — will bring up to me on a piece of paper. Finally, I — I want to underscore that the event must conclude by 1:15.

Mike Petters’ appearance here is the 11th in this Captains of Industry series, the purpose of which is to make available a prominent platform from which senior executives whose businesses contributor to national security can address the public interests their companies serve and the public policies that shape their markets. Among those who have preceded Mike on this stage are Dave Melcher, the CEO of Xcelis, who launched the series a little over a year ago; the CEO of United Launch Alliance, Tory Bruno, who spoke just last month and I know several of you in the room today were here for that address; and another, who is, himself, here in the audience today, former deputy secretary Bill Lynn, who is now the CEO of Finnmeccanica North America and DRS Technologies. Thanks for coming, Bill.

By engaging the perspectives of these business leaders, our Captains of Industry series is cultivating a constituency, I hope, for finding practical solutions to the challenges and opportunities that lie at the interface of defense ministries and industries. Mike’s address is entitled Playing the Long Game, which I have come to understand he employs as a metaphor for addressing a wide range of problems he sees threatening our national security and economic prosperity. Building a better — building a better bridge between business and government requires that we, he says, “play the long game.” So, too, does building the infrastructure of our foreign relations, and recapitalizing the human resources we have to do science, technology, engineering and math in our technology industries.

I obviously will permit Mike to elaborate on this theme himself, but will confess off the top that I am, myself, highly susceptible to this slogan as some kind of a touchstone of corporate strategy as well as government industrial policy when it comes to defense in the 21st century. I now want to invite to the stage Mike Brunner to introduce our featured speaker. Mark is the senior advisor to Virginia Senator Mark Warner and is the senator’s principal legislative aide on matters concerning defense, foreign policy and energy. Before joining the senator, Mark was a U.S. Navy officer, a career that involved him in a wide range of assignments that included flying helicopters in the Arabian Gulf and advising the U.S. mission to the European Union.

Important to us here at the council, Mark is also a member, long-standing of the council. He has known Mike Petters, as you can imagine the Virginia senator’s legislative aide for defense might have come to do, for some time. And I thank you, Mark, for coming here today to add a personal touch to our introduction of Mike Petters, our speaker.

Mark?

BRUNNER: Great. Thanks, Steven. I just want to be sure it’s clear that it’s not a requirement that the Virginia senator’s legislative aide introduce Mike Petters. That this is something I was — I was enthusiastic about doing. But — but, Steve, I appreciate, too, this series of events on — especially on defense acquisition, where I think you’ve been ahead of the curve at rethinking how we buy weapons and also what the long-term implications are for the industrial base. So it’s a terrific series. I try to make as many of these as I can. And as — you know, getting off the Hill, getting downtown, is not easy. But I always make this a priority. So appreciate that you continue to invite me.

But today I want to introduce Mike Petters, the president and CEO of Huntington Ingalls. Mike serves as the president of one of the largest manufacturing companies in America. HII has almost $7 billion in annual revenues and employees 38,000 people in Virginia, Mississippi, Louisiana and California. He’s responsible for leading the design, construction and overhaul of ships, submarines and aircraft carriers, as well as a number of other business lines that he runs. Mike graduated from the Naval Academy, is a former submariner, and he began his business career in 1987 when he joined the Los Angeles class submarine construction division at Newport News Shipbuilding.

Mike holds an MBA from William & Mary, and is an executive committee member of both the Aerospace Industries Association and vice chairman of the Virginia Business Council. Now, the title of Mike’s address today is The Long Game, and we couldn’t have a better speaker on this topic. While many of us in D.C. are focused on short-term budget gymnastics like annual sequestration cuts, continuing resolutions and CRomnibuses, Mike has the challenging task of trying to keep his head down and chart a sustainable course that delivers a product whose development — development and construction spans multiple budget years and several Congresses. Again, aircraft carriers are 50-year platforms.

And to do this, Mike has been a proponent of innovative financing. In fact, when I first met him I was on the staff of Senator John Warner from Virginia about a decade ago. And he was talking about how the government could save a lot of money with multi-year buys on this new program called the Virginia class submarine. Well, I’m happy to announce that this year, partly due to Mike’s diligent efforts and his partnership with the navy, that the navy signed the largest contract in its history for 10 Virginia class submarines. And the costs savings on this one multi-year buy were so significant that essentially we bought nine subs and got one for free, which is not a bad deal for the taxpayers.

Mike was also a great partner for Senator Warner and I when we were hit, in January, with the unwelcome news that the administration was gonna retire one of our aircraft carriers. We worked with Mike and his team to fight for the refueling of the George Washington. And I’m proud to say that last night the Appropriations Committee agreed to add almost $1 billion to refuel the George Washington and ensure we get the full service life out of this national asset.

So without further adieu, Mike Petters.

PETTERS: Well, thanks, Mark. I — I appreciate those very kind remarks. And none of that happened because of anything that I particularly did. But we have a great team involved with great issues, and that comes to pass. But this idea that we’re getting 10 submarines for the cost of nine, or that we’re getting one free, while it may be mathematically true my friends in New York on Wall Street may not like to hear it that way. So we might want to find a — a little bit of a different slogan.

And, Steve, I want to thank you for inviting me. We were at a dinner about a month ago and we started having a conversation, and the next thing I know I got a phone call and said, hey, can you come — can you come do this and carry that conversation on? And the conversation we were having was what’s your horizon, how do — how do you make decisions, and — and do you make decisions based on short-term pressures or long-term views. And so that’s — that’s sort of the genesis of this. And I also applaud you and this organization for the series. Because I do that that, you know, people need to be heard.

Sometimes, in Washington, I’ve — I’ve head an expression. That all the things have been said, but not all the people that need to say it have said it yet. So — so some of this is — I’m afraid is gonna come across as being things have been said before. It’s just add me to the list of people who are saying some of the same things again. On the other hand, maybe we can — maybe we can have a conversation about some — some more tangible activity that could come out of this. So I’m really happy to be here, I’m really happy to engage with you.

You know, I think of the things that, you know, sort of in the aftermath of the most recent election I think it’s kind of interesting to kind of watch and see how people have responded to this. If I could — if I could have my druthers I think that I would go to the dictionary people and I would take the word “mandate” and cross it out of the system, and not ever let anybody ever use that again. Particularly in the political sphere. Because I think that to — to read that you have one vote more than the other person as a mandate is a very, very dangerous thing to do for — for a politician. But I think it’s very dangerous for the country, as well.

You know, we’ve had some events here over the past several — several — couple of months, where we — we are reminded — whether you think about what’s happened in Missouri or in New York or even across some of our other fine institutions — you’re reminded that it’s — it really is an act of faith for the 49 percent to allow the 51 percent to govern. That’s truly an act of faith. And that, I think, is one of those things that sets America apart from just about anywhere else in the world. Because if you’re in the 49 percent in any other country, in some countries that means you can go get your guns. And — and it creates a real challenge.

