Ellen Lord, CEO of Textron Systems, gave the third address of the Atlantic Council Captains of Industry series on January 15, 2014, speaking on her “View of Defense from Inside a Multi-Industrial Company.”
President and CEO
FRED KEMPE: (In progress) – good morning, and welcome to the Atlantic Council. I’m Fred Kempe, president and CEO. Our purpose today is to hear from Ellen Lord, the CEO of Textron Systems Corporation, who will make an address entitled “The View of Defense from a Conglomerate.” Hers will be the third address in our new speaker series Atlantic Council Captains of Industry.
We start – over the last four or five years, we’ve started a lot of new initiatives of the Atlantic Council, and you can tell right away which will get traction, which have a lot of interest and which have a little bit less. And this one, right from the beginning, has gained a lot of interest because it’s the right speaker series at the right point in history because it’s trying to create a pre-eminent platform from which senior executives whose businesses contribute to national security can address the public interests of their companies – that their companies serve and the public policies that shape their markets and the context in which we all exist. We launched the series in October with an address by the chief executive of Exelis, David Melcher, who made a terrific presentation about the full range of issues facing the defense industrial base. That was followed in November with an address by the chief executive of BAE Systems, Linda Hudson, who added her voice to the important public conversation about the health of the defense industrial base and in particular an emerging crisis over how the industry can attract, develop and retain the world’s best talent.
The – I want to summarize very briefly the impetus for this series and put it in the context of the Atlantic Council’s mission and the work of its Brent Scowcroft Center on International Security. The impetus is twofold. First, there is a recognition that the business or marketplace of defense is a vital thread in the overall fabric of U.S. national security and the national security of our allies in the Atlantic alliance and partners around the globe. Indeed, it can be said that this proposition was also central to the establishment here at the council of the M.A. and George Lund Fellowship, which is held by Steve Grundman, who will join Ellen on the stage to moderate the Q-and-A that will follow her address.
The second impetus for this series is a recognition that the marketplace is at an inflection point formed by the confluence of several factors which together mark the end of what I think historians may come to call the post-Cold War era and the beginning of something new. Different people are calling it different things. I like to think about it as an era of global competition, which gets to the whole point of the talent that one has to attract, and particularly in this industry. Chief of the factors for the defense industry is of course is fiscal crises, reducing investments in national defense by nearly every national capital represented in today’s audience, but certainly not every national capital in the world.
In addition, there is a fact that allied militaries are receding from more than a decade of counterinsurgency wars, despite the fact that many of the sources and expressions of those conflicts continue to percolate throughout the Middle East and South Asia, and we’re of course seeing increased difficulties in South Sudan and in Iraq and of course in Syria. I would ask (sic) to this list of factors forming the market’s inflection the advance of commercial technologies, the huge, fast advance of these technologies in computing, sensing, communication and biotechnology, to name just four disciplines, and they’re transforming the leverage and locus of threats and antagonists.
And finally, it must be said this particular growth story that inspired the capital markets’ support of the post-Cold War restructuring of the defense industry is also at an end. So the Captain of Industry series is a chance to talk about all that and a further expression of what its namesake, General Brent Scowcroft, had in mind for the center. This series is the brainchild of George Lund. George Lund is chairman of Torch Hill, and he is executive committee member of the Atlantic Council board and vice chairman of the Scowcroft Center. It’s great to see Steve Kappes here representing him today. We’ve got several board members here. That’s always a good sign, but it’s particularly a good sign when some of them wore a lot of stars on their uniforms. General Wald, General Cartwright, it’s great to have both of you here, other board members, Marten van Heuven, Ralph Crosby from Airbus, Jonas Hjelm from Saab, Steve Kappes, as I said, John Macomber and Mary Howell, who it is my pleasure now to introduce so that she, who has worked with Ellen over many years at Textron, can introduce our featured speaker.
Mary is the former executive vice president at Textron. She is on the executive committee of the Atlantic Council board, is one of the leaders of the Atlantic Council. And before turning over to you, Mary, I want to thank you publicly for everything that you do for the Atlantic Council. (Applause.)
MARY HOWELL: Thank you. Thanks so much, Fred. It’s a huge honor for me this morning to introduce my friend and former colleague Ellen Lord, who serves as the president and CEO of Textron Systems. And just an aside, John Macomber was Textron’s lead director for many, many years and knows Textron well, as he spent many years with the company.