And so — so if you are in that place, why would the 49 percent allow the 51 percent to govern? Because the 49 percent believe in the process, they believe in the fair — they believe that there’s fairness, they believe that there’s equity, they believe they will be heard, and they believe that there will be engagement. And so as long as you have those things in place you can create a coalition or cohesion to move forward that is not in the definition of mandate. And so I think that that’s one of the things that this election has kind of taught me, or that I’ve seen happen here. And — and my hope is that, going forward, we will — we will move beyond this idea that somebody — you know, that there’s a mandate on one side or the other.

In fact, what I — when we were at the Reagan Forum a couple of weeks ago I talked to — I had a chance to be on a panel. And I pointed out that I really don’t think that the current election was about picking Republicans over Democrats. I think it was a — it was a message from the electorate to say we’re interested in economic growth and we’re interested in creation of jobs, and we’re not happy with what we’ve had so far so we’re gonna let the other guys do that for a little while. But be aware that if the other guys don’t get this right we’ll try something else. And so — so I think that if — I think that going into it with that spirit can create a — a — an opportunity for cohesion.

In — in the main, I think that we actually have an incredibly good process. Our process for setting national priorities and applying resources against those priorities has served us very, very well. It’s painful to participate in, as Mark was — was talking to. That you have to engage, it’s not a passive process. It’s an emotional process. Frankly, it’s pretty ugly to watch sometimes. But in the main, we end up with a — a reasonable set of priorities and we end up with a reasonable set of resources to apply to those priorities.

And so one of the things, if you’re gonna play the long game and you’re gonna do this right relative to our government and our — and our society is, you got to allow that process to work. And I — quite frankly, for the last couple of years we haven’t. We’ve been in a — we’ve been in a place where we’ve said we’re gonna do things by formula, and, you know, instead of doing nine out of 10 things — which every household in America would do if they had to — if they had to tighten their budgets — we’re gonna do 90 percent of everything. Which is a really — a really tough environment for — for us to be in.

You know, it’s a little trite to say it’s hard to build 90 percent of a ship. But, in fact, it’s really hard to build 90 percent of a ship. You know, and — and as Mark pointed out, and Steve pointed out as well, we are building — we are building platform today — we’re building unit son the John F. Kennedy, the CVN-79. The Kennedy will deliver to the navy in the early ’20s. It will come back in the mid to late ’40s to the shipyard to be refueled. And it will come back to the shipyard in the early ’70s to be inter-activated. Now, I grant you that my horizon is probably a lot further out than just about anybody else’s. But what does it take to be successful when you have to push your horizon out there?

I — I think leaders have to understand that — that they are — in just about any circumstance, the leader of an organization has to have the longest view of anybody in that organization. There will be — everybody around the leader will have a shorter view. They will have pressures on them that are gonna push them to say you need to do this by Friday, you need to do this by — by next month, or whatever it is. The leader is the one that has to stay the course and have eyes on the horizon, whatever that horizon is. And my horizon is out to the ’70s, but I understand there can be businesses where the horizon might be to the end of the month. But you need to have an idea of where that horizon is, and then — and then — and then focus on it.

When — when we think about where we are in — in the national security arena, though, let’s think a little bit about how those stakeholders are. The stakeholders are — you know, clearly the Pentagon is our customer and the Congress as our — as our representative of the taxpayers. And those of us that are in the business of national security never, never, ever forget that that’s who we’re working for. Think about the institutionalization of things in that environment that are driving everybody to be short term-focused. You know, our customer — frankly, the navy has a 30-year plan, which is a — which is a godsend relative to what a lot of the other services have and a lot of the other companies have to deal with.

But that plan changes every year-and-a-half, 2 years. It — it moves around a little bit. So it’s notional and directional, and it’s not — it’s no decisional. We talk about budgets. If you — if you think about how a business operates, we operate in an environment where we make investments and we look for returns. And if you think about how our customer and how our Congress operates, it’s we’ll establish a budget and we’ll measure expenses against that budget. Good programs are identified as programs that run under budget. Now, think about what that means for a minute.

If I have a department in my organization and I said, OK, your budget for the year is $1,000. And towards the end of the year the department manager has spent $900. Now, he comes in at $900 for the end of the year, he’s a great leader and a great manager. But if he took $100 — and let’s say this was 20 — 2005. If he took that $100, and instead of giving it back and being a hero in 2005 he had gone out and bought stock in Apple. Well, he wouldn’t be a hero in 2005, but by 2014 he would have an investment that would have paid many, many times over his — his — his budget.

And so there is a contrast between thinking short-term and thinking long-term. And I think the real challenge that businesses have is that we think about everything in terms of investment and return, and our customer and the taxpayers think about it in terms of budget and expense. And — and where that intersects in our business, that intersects in the contracts that we sign. And so the people that are working on those contracts actually have to understand that they’re doing a translation. That can be very, very challenging. And I — and I frankly think that as we move forward I think that’s gonna become even more of a challenge.

Budget pressures are going to create incentives for contracts to have a little bit more scope, a little bit less fee. Maybe we’ll incentivize a quarter less — a quarter of a point less on fee return, but that’s the investment return that’s needed to sustain the business going forward. And that can be, you know, heroes today create problems for tomorrow. Now, you — you take the business and you think about customers and the political environment, and turn around and think about how our owners are and think about what drives them.

I read over the weekend that half of the shares that trade on the exchange today will be traded by high-frequency traders. Now, high-frequency traders serve a purpose. They create liquidity and they do lots of things to allow the — the efficient allocation of capital, which is what — which is really a miracle in this country. But at the same time, high-frequency traders are not terribly interested in what I have to say about strategy or where the company might be in 2016 or 2020, or that delivery of the ship in 2022. They’re interested in what the price says today.

And that’s an interesting thing to think about is what the price is. Because if you have perfect knowledge of everything that’s going on inside of a company, and you have perfect knowledge of everything that can happen to that company, you can come up with what the value of that company is. No one has that knowledge, no one. Not even me. And so in some ways, the stock price that shows up on any given day is not really the value of your company. It really is an opinion about the value of your company, right? And so as the opinions move up and down, people are trading on the change in opinion.

In the meantime, there are a lot of things you can do to influence that. You can buy back shares, you can raise your dividends, you can — you can do lots of stuff that will actually affect the — the — the perceived value of your company. But they may not be doing any — they’re not investments, necessarily, that are creating new value inside of your business. And that’s an environment that we’re all struggling with right now because it’s — it becomes really hard for us to describe what we’re doing that’s an over-the-horizon description of our strategy. Because it’s really hard to — to talk to that when — when you’re getting literally instantaneous feedback on — on what’s happening with your share price.

And so the lens of value, the institutionalization of the short-term — you know, high-frequency trading is, you know, down to nanoseconds — you get weekly reports from — and comparisons to how you did each week on — to all the other companies in your industry. You have quarterly earnings reports, you have annual reports that come out. You know, if you’re building a product that takes 8 years to build, and you have a 1-year annual incentive program that you’re trying to work with your shareholders to incentivize your workforce, you know, you got to make sure the folks in your organization don’t try to maximize this year at the expense of next year. That’s the leadership challenge.