But Textron is known around the world for its powerful brands of aircraft, defense and industrial products. And Ellen is instrumental in leading Textron Systems in numerous areas. Most important, her insight and leadership have been critical to successfully leading Textron with customers, groundbreaking technologies, innovative solutions and first-class service.
One thing you may not know about Ellen is that she started her career with Textron, but she started her career before Textron with a bachelor’s and master’s in the science of chemistry. And early on she was instrumental in the automotive – in groundbreaking solutions that have really played a lot in the current automotive industry. So Ellen’s chemistry background is an interesting fact that a lot of people don’t know.
But prior to joining Textron, she served as key – in key management and executive roles. And the thing, I think, about Ellen that I like the most is she’s intellectually curious. And in this group, that is something that is – that is so important. And she’s a great leader, a great communicator.
And it’s my great pleasure to introduce Ellen Lord. (Applause.)
ELLEN LORD: Great. Thank you, Mary. Good to see you. That was a very nice surprise to have you here this morning.
Thank you, Fred, and thank you to the Atlantic Council for this opportunity to engage in a dialogue.
I grew up in a multi-industry company, Textron, joining right out of graduate – (off mic) – industry. After about 11 years, I had the opportunity to join our aerospace and defense group and really found something that I wasn’t aware of, basically a latent patriotism. I became very, very proud to be in an industry that really benefits the community I live in, our nation and really the world. So I’m very proud to be part of the aerospace and defense industry and hope that I can make a difference, make a difference to the war fighter, make a difference to our nation and make a difference to our industry.
So I have a hypothesis. I believe in – that in this current environment, the U.S. will gain the most benefit from having multi-industry companies applying commercial best practices. I believe we can do this ranging from investment to product development to fielding solutions. We truly believe that large specialized companies will add value, but greater efficiencies and increased responsiveness are inherent in commercially driven businesses, diverse businesses. We think we can leverage talent, we can leverage technologies, and we can leverage channels.
Companies that efficiently provide capabilities will drive the greatest value, especially those that can quickly and cost-effectively produce at all levels of throughput. And in the environment we’re entering, I believe we are going to see a lot of low throughput. We have to be able to adjust and do that efficiently to keep our defense industrial base.
So let me tell you why I believe this to be the case. Starting with what occurred in the 1990s, when corporate strategies changed at the end of the Cold War era with the Berlin Wall coming down in ’89, we saw a major wave of defense consolidations, really to create scale. We emphasized the creation of defense pure plays and a lot of commercial ties were cut. Scale and size largely took precedent. We saw the rise of the large prime integrators. Winners were those that generally got there first and got there very boldly.
Today we see challenges, sequestration, U.S. budget long-term declines, excess capacity in niches and markets and strong international competition. As a result, we see shifts in strategies. We believe that the center of action will be midsize companies. We believe that there will be a re-creation of a strong midtier that’s basically disappeared in the last decade. Strategies appear to be fractured, with some companies becoming more specialized while others are gaining bulk scaling up.
We believe that the government services sector will be affected first, although we believe that there will be differences, changes in the hardware niches as well. The ability to leverage commercial business practices, including different business models and commercial technology, will be increasingly attractive. Ultimately, the companies that can efficiently and cost-effectively provide capabilities will be the winners, especially those that can cost-effectively produce at lower production levels. However, companies that can achieve this should not be penalized but rather rewarded.
We believe that a well-constructed, multi-industry company is perfectly positioned to address such challenges. How do we do this? We think we have to offer avenues to leverage commercial practices and technologies, providing financial depth for continued investments through the downturn and providing attractive advantages in international markets.
Before I go further, let me tell you a little bit about Textron, where my perspective comes from. I have worked at Textron for 30 years, about 11 years in the automotive and the balance in aerospace and defense.
Textron is comprised of five segments. We have Bell Helicopter; Cessna, an industrial group ranging from Kautex making very specialized – (inaudible) – fuel tanks, for instance, in the automotive industry to Greenlee, who makes tools for electrical contractor. We also have a finance group, basically does internal financing for our planes and helicopters now. And then we have Textron Systems, which I have responsibility for.