So — so as you think about where your horizon is and what all these pressures are, we can go on for as long as you like about all the different — the different pressures. I — I thought I’d share — is what — how I think you have to think through as a leader of an organization. Number one, you have to think that you’re the longest person, you have the longest horizon, in the room. And that you’re — you’re gonna have a view that is about creating value in your organization that is longer and — and — and farther out than anyone else. Number two, you have to really decide on what are the things that you really believe in.

Now, I’ll tell you what I really believe in, but it — but I think this is fair game. Any — any leader can do this. When I was at the Reagan Forum, one of the things I saw in the library was that Ronald Reagan, underneath everything else that he had to say or did, the one thing that his — was his touchstone was that he believed in the human dignity of every single individual person. Whether — whether you were a rocket scientist or a painter or a cleaner or an engineer, it did not matter. There was dignity in that person and there was value in that person. And that’s — that sort of was the foundation of — of — of philosophy of the world.

You know, my view is I — I — I won’t — I won’t say that the president was a — a — an inspiration for me. But as I saw that, I thought about — it made me think about what are the things that I believe in. The first thing that I believe is that everybody that comes through the gates our business every single day wants to do a good job. And the challenge for the leadership team is to make sure that we do everything we can to give them every opportunity that we can for them to do their very best work. Now, think about that for a minute. What does that mean That means they have to have tools. That means we have to invest in the capital for — for — for their success.

But it goes beyond that. We have decided, for instance, that we’re going to put health clinics in our business. We have decided that we’re going to allow those clinics to support our folks, and they’re gonna be right on-site so that our folks can use them without having to take a day off to go to the — to go to the — to go to the doctor. And their families will use it. Now, what have we done there? You know, there’s sort of the magician. You know, the right hand is the one he wants you to watch, but pay attention — really watch the left hand because that’s where all the action is. What’s going on there? Number one, we care about our employees. Number two, we’re investing in them.

Number three, we want them — we want to capture the return on what — on — on that investment. And we want them to help us capture that return. Now, here comes the left-handed part of the magician’s thing. Number four, we’re breaking the fee for service model of medicine because doctors will be on salary to us. Which means that they don’t have to go and spend 6 minutes with a patient every — you know, 6 minutes — every 6 minutes get a new patient so that they can make their numbers for the day. They get 30 minutes with an employee. And if they have 30 minutes with an employee, and they have a discussion with the employee and they say, “Look, you probably ought to give up smoking,” or , “You need to probably walk around the block three times a week.”

And that turns into a health consciousness in one of our employees, that means that that person is a productive member of our society and a productive worker for this business for a couple of more years. That’s really, really good for us. And so that’s one example of how we take this view that I don’t know where the — I don’t know where the health care system’s going to go. I don’t — I think there’s as many opinions about that as there are people in the city. But I know what’s right for our businesses. That we’re investing in our folks, we want to give them an opportunity to capture the investment on that — capture the return on that investment. And — and we’re gonna sustain that and create a sustainable approach for going forward.

Beyond that, the other thing that I believe in. If I believe that everybody that comes through my gates every day wants to do a good job, the second thing that I believe in that probably is more about my leadership style than anything else is that when the shipyards decide that they want to do something it gets done. And the challenge of the leadership team is to persuade, cajole, whatever you want to call it: get to the point where the shipyard decides that it wants to do something. It’s not enough to stand up and say we need to go over to the right. It — you know, if — if — if President Teddy Roosevelt — if he had decided to go up San Juan Hill and no one had ever followed him, you know, what would have happened? I’m not sure how that would have turned out.

The thing about the shipyard is, there’s so much deep talent in what we do that when — when the shipyard, as an organization, decides that we’re gonna go to the right we go there better than anybody else. And so — so for me, it’s always been about make sure that you — you do the — the kinds of things that are gonna create support. And what I found is, that’s actually true whether you’re talking about inside of my business or outside of the business. And Mark talked about a couple of the things that — you know, whether it’s a multi-year procurement for Virginia class submarines or multi-year procurement for aircraft carriers or the engagement — the full court engagement — on the value of 11 carriers in the fleet or the discussion that we’ve been having for the last year about amphibs and the amphibious industrial base, all of that requires — it’s not enough to just stand up and say that’s the way we’re going. It does require you to go out and — and create support and get the institution to believe that that’s the right direction to go.

And when that happens, then good things happen. And I think that long game leaders have got to become — you know, to be a successful long game leader you have to understand that and be willing to put the energy into it to go create those kinds of long term coalitions. So with that, I’m gonna stop at that point and open it up to our discussion and questions.

So — and I appreciate the chance to be here, and thank you for your time.

GRUNDMAN: Great. If you could sit right there. That’s terrific, Mike. Thank you very much. That — again, you’re not the first to exemplify what I — I’d hoped this series would draw out of senior business leaders whose businesses affect national security. That was — that was right on the mark.

So let’s develop some of what you’ve said, and — and — and raise a couple other things. Your — your introduction, I — I mentioned that you were a Naval Academy graduate and a naval officer. But what I want to know is how’d you get in this business? Turns out to be an interesting answer, when I ask, typically. How did you — how did you get in this business?

PETTERS: You know, when I — when I was making the transition from to navy to a career outside of that I — you know, being nuclear-trained, I had a chance to do — go work in the power companies. And when I interviewed with the folks at Newport News I actually saw an opportunity to do more than just be an engineer inside a reactor. And, you know, I went to Newport News thinking that I’ll use this platform of what I know how to do to pursue an MBA, and — which is William & Mary’s right there.

GRUNDMAN: Yeah.

PETTERS: And so we did that, and — and in the course of pursuing my MBA, Newport News decided to throw bigger and bigger jobs at me. And so, you know, once you buy your second set of steel toes in the — in the shipyard you’re a lifer. And — and I’m on about number four at this point. So.

GRUNDMAN: OK. That’s the — that’s the mark. You alluded to the — the dinner, where you and I first started talking. And the — the formulation of your business’s strategy — it’s the way I heard it, I’ll let you decide if that’s the way you want to articulate it — but the formulation that really struck me was, my words now, “I’m not a shipbuilder, I’m a company that does engineering processes.” And I’d ask you, if you could …

(CROSSTALK)

PETTERS: Sure.

GRUNDMAN: … develop that because I think it’s interesting.

PETTERS: Yeah, we — it — well, it’s — you have to kind of think about who you are. And when — when you see or think about the shipyards, the first thing you think about are the big cranes and the big ships and all the great folks that do that work. And — and they are the heart and soul of — of who we are. But behind all of those folks — all the welders and the painters and the riggers and machinists — behind those folks are the engineers. And it turns out that we’re a really big engineering company. We have 5,000 engineers and designers in shipbuilding. And what we found over the past 3-1/2 years, since we left Northrop Grumman, we’ve been going through a process.