Textron Systems is about a $2 billion company. It’s made up of multiple operating units. We have products ranging from unmanned aircraft systems, Shadow aeroson (ph) tactical unmanned aircraft systems. We have wheeled armored vehicles. We have precision weapons, such as the thousand-pound air-to-ground (centrifuge ?) weapon, precision-strike capability. We have a piston engine company. We have a couple intelligence software companies. And we have a simulation and training group. We’ve just recently acquired two companies, Mechtronix and OPINICUS. We’re building that capability, primarily for aircraft but not just limited to aircraft.
So what are the domestic benefits of a multi-industry company? We think the ability to share talent, technology and channels are very significant. As a diversified company, we can offer a variety of positions and assignments to our employees. We can recruit the best and the brightest. One of our greatest competitive strengths is the diversity of our workforce and the different experiences that they gain in our different companies. We’re able to realize efficiencies and have the ability to leverage technology and talent across the defense sector. Commercial technology positions us to be able to take advantage of opportunities.
We have the ability to scale, and we have a commercially minded workforce. Just last week – where I picked up this cold, so I apologize for my voice here – 150 Textron executive were in Florida for our global leadership meeting. We kicked off the year looking back at 2013, looking forward to our 2014 plans, but most importantly, we listened to our colleagues talk about what they’ve done in the last year, both in terms of operations as well as growth. They tell stories of the successes they’ve had, the issues they’ve faced. And frankly, it’s extremely inspirational for all to hear. And you can apply some of the incredible materials technology that’s been developed at Cessna that reduces the number of rivets, the number of different individual parts in a section of an aircraft; you can take that, and you can extrapolate, and you can apply that to Textron Systems, where we’re making unmanned aircraft systems.
We also during this global leadership meeting hand out award, the Chairman’s Innovation Awards. This has become an incredibly competitive event. We had teams of five people. About 135 people applied this year to win one of five awards for different types of innovation. Our employees sit and listen to these awards and not only think, how can I apply what’s been in Wichita, Kansas, or in Dallas, Texas, to where I am in Goosecreek (sp), South Carolina, or Hunt Valley (sp), Maryland, but they also want to be up on that stage the next year to get that award, and, oh, by the way, get their $10,000 as well. And people like me sit there taking notes because I see talent at our different companies that I want for my company, I want for our industry, people that can make a difference.
I believe with Better Buying Power 2.0, another initiative, Textron is going to be better-positioned to compete in the government space when we take a look at the commercial practices in use today and apply them to the defense industry. For instance, we need to work more with (cots ?)-based different parts and systems.
As an ability – I’m sorry, as part of a multi-industry company, we have the ability to better ride out the downturn and product – protect the industrial base, protect the industrial base, a key concern I have. The ability of multi-industry companies to invest during the downturn is significant. We leverage our commercial sister companies. Let me give you two examples of that. One is the Shadow M-2 Tactical Unmanned Aircraft System, and the other is the Scorpion light attack jet.
Cessna developed the Scorpion light attack jet through a new partnership using commercial best practices. They took a small group of people, put them in an empty building and, under 24 months from a clean piece of paper, they had their first flight. How’d they do that? They took a composite air frame and commercially available parts that were already being used on other Cessna aircraft, and they designed towards a low total ownership cost and came up with a system that can be immediately exported – another key, immediately exported. This jet was designed to be operated at less than $3,000 per flight hour, making it very interesting for a whole variety of missions. Compare that to the F-16, other aircraft.
Second example, leveraging our IRAD in a down cycle. We on our own dollars have developed the Shadow M-2 tactical aircraft. Taking the wings from the current Shadow and multiple other parts, designing a new fuselage, we’ve come up with a system that we demonstrated multiple times now that has the ability to carry the payloads that strategic aircraft are flying today. We are going to be in a position to be able to deliver a capability to the war fighter at much lower cost.
So what did we do? What are these commercial practices I’m talking about? We went out, we looked at the marketplace, we looked at the needs, we looked at the future, we identified what the gaps are and we took our own money, we made a bet ourselves on what is needed and we developed the capability and we went and flew. And we think the customers will follow.