You know, we’re closing the shipyard in Avondale. And we started that process — it’s a — it’s a grueling, terrible process to go through. We started that process with 5,000 employees there, and we actually started trying to figure out how do we redeploy our manufacturing employees into a new space. That — because that’s what our opportunity was. And we have been, you know, I’d say completely unsuccessful at that. What we also found, though, was that when we brought our engineers to talk to engineers in other spaces it takes about a minute for them to get synched up and start using the same language and talking about all the same things.

And so what we’ve — we’ve come to realize in that process — I — this is not one of those things where I just had a blinding, you know, vision of this is one of those brute force recognitions — is that we really are an engineering company that makes a lot of really cool stuff and our engineers do really cool stuff. And now when you step back and think about, OK, you’re an engineering company, who are you providing that for, well, we only have one channel. Our one channel for our engineering capability is towards the Pentagon. And, you know, it’s a — if you have a — if you’re any company, and you have one channel for your — for your product, and that customer or that channel is, you know, pick your choice — it’s flat, it’s capped, it’s uncertain, however you want to put it — you need to think about how do you open other channels.

And I think everybody — everybody, in every business — is to always try to figure out how do I open another channel. For us, we decided that we could open another channel for that engineering capability in a place where there’s a high demand for engineers. Today, the — we — we’ve been doing work with the Department of Energy, taking advantage of our nuclear capability inside of Newport News. We’ve been on a team Fluor down at Savannah River, supporting that team for, gosh, that’s probably been 6 or 8 years now. And that’s going really well.

But we have — as we’ve tried to pursue other opportunities in the Department of Energy space we — we have organically been almost completely unsuccessful. And what we found was, we have this tremendous capability and we have this tremendous depth, but we don’t really have any access. And in January, we acquired S.M. Stoller Corporation, which is a small engineering services firm. They have 25 — they — they are on-site on 25 DOE sites. Their biggest issue on a day in and day out basis is staffing. And so if you take — you know, to borrow some — some phrase, some terms — if you take 25 sites of bandwidth and you marry it up with 5,000 engineering designers of depth you have an opportunity to create value there that was not there before.

I mean, Stoller was gonna go continue to pursue things, we would continue to pursue things. But now you marry that bandwidth and depth up and you might actually be able to capture — pursue and capture things that were not there before. And so in that case, we — it makes sense for us to — to bring that together. You know, in the DOE space there’s going to be several re-competes (ph) of several of their sites over the next 5 years or so. And we see that — while the total dollar value is kind of, you know, eyewateringly (ph) large, participation in that is going to be substantially more than what we’ve seen before from our business standpoint.

So that just seemed to make sense for us to — to got down that path and open up that channel. We took another step towards the oil and gas space in — in May, where we said, OK, we — we can open another channel here because this is a space where the demand for engineering talent is exceptionally high and the supply is exceptionally low. And so as we — we acquired UniversalPegasus in May, they have sites in Houston, Calgary and Aberdeen. And frankly, they have engineers — they have over 1,000 engineers and designers all over the world. They understand how to be successful in that business, and we can bring a solid — a solid balance sheet to support them, solid contact and capability for staffing to support them, and engineering disciplines that they don’t have that they can use.

And we’ve already had cases where the folks in Houston or the folks in Calgary have called into our shipbuilding business and said, “Hey, have you got somebody that knows how to do lifting and handling,” as an example. You know: “We’ve got a customer that has a lifting and handling issue, and we’d like to apply that resource.” So we’ve been able to do some of that. And so I believe that that’s going to be another place where we’re gonna be able to create value that, between us, would not have otherwise been there. But in the end, this is a long game, right? And — and — and my business in shipbuilding, for the last 30 years, has been focused on process. How do we do what we do and how do we do it better?

If you look at our R&D investments, it’s really — we — we invest in some gadgets and gizmos along the way but, really, it’s about how — we’re gonna invest in the — in the TV screen for the welder so he could weld better, right? And so we make those investments. We’re looking at a Pentagon that’s going to move to a more competitive environment. And — and, it’s going to move to an environment where commercial standards are going to become more — gonna come more into play. Well, you can just stand up and say, OK, we’re going to be more competitive and we’re going to be more commercial. And now you run the risk of being, you know, the guy that ran up the hill and normal nobody followed him up the hill.

But if you bring into your organization the culture of an organization that, every single day, the folks in that organization are waking up and their first thought is how do I run faster, how do I outrun the other guy, how do I — and you bring that, that’s what’s happening in the oil and gas space. And you bring that mindset, and you start to — sure, sure, we can support from a staffing support or financial support to that space, but the next thing that happens is it starts in infect back into our space. And so you could think of that as sort of a vaccination, if you will.

GRUNDMAN: OK. Another good metaphor.

So that segues to something else I wanted to ask you about, not — not as an ersatz equity analyst, but because I think it’s a strategic question. And that is, directly, what is your capital deployment strategy? Part of was buying a couple companies outside your main lane, but …

(CROSSTALK)

PETTERS: Yeah, we …

GRUNDMAN: … what’s the — what’s the whole of that story?

PETTERS: We’ve been — we’ve tried to be pretty clear that we’re gonna continue to be very balanced. We need to invest in our — in our navy facilities to continue the franchise that we have. I mean, we’re — we’re a principal partner with the navy and the fleet that they build today. There’s no future for this business that doesn’t see that that’s going to be the case in 5, 10, 20, 30, 50 years. And so we will continue to be investing in our facilities. We will bring our shareholders along, you know, at a — at an appropriate pace. And we will continue to think about our — think our way through are there — are those — are there those kinds of investments where we are a better owner of that business that takes advantage or opens a channel or creates value that was not there otherwise.

You know, if all we do is go and — and acquire a bunch of companies that there’s no — there’s no reason for us to own them over anybody else, then that doesn’t make any sense. But, you know, in — in a case where we have a capability inside of our — inside of our government business, or even if we have a capability in, say, UniversalPegasus, that now could be married up with a different capability in the oil and gas space. I mean, I — I think that there’s — there’s — we’re gonna be open to those opportunities. But we’re gonna do that with a — with a — with a, you know, pretty clear-eyed view of the risk of that.

You know, I — I — I understand that defense companies have got a pretty checkered record of being able to do this. And I — and I think that one of the challenges is that when defense companies have tried to do this and it hasn’t gone well, and you look at times when defense companies do this and it goes well, what’s the difference? I think there’s two — two things. One is, when it doesn’t go well sometimes it’s led — it is because the — the — the defense company went in and said, “You know, because I can build aircraft carriers I can do anything else.” And they go into this — they go into this greenfield, if you will, and say, “OK, I’m here,” and they find out that, yeah, you know, you got a lot of capability but you’ve been thinking about process for 30 years and, you know, we — we’re thinking about — we’re thinking about efficiencies here. And things fall apart.

So we’re avoiding that. And the second thing that they do is, they make the mistake of going into those spaces and saying, “You know, I — if I’m — if I can be in charge on an aircraft carrier I could be in charge in this space.” And so our approach has been we’re not looking to go out and be in charge. We’re looking to apply our capability to legitimate partners who already know how to be successful in that space. You know, if they already — and UniversalPegasus knows how to be successful in that space, S.M. Stoller knows how to be successful in the DOE space, now you’ve got that part of it as part of your portfolio. Now you can figure out the best ways to support that and be successful.

Is that going to be the principal driver of our — our overall capital deployment? Frankly, no. Because if you list the first 10 things that have to happen between now and 2020 for my business — you know, Mark had kind of talked to them about it before — we got to finish CVN-78, we got to get a contract for CVN-79. There’s probably a long lead contract in there for CVN-80. There’s a refueling contract for 73, there’s a — the next block of submarines needs to be done. ORP has to happen. The Amphib LPD-28 needs to happen. The follow-on LXR program has to happen. LHA-8 will be up there. And there’s a competition for destroyers. I just rattled off the 10 — the 10 top things that have to happen for my business in the next 5 years.

I didn’t mention Keystone, and UniversalPegasus is a key supplier to the Keystone project, right? So — so when we say “balanced,” you know, you start with the capital and investment in our process to preserve that franchise with our — with our navy customer. We will look for opportunities to — to give our capabilities other customers, if that makes sense. And we’re gonna bring our shareholders along.

GRUNDMAN: Somewhat apropos of this theme, I wonder if I could draw you out on — on what you’re trying to do at Avondale, which also has an energy angle to it.

PETTERS: Sure.

GRUNDMAN: Which I hadn’t heard until I did a little homework for our conversation.

PETTERS: Right.

GRUNDMAN: So I think it’s an interesting story …

PETTERS: Yeah.

GRUNDMAN: … Although maybe a developing one.

PETTERS: Yeah. I mean, it’s a tough story. You know, it’s — it’s — 4 years ago, when we were part of Northrop Grumman, we made the decision — it became pretty clear that there just was not enough navy work to preserve that facility. And if you go back, when we built 600-ship navy back in the ’80s we had six major shipyards doing that, right? Avondale was one of the six.

GRUNDMAN: Right.

PETTERS: This is the first of those six to actually face the prospect of not having business. And so working your way through the — through the what do you do with a site like that and how do you — how do you manage your way through that has been quite a challenge. What we always said from the beginning was — the — two things. First of all, when this decision was made I actually went to the Northrop Grumman board and I said, “It’s not conventional, but I need you to make sure that we leave the two ships that are there to finish there.” Because usually, when a business goes …

(CROSSTALK)

GRUNDMAN: Which were the …

PETTERS: It was the LPD-23 and LPD-25.

GRUNDMAN: OK.

PETTERS: You know, there were two reasons for that. One was, if we picked those ships up and stopped them in there, and tried to go take them to Ingalls, it would have been so disruptive to Ingalls. And we were just starting the recovery at Ingalls, you know, to get that sorted out and we didn’t need to add that complexity to what was happening at Ingalls. And so that was sort of my first motive for that. But the second motive was, I knew it would take, you know, 3 — 3-plus years to do that, 4 years as it turned out. And I could use that time to try to figure out what to do with the site. And we tried everything.

GRUNDMAN: And the assets are on your balance sheet, or navy …

(CROSSTALK)

PETTERS: Yes.

GRUNDMAN: There’s navy …

(CROSSTALK)

PETTERS: No, they’re ours. They’re ours. They belong to us, yeah. And it’s about 260 acres. It’s on the west bank of the Mississippi River. It’s — you know, it’s been — at the time that the announcement was made in 2010 it was the largest employer in the — in the state of Virginia. And — I mean, state of Louisiana, sorry.

GRUNDMAN: Yeah, yeah.

PETTERS: And so it’s been really — really challenging. And as we’ve — as we’ve worked our way through that, we’ve said that if we’re gonna successfully redeploy that — now think back to what I just said. If you’re gonna do this you don’t want to really be the guy in charge, and you need to partner with somebody that really knows how to be successful in a different space, right? So we’ve — we have picked up a lot of rocks and looked under the rock to see what we could find. In fact, I even picked up the commercial shipbuilding rock again for a few months, and then put that one back down. It was — that one was kind of hot and, you know, didn’t hang to that one for very long.

But we looked. We looked. We tried all that sort of thing. Where we are today on that is, we’re finished — all of — we’re finishing up. In fact, we’re pretty much done with all of the navy work that’s going on in that site. And so we’re — we’re — we’re pretty close to now closing that. But we’re having — we’re doing a — we’re doing a study with Kinder Morgan on how you redeploy that site and what’s the best way to use a site like that’s located on the west bank of the Mississippi.

GRUNDMAN: For those who don’t know that brand, Kinder Morgan is …

(CROSSTALK)

PETTERS: Kinder Morgan is, you know, one of the — one of the most successful companies in the oil and gas space. They — they operate just about every aspect of the oil and gas they’re involved in, and operate terminals and storage and warehouse around the world in support of that. And it’s — you talk about a credible partner, there’s probably no more credible partner in oil and gas than Kinder Morgan.

GRUNDMAN: OK.

PETTERS: So more to come. We haven’t figured out yet exactly how that’s gonna play out, but that’s where it stands.

GRUNDMAN: Yeah. Let me — let me turn to — and — and I — I will take questions from the audience. We got a lot of breathing space here, so just stand by and let me run through a couple other things.

I’m interested in — in a little bit more discussion about your relationship with your primary customer, the — the U.S. Navy and — and the Pentagon. You know, again, in part because I’m — I’m just picking up one of the primary themes of this series and of — of — of practically every conversation that — that I’m party to around here in Washington. And I — and I guess what I — what I’m interested — what I’m particularly interested in with respect to you and your business is that you’re a unique — not every company I would say this of. You’re a unique company, right? You are a, let’s politely call it, a “sole source supplier,” or nearly so, of a couple of major products in — in the U.S. arsenal.

And — and — and a customer who it — itself, right?, under the guise of better buying power, is trying to flex its monopsony — to use a fancy word — power a little bit. How — how — how is that relationship, that monopsony versus — again, polite term — “sole supplier,” working — working out? Has it changed, is it the same, is there something at play right in this juncture?

PETTERS: You know, it — it — it’s a dynamic relationship. I — I would — I would say that when we think about negotiating our contracts, you know, a lot of folks are — would say, well, the negotiation but how do you set the price? And — and for us, on — on some of the contracts you (inaudible), like the carrier contract in particular, it’s really not about price. It really is about coming and — and settling in on a scope of work and a — and a — an agreement on how much risk there is in that scope. Because, you know, everybody kind of knows what the — what the budget is, we know what the cost cap is, we know what our portion of it. We — we — you know, when you — when you go to sit down to — to do this negotiation, the cards are all kind of up on the table, right?, at least in terms of how much money is in the room.

GRUNDMAN: Yeah.

PETTERS: And so now, how do you take that and decide how does that translate into scope and — and risk and return on that risk, and how do you adequately create a profile that makes sense for both the taxpayers and the — and the company. It’s a challenge. And — and — and that discussion is exactly what I was talking about when you say that — when I — when I point out that, you know, our government operates on an annual budget and expense kind of mindset. And we are operating on a — on an investment and return mindset. And that translation is, how much scope do I get, how much risk am I taking, and how much return do you get on that kind of a risk.