What are the international benefits of a multi-industry company? Well, for instance, at Textron Systems, we’ve decided that we can no longer jump on a plane, fly 17 hours, go have a series of meetings, for instance, in the middle for a few days, bring our BD people back home, start writing emails and hope we’re going to be very, very successful doing that, opening up new avenues. What we’ve decided we have to do is put people on the ground with our customers. So we’ve done that. In 11 different places right now over the last year we’ve put our employees. They are very locally involved, very regionally focused. We have people in Riyadh, Abu Dhabi, Stuttgart, Tripoli – a whole variety of places.
We think that this will make a difference. And oh, by the way, we can do this fairly easily because we have a lot of our commercial sister companies with people in some of these locations. And what can we do? We can leverage the contacts they have, the channels they have, the knowledge of how to do business locally. This applies as well when you look at offset requirements, as we begin to do more and more internationally. Traditionally, offset programs were structured to provide support for the defense industry in the countries in which we were doing business. Now we see that customers are aligning their offset programs with national development goals.
Multi-industry companies with operations in the defense and commercial markets can really provide a wide range of offset solutions. For instance, when I went to one of my CEO’s quarterly face-to-face meetings a few months ago I spoke about the fact that we have hundreds of millions of dollars of offset obligations around the world and that we had the ability to develop businesses in these countries where we actually have money, in our FMS case, to develop the business. But what we wanted to do was really develop a business that will grow our core businesses versus do things that just really weren’t aligned.
One of my colleagues picked up on that and we now have a very interesting venture being investigated in the Middle East where we can use our dollars from our FMS case to develop an automotive parts business that will utilize the technology from Caltex, as well as a lot of their skill sets, people, manufacturing know-how, and set up a facility that will be funded with the dollars from our case and will provide business that we can leverage on an ongoing basis. There are a variety of companies that are beginning to do this. It’s huge for us in terms of building business internationally where our sister company is already strategic labor targeting.
Our successful growth is really being defined by the relationships we develop overseas. I mentioned the fact that we have our employees on the ground taking their families to many of these locations, becoming part of the community. If we are going to really take advantage of offset requirements we have and generate new businesses in these communities, we’re going to need a workforce in order to be able to do that. And you can’t just start and build from ground zero the day you open the doors. So what we’ve decided to do is leverage some of the talent development techniques we have here at home and take them abroad.
For instance, we have a very significant internship program where we go out and recruit at specific universities and bring kids in for six – three to six month internships. We basically are letting the schools sort through who the qualified applicants are and then we’re giving them a three to six month interview. If things go well – we like them; they like us – then we offer them a job. Even when we don’t end up with people working for us in the long run, they know Textron. And typically that works out well for everyone in the long run. So what are we doing? We’re taking that abroad.
Tomorrow I’m actually catching a flight to Riyadh. After invitations and meetings with Nala Ajubere (sp), I’m going to talk to a whole variety of women in Saudi Arabia who are here in the states at colleges and universities who are incredibly talented but don’t have the opportunity to really lean much about business in limited opportunities at home. What do we want to do? I want to bring these people in for internships, get to know them, at the very least make friends that we will have in Saudi Arabia as we enter different ventures in Saudi Arabia. In the best case, we’re going to have future employees who are going back home that we can hire there.
It takes a long time to develop these relationships, but I believe that we really have an edge as a multi-industry company. I obviously have constraints with clearances, propriety information, however I have sister companies that want to have these same interns. So this weekend when I’m talking to people I won’t just talk about our unmanned aircraft systems, I won’t just talk about our wheeled vehicles. I can talk about Bell commercial helicopters. I can talk about Cessna citations. I can talk about a whole variety of things. We can then leverage what we have in our company.
So if I come back, it’s my view that the U.S. will gain the greatest benefit from the aerospace and defense industry, in this current environment, from the application of commercial best practices. The government can help industry three ways. How can help us to be stronger, to really support our national defense industrial base? One is speeding up FMS cases. We obviously are looking to the international marketplace to sustain us through the downturn in domestic spending. We must better balance the benefits of the FMS process with the burdens it puts on industry.
The U.S. government’s use of the services structure and process as part of the FMS puts our services in a tough and unenviable position of being the middle man, many times creating added cost and process that may actually conflict with our ultimate customer’s needs. Further, FMS sales can be unpredictable, burdened by process, including lengthy audits to review identical costs incurred in the same product for a different country.