That’s pretty tough. And when you — and when you go and stick on top of that — you know, in the case of the carriers — the taxpayers have actually been very emphatic about “and we are not going to pay any more than this much.” And so they’ve created cost caps. And — and so here we are, in the last, you know, year and a piece of — year-and-a-half or so, less than a year-and-a-half — of the forward delivery and everybody on the program is committed to getting the ship done for less than the cost cap.

GRUNDMAN: Right.

PETTERS: That cost cap was set in 2006. That — at the same time that that cost cap was set, the taxpayers set another cost cap for the 79. So we’re sitting here negotiating the 79 for a ship that’s gonna deliver in the early ’20s, and the — and the — you know, the boundary condition was set in 2006. And so that makes for a really tough negotiation, really tough negotiation. And what it points out is that the real competition on those parts of my business are not with — as you point out, there’s nobody else that’s gonna build an aircraft carrier, but the competition is with the budget. And the competition is with other folks who are looking for pieces of the budget. And so we’ve got to figure out how to be that affordable.

GRUNDMAN: So the several — several indicators that have — that have come through the Atlantic Council and elsewhere indicate — suggest that this — I — I — I like your formulation of the — the contracting folks being them who have to translate between return on investment and — and program — program price, budget, versus cost execution. The — the several indicators are is that it’s — it’s bad. The government is bad at this, and getting worse. Now, I’m not asking you necessarily to criticize your customer, but let — let — let me flavor the — the — the — the question by saying when I was in government I thought MAV-CO8 (ph) was a darn good monopsonist. And I wonder are — is MAV-CO8 (ph) a darn good monopsonist, or are — are things bad and getting worse in their capacity to make that critical translation.

PETTERS: Well, I’m glad you didn’t ask me to …

(CROSSTALK)

GRUNDMAN: On nuclear ships, at least.

PETTERS: Yeah, that’s right. So — so I — I think that, you know, there’s two pieces of the conversation with the — the citizens of the United States that could be improved.

GRUNDMAN: OK.

PETTERS: OK? One — one is the budgeting process itself. You know, in the — when the cost cap for the carrier was set in 2006, the budget for the carrier was actually set many years before that, right? And so by the time — we didn’t sign the contract for detail, design and construction on the ford (ph) until 2008. And by the time you get to the place where you’re — you know, the process that we have, by the time you get to the place where you’re actually negotiating, you know, our piece of it you’re many years away from when the first estimate was put together and — and a bud was created.

GRUNDMAN: The GAO baseline, if I may invoke it, right?

PETTERS: Yeah. Whatever — well, it’s actually the — it’s the first time it show up in the fit-up (ph) is — is kind of where it goes. And — and so if you were to go and — and go back to the — the original set of assumptions that were made to create that number in the fit-up (ph), and you were to say, OK, how many of those in — that was in 2003 or ’03, and how many of those have actually played out and are we living through and turned out to be correct in 2014 or will be correct in 2016, I’m gonna predict that that would be a very, very short list. And so the question of how do you get that process to be — for there to be more accountability in that process, because it’s very — it’s — there’s a lot of — there’s a lot of time that removes the budgeting process from the execution process.

And how do you create more accountability back — you know, if you go into a program, as I said before, you go into a program and you get it wrong — you get the budgeting process wrong — if you get it wrong on the low side you’re a bum because the risk of running over and — and the fact that you run over is a lot higher. So you ran over your budget you’re a bum. If you get it wrong on the high side you’re a hero, right? But you don’t have this kind of money sitting around that you can allow everybody to be wrong on the high side.

GRUNDMAN: But — and no one’s accountable for what you could have bought with the money you didn’t need (ph).

PETTERS: Right. So — so this budgeting thing, this challenge of getting the estimates right and getting the budget right and — and finding some way to create some more dynamism in there and accountable in there, is something that I think — I don’t have a solution for it. I just see that as being something that overwhelms the process that goes forward. And — and then, you know, the — the second thing is that when we — when we actually have a conversation with the taxpayers about what — what it is they’re buying we don’t do a very good job of describing how much risk there is in what we’re buying for that price.

So if I sign a contract — I — I sign and contract and — says I’m gonna get it done for this target price, I have a path to get it done for that price. I also have agreed that there’s a set of risks. That I have to retire that risk. And I may have to retire, you know, 80 percent of the risk to get to that price or 50 percent of the risk or 20 percent of the risk or 100 percent of the risk, right?, to get to the target price in there. But if I only — if — if — if I have to retire 50 percent of the risk to get to the — to the target price, and I only retire 40 percent of it, I’m a bum, right? And we’re moving into an environment where I think that we would be happy if the risk was at 50 percent.

Because I think the risk is going to be in the 80 to 100 percent. And you’re gonna be sitting here now, making decisions where, you know, I’m gonna sign a contract for — with — with — I have to retire 100 percent of the risk to be on budget.

GRUNDMAN: Right, right.

PETTERS: And, boy, if my guys are great and — and the shipbuilders, you know — I — I got plenty of time to tell you how great the shipbuilders are. They retire 90 percent of the risks, then we’re bums.

GRUNDMAN: Right. And — and to — by this term “retire risk,” just in palpable terms, is I’ll be able to get this material cost to thus, I’ll be able to weld this kind of a seam at this — is that what you mean?

PETTERS: Yeah, exactly. I mean, we’ll — you know, especially on a platform where you are putting in new technologies, you’re gonna — you know, we put in — well, in fact, some — some new technology here, right, Roger? And — and, you know, you make some assumptions on how that’s going to go. And — and the one thing that I know is that when you make those assumptions you’ve either — you’re gonna be wrong. You either — you either got it way right, you — you know, with a lot of margin, or you got it way wrong with a lot of — a lot of miss. It’s hardly ever that you get the assumptions exactly right.

GRUNDMAN: Right. The only thing you know for sure is it’ll be wrong.

PETTERS: It’ll be wrong, right. So — so — so that — so that’s the challenge. And when you’re — and the — the hard part is how do you have that conversation on the front end. I’m — you know, I’m gonna pretend to be a little naive here, and say we ought to be able to have that conversation. But the realist part of me says that if you start having that conversation and — and suddenly programs that we’ve always been able to get done somehow we start to recognize how much there — risk there is in there — I’m reminded, when I came Washington, you know, gosh, 25 years ago I was told about the Serengeti rule. The Serengeti rule is, if it limps it dies.

GRUNDMAN: Ah, yes.

PETTERS: Right? And so if you have a program that suddenly starts to limp, in this environment, you are creating hazard to the program. So how do we have a conversation where we can actually talk about the risk that there is in this program without creating the — the machinery to — to force the program off the table? That — I think is — that’s — to me, those are the two parts of this. Whether you’re a monopoly in a monopsony kind of relationship, or even if you’re in an environment where you’re — where you’re — you’ve had a competition for a program and the program is planned out and now you’re trying to move into some kind of production run, how do you have that conversation with — with the organization, with the — with the country?