Please don’t mistake my comments. Audits are necessary. Part of the reason our foreign customers go the Foreign Military Sales route versus direct commercial sales is because it brings a level of compliance that puts them beyond question in terms of their business practices. So it’s good. It’s good for the government. It’s good for us. It’s good for the customers. However, the process should enable, not hinder. There needs to be rewards for moving cases through a compliant process quickly versus only a fear or not complying.
The second way our government can help industry is supporting the export of new technologies. While we want to preserve the best technology for our nation, we also need to keep in mind that our national security depends on stability and the ability to enable our regional partners. This requires at time the export of new technologies to extend our partners’ capabilities, which has the added benefit of maturing the technology and the capability here at home while preserving our industrial base.
Third, we need to allow for greater COT (ph) utilization and encouraging commercial best practices. Commercial best practices should be applied wherever possible to speed development, reduce costs and improve overall effectiveness – even without Better Buying 2.0 and similar initiatives. As a representative of industry, I ask the policy community to consider these three factors in our collective efforts to make the U.S. more competitive and secure around the world. Thank you. (Applause.)
MR. GRUNDMAN: Thank you very much, Ellen. That was terrific and right on-target for one of the themes that has been germinating around the council, around the emerging defense challenges practices that I run, and that is the role and place of multi-industrial firms, commercial technology in this next turn of events that will perhaps restructure, or, at the very least, shape the defense industry and the capacity that our industry has to serve national security.
So thank you very much. Right on-target to what I know a lot of my friends and colleagues in this room and I have been discussing over many months now. I wanted to start the – start a dialogue and obviously draw in those of you who are in the audience, but if I may exercise the prerogative of the moderator here, to draw out a little bit more why it’s possible, at Textron, to undertake an initiative like the scorpion or the shadow initiative that you’ve described.
I don’t think it’s calling him out to say that when Dave Melcher, the CEO of Exelis, was here in October, he, as pointedly as you said, Textron will do this, said, I need a customer – I need a customer with a requirement before I’m going to take money off my balance sheet or anywhere else and apply it to, you know, inventing something that I’m not sure there’s a customer for. So how is that conversation or that process different at Textron than you might imagine in – we can imagine it is in a more specialized defense contractor?
MS. LORD: Great question, Steve. I think it really goes back to the commercial mindset. We, in a commercial environment, would say, what’s the right thing to do? How do we lean forward, make the bet to really grow our business? And we have that prerogative, always, to do that, and I think at Textron, we look across all of our businesses and say, what is the right thing to do? We’re willing to take that risk. It’s really high-risk, high-reward, and I think that’s really our company ethos.
MR. GRUNDMAN: OK. I do want to draw in other questions from the audience here. We have – we have a full half-hour to take questions and engage Ellen in conversation, so those of you in the audience who would like to begin – I see a question right there. And please identify yourself. This is all on the record. Please identify yourself and where you’re from before you ask your question.
Q: Stephanie Hausheer with the Rafik Hariri Center for the Middle East here at the Atlantic Council. I wanted to follow up on what you talked about with regard to recruiting Saudi women from Riyadh, because as I’m sure you’re aware, there’s about a hundred thousand Saudis here in the U.S. studying. So I wonder if you’re also trying to get them – women in particular internships here after they graduate?
MS. LORD: Absolutely, Stephanie. I was not clear. That is absolutely what we’re trying to do. We are working through the embassy, and we are looking at people – Saudi women that are going to school here. What we’re trying to do is get a total picture – get everyone involved working with people in Saudi Arabia as well as here, but the intent – let me be very clear – the intent is to give Saudi women experience here in the U.S. initially working not only with our defense companies, but with our commercial companies. So what we are doing is targeting specific universities and colleges, working very closely, actually with the Saudi embassy here in D.C.
MR. GRUNDMAN: OK, I have three in the queue. General Wald, then Marjorie Censer and then Harlan Ullman.
Q: (Inaudible.) I can see why you’re the CEO. I happen to agree with everything you’re saying. But my question would be – if I were – and I know this is on the record, so it’s delicate, but if I were Frank Kendall, and you were talking about better buying power 2.0 and commercial practices, which I totally agree with, what are some of the pieces of advice you would give him as far as how the DOD could better accommodate some of those or even adopt some of those practices and in what areas?
MS. LORD: Thank you, General. Good question. First of all, I would say, let’s have more fixed price competitions. We are seeing some cost plus competitions, where we would really rather have it be fixed price, and then we have an issue – and I don’t believe this is Textron-specific at all – where we get challenged on commerciality for certain systems. That’s one thing.