GRUNDMAN: Permit me to speculate that maybe the oil and gas industry has figured out how to manage this in — in a way that you could draw back into your business. With one last question, I will — one last of my own question, I will open up the conversation to questions from those of you in the audience. My last question is this. In a platform that’s gonna last 50 years, among today’s buzz words is “modularity.” I — we had the DARPA director here on this stage 6 months ago, and — and — and she had some almost truly fantastic ideas for — well, actually, not just ideas. She was investing in technologies that would enable defense systems, my words, “to keep pace with Moore’s Law,” almost literally.

Is there — in this latest class of CVNs that are moving into trials, is there something about modularity that they — they have deliberately designed to accommodate?

PETTERS: Absolute — oh, absolutely. I mean, it — the most obvious example is we have — you know, so many times we’ve delivered an aircraft carrier only to have it go over to Norfolk and the first thing that happens is they rip something out because they got to put a new system in it.

GRUNDMAN: Right.

PETTERS: And that happens a lot in the combat system and in the — in the communications systems. What we did was, we stepped back from that. This is one of those examples of — of work that we did that was really not process-related. But we stepped back and said how do we create a space that’s reconfigurable. How do we — how do we take this open architecture idea that everybody’s using in — in weapons and sensors and communication systems, how do we take that and turn that into the platform. And we actually — our guys sat down and figured out how to create a — a space that’s like this, that has heat, power and light for whatever systems you want to put in there and it’s shock-qualified and shock-tested.

And we’ve demonstrated that our apprentices can go in and take a space that’s this size, we can turn it into a combat center. And in 8 hours we can turn it into a special forces meeting room or a — or a skiff or whatever it is that they need. But the main thing is, you don’t have to go and cut foundations out.

GRUNDMAN: Literally cut.

PETTERS: Literally. You don’t have to cut them out, you don’t have to — you know, you just — it’s a — it — you bring it back in, you use the — I mean, there’s fixtures that you have to use, and it’s a special equipment. But you can bring it in and you can set it up, and it — and it’s shock-qualified and it’s hardened and it’s ready to go, and — and a — and will be — that’s one of those life cycle savings ideas that’s going to pay off for 50 years. That’s just one example.

GRUNDMAN: Yeah, sure.

PETTERS: I mean, there’s lots more.

GRUNDMAN: Sure, thanks.

OK, first hand I see it Harlan Ullman. Although please identify yourself, just as I implored everyone to do. Here’s the microphone.

QUESTION: I’m Harlan Ullman with the Atlantic Council. Thank you for your comments. I’m taken with the long view. My question, Mike, really is for a slightly shorter version of the long view, the next 2 to 5 years. When you were talking, I was thinking about Roy Ash at Litton Industries 40 years ago, and Gerstner at IBM. And you had the defense company that was gonna be a conglomerate, and then you had Gerstner who shifted IBM to something else. I would guess, the next 2 to 5 years, you’re gonna see really dramatic cuts in procurement in defense and DOE. And I would not be — I would be surprised to see a navy of above 250 ships, maybe.

Now if that’s true, and you have a real compression over the next couple of years, how do you see making this shift to what Steve alluded to, which was the oil, gas and energy sector which, to me, is an area for prime growth? Because what you’re suggesting, it seems to me, between the lines is looking to straddle both the private and public sector as a means of hedging your strategy in the event that defense does head south. Do I understand that correctly, or am I exaggerating the case?

PETTERS: Yeah, I’ve — I’ve — I’m not doing it so much because I think defense is gonna go south. I — I’m — I don’t share your view that we’re headed to 250 ships or 200 ships. I — what I — what I look at is, when we stack up the — the priority — you stack up the order of battle in the 300-ship navy today. And you start with — you put — you put on top of that list the most complex ships there are — carriers, submarines, destroyers, amphibs — what you see is, you see a lot of alignment in the industry and the navy around those not only are the most complex platforms, they actually are our priorities, you know. And — and — and so when you have the marriage between the navy and the industry saying that these are all — you know, the navy recognizing that the complexity is their advantage and the complexity makes it a priority, I think that there’s a scrum below that level.

I think the amphibs are kind of in the — in the mix there of the scrum. But I think the small surface combatant is in there, I think some of the auxiliaries are in there. That’s where — that’s where your — the — the real battle is going to be over what are these platforms — are gonna look like. I think it’s pretty clear, based on, you know, what Mark said here today, that — that there’s a strong commitment on the part of the country to stay with 11 aircraft carriers. And if you stay with 11 aircraft carriers you are setting the size of the navy to be something that supports that. But, you know, whether it’s 306 ships of 285 ships, I — I’m not sure how you count it.

But I — but I think that that creates a structure there. So I — I’m not looking to take my business and go over to the oil and gas space. I — actually, as I said, I’m — I believe that our partnership is the key — our partnership with the navy is the key franchise of this business. And there is no future that I see where that’s not true. If we are successful with DOE or we’re successful with oil and gas it’ll be on the margins and it’ll be — it’ll be incrementally helpful. But it’ll be helpful both ways. It’ll help — it’ll help us with some low capital investment kind of returns in the business, which we can use. It’ll also help us with our learning how to think a little bit differently about our business.

GRUNDMAN: There’s a question, a gentleman in uniform in the back row?

QUESTION: Per Rasmussen from the Danish embassy in Washington, D.C. Thank you for a very enlightening presentation. I hear two things. One is going towards commercial standards, and I hear modularity. In Denmark, we don’t do things for the past 35 years. I just wonder, if it isn’t made here it doesn’t work? Why don’t you look around? Why do you create your own organization to deliver these things? Thank you.

PETTERS: Yeah, I mean, I think part of it is that we’re operating in an environment where we have some legal structures that force us down that path. You know, we have 5,000 suppliers in this country. We don’t have very many suppliers that are not — not in the U.S. And that we have some — we have some — the taxpayers have made some rules about how we can engage. I — I do think, though, that things like commercial standards and modularity are going to be brought to bear to wrestle with the size of the budgets and how much of — how much of the budget can be applied to the platforms.

But I think that — I — I also think that if you look around the industry, you’re hearing us talk a little bit about oil and gas. If you scratch out oil and gas, and you put in — pick another word, “international?” — you know, the discussion’s the same. It’s — other companies are using the international space as a way to describe they’re gonna open up another channel for their capability. I — in shipbuilding I’m not a believer that the international navy shipbuilding business is a real opportunity. I just don’t think that it is. And I am convinced, having scars, that the commercial shipbuilding business is not a real opportunity for my business. And so — so we’ve had to try to figure out a different way to open up a channel.

GRUNDMAN: Is there any reason at all to worry about the flip side of that, which is commercial hulls being sold to the navy? Hulls, maybe just.

PETTERS: It’s about — I think it’s about mission, you know. Because I think — I think that, you know, there’s a really good program that’s going on today, the MLP program, that — not in my business, but — but our friends at General Dynamics have got a nice program there where they have a ship that’s built to some commercial standards and it’s providing some capability to the Marines that the Marines need. And they’re doing it in a pretty affordable way. But that’s not a platform that’s gonna go and knock a door down if you need to knock a door down, which the Marines get called on to — to do from time to time.

And so you — you have to kind of step down to what is the mission, you know, and — and do you have the survivability to perform that mission if you just are relying on commercial standards. And, you know, a lot of — a lot of the missions that we have laid out there won’t lend themselves to that.

GRUNDMAN: OK. There’s a question in the fourth row, right in the middle, please?

QUESTION: Hi. Andrea Shalal, with Reuters. Mike, I wanted to follow up on this kind of ongoing discussion about innovation and — and how that applies to your sector specifically. Yesterday, Bob Martinez of the — of CSBA, you know, talked about a report in which he sort of focused on the extended range, unmanned capabilities and — and sort of said, along the way, that perhaps some of the current modernization programs would have to be scrapped. One of the things he mentioned was amphibs. He mentioned that amphibs are in that scrum space. I mean, how are you translating all of this discussion about innovation into what you’re gonna be doing in that very long view? And where are the connections, and what — what does it mean that China and — and, you know, is — is developing missiles that can be — you know, that will make those ships that you build less safe?

PETTERS: Wow, there’s a lot in that question. I should …

GRUNDMAN: Just a couple minutes.

PETTERS: Yeah, I should just start out by saying, you know, I’m not really a geo-strategist of some kind. And I don’t really get too involved in the discussions inside the Pentagon about missions and capabilities and — you know, and — and counter-capabilities and those kinds of things. Where that translates into my business is, it turns into the requirements of the ship, right? The requirement — we get a set of requirements, or we engage with our customer, on what are the requirements of the ship. Often, we don’t know how those requirements trace back to whatever the — whatever the perceived threat might be.

And so I — I’m — I’m gonna be a little — be a little standoffish on this and say I’m not — I’m not exactly sure how all of that comes together. What we do is, we look at the sets of requirements and we try to identify those requirements that are — we would suggest, and we — we have done this on every ship that we — that we build. We do go back to the navy and we say, “Here’s a set of requirements that, if these were changed, could reduce the cost of this ship. From our perspective, they don’t change the functionality of the ship or a capability of that ship to meet what we think the mission is.” The navy will do a review on that, and then in — you know, in some cases they accept it, in some cases they say no, we have to have it this way.

But, you know, that’s our — our attempt is to kind of try to keep the — keep going at what are those things that are really driving the cost and — and can — can we change that or can we — can we approach that a different way and get at it in a more efficient way. So, you know, beyond that it’s — it’s a — it’s really about what are — what are the requirements that come to us. We’ve — we do have discussions sometimes that are nice and interesting to talk about what’s the navy after next look like. But, you know, that becomes really hard to act on, and — and from my standpoint the most important thing for us to do is to recognize we’ve been doing process for 30 years; we’ve got to do more than that now.

Because the environment in the future, whatever the missions, whatever the capabilities are, it’s gonna require efficiencies. And — and we’ve got to — we’ve got to become ever more efficient every single day. And so that’s kind of the way we’re going after it.

GRUNDMAN: We have time for one last question. From the second row, Ralph Crosby?

QUESTION: Hey, Mike. Ralph Crosby.

PETTERS: Hi, Ralph. Good to see you.

QUESTION: Good to see you. Down at the — kind of the base level, and to go to the point you made at the — at the end about efficiencies being important, Steve tried to get at the question of how good is your customer. I kind of think of the customer — I mean, look, if you want to run up San Juan Hill you don’t have to just have 5,000 shipbuilders with you. You got to have 4,000 GAO, DCA, DCMA, contract managers with you. And I think one of the fundamentals of kind of defense contracting that we face going forward is do we have the competencies to really — to really execute what — after you get past the requirement stuff, what we commit to do.

And for example, on the side that I was always in, I think the U.S. Air Force at one point in time had developed the most exquisite capability of best-value contracting that ever existed, which has now disappeared. And I’m wondering — disappeared and been disavowed. And I’m wondering, in the sense of innovation, efficiency and so forth, are we doing enough — as the customer, the government customer — to ensure we have the enlightenment and the capacities to — to — to get those efficiencies and — and — and the leverages that we ought to get for the dollars that we spend in your business.

PETTERS: Wow. You know, Ralph, that goes — that cuts across not just defense; that cuts across everything that the government’s involved in, right?

QUESTION: But defense is the best at buying things of any part of this U.S. government.

PETTERS: That — that’s true.

QUESTION: (Inaudible) talk about that.

PETTERS: OK. So I — can’t figure out where to start with that. The — the — the challenge that I think we have is that we — we are moving to a place where — kind of back to we’re institutionalizing so many short-term things that it makes some of these long-term investments that you’re talking about really hard to — hard to come to fruition. I know of a case — without naming any names, I know of a case where a company won a competition to build a prototype and worked with the government to build the prototype. When the prototype was finished, the government decided to hold a competition for the production. The other companies that were involved in this, one of them decided to go do it on their own.

And as I understand it, the — the — the government company prototype team had developed this prototype towards a set of standards. But when they went to the competition, they had to relax the standards so they could have a competition. Now, that — that makes no sense to me. You know, that — if you’re gonna go — I mean, it — it’s almost as if you’re saying you’d be better off not to win the prototype competition so that you could go and participate in the real competition. And I think that’s just an example of we’re not thinking long-term enough; we’re just not thinking long-term enough, and we — we’ve got rules and regulations and — and — and requirements that are causing us to institutionalize short-term thinking that’s keeping us from making some of these long-term decisions.

And I — I just think that continues. It’s — I — you know, my — my bottom line point here is that I don’t know that I — other than to say I can vent about it and say it’s a really bad thing, it would be nice to point out that, you know, as we go through acquisition reform I — you know, there — there’s a big challenge here in acquisition reform to try to figure out how do you get back to a place where you can think a little bit longer term about some of these programs. The ships that we build, we’re not building them for this administration. We’re not even building them for the next administration. We’re building them for the administration after that.

You know, there’s a — there’s a great history story of when George Washington wanted to buy the first six frigates in the U.S. Navy one of his most vocal opponents was a guy by the name of Thomas Jefferson. And when Thomas Jefferson became president, what did he do? He sent the six frigates over to take care of the Tripoli pirates. So, I mean, you know, there’s — this is — this is a real challenge for this country. It’s a real challenge for leaders to stand up and be heard on. And it’s really important, I think, for — for folks to stand up and make the point that you’re making, Ralph.

GRUNDMAN: That historical reference, I think, makes a perfect arc to the conversation, or — or — or draws the conversation to a perfect conclusion. Do you have any final words, Mike, before I thank you.

PETTERS: Well, again — no, I thank you. I — this is a — it’s been a great experience, and I — and I applaud what you and the Atlantic Council are doing here.

GRUNDMAN: Thank you. Thanks, again, very much for coming. And thanks again to Mark Brunner for participating in the event. Thanks to all of you for coming. We’ll do it again probably next month or the month after. Stay tuned.

END

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