Another is, we fall into what I’ll call the trap of having to meet very specific requirements, and you’re noncompliant if you don’t meet those requirements. If the aperture could be opened up so that more creativity, if you will, could come into the solution, that would be a great thing. Now, I don’t, for a moment, think that’s an easy thing to do. Everyone tries to do acquisition reform and so forth, but those are two of the key points I would make.
MR. GRUNDMAN: You know, the first point you made I find especially interesting, because somewhere along the way, in the history of this industry, I think – at the end of the 1980s, we all were taught to dislike fixed-price contracts, that those are scary and risky and they put companies out of business, but the industry needs to respond to practically an invitation from the likes of Frank Kendall and – (inaudible) – Ash Carter and encourage contracting officers and program managers to do develop acquisition strategies that enabled fixed price contracting and, I don’t know, get past this weird reflex that we learned 20 years ago. Do you know what I’m referring to?
MS. LORD: Absolutely – absolutely, because again, when I talk about our sister companies, there’s a lot of very clever technology, clever solutions that could be leveraged. But frankly, we’re not incentivized to do that right now, because it’s too hard, given the rigor of our acquisition environment. And I – and by the way, I think these are all unintended consequences. I don’t think anybody tried to do all of this; it’s the complexity of the challenge.
MR. GRUNDMAN: Marjorie Censer.
Q: Hi. Marjorie Censer with the Washington Post. I’m interested in what you think is coming in terms of the reshaping and how Textron fits into that. How does that affect your company’s M&A strategy? What are you looking at as potential buys, potential divestitures?
MS. LORD: Marjorie, I think you’ll see, just very recently, we acquired two simulation and training companies, for instance. We think there are going to be many fewer flying hours available to pilots, so simulation and training – it will be of paramount importance. We think that’s an attractive niche and are working primarily in the aircraft segment for that now, but we believe four-wheeled vehicles for unmanned aircraft systems as well – that there’s a lot of opportunity.
I think you’ll also see that we are working on the Beech acquisition as well, which, again, brings more airpower to Textron for a variety of different mission sets. I think affordability in terms of solutions for the warfighter is the key, and what we’re doing is looking at niches where we believe we bring a value added solution at a compelling price.
MR. GRUNDMAN: Beechcraft is a – generally thought of as a commercial brand, but I wonder if – having mentioned it already, if you could say a little bit more about the intersection, potentially – and I know that the deal is subject to regulatory review, and you may be restrained, but of the – the significance of it for Textron Systems’ military business if you can.
MS. LORD: Yes, I hear my lawyers now.
MR. GRUNDMAN: Yeah, I know.
MS. LORD: The Beech portfolio fits beautifully with Textron, and we’re just working through the integration right now. So I really can’t comment much, but if you do look carefully at what they have, there is a lot of military activity that is very interesting.
MR. GRUNDMAN: Thanks. Harlan.
Q: Thank you. I’m Harlan Ullman. I’d like to ask a question about your strategic planning and strategic thinking processes. Over the last couple of years regarding not just your own business sector but also the larger economy, what do you think have been your assumptions that actually have been most effective, and which assumptions have you made that maybe, if you had a chance, you’d like to do them over again?
MS. LORD: That’s a very good question, Harlan.
Well, first of all, let me just say that we do not have a big strategic planning group at Textron. In fact, that’s kind of an inside little debate we have. We talk more about business develop and what’s right in front of us and what’s over the next hill, so to speak, versus big, bold strategies. I think what we’ve looked at is, we knew there would be a drawdown. We know that there is not a lot of airspace to go and fly things, whether they be manned or unmanned. So we’ve said, how will we react to that? How will the industry – how will the government react to that? And we saw the need for a simulation. So I think that’s worked out very, very well.
I think we can’t always predict how successful we will be internationally, particularly the time frames, so I think whereas we had a good strategy to go international – my company’s about 35 percent international right now; we’ve been doing this for about five years; we want to get more so – that we underestimated the complexity and the time frame that it takes to close some of these deals. I think we also underestimated energy, time, effort and therefore, cost it takes to engage in some of these international procurements, and how we’ve unfortunately ended up in a place where these FMS cases just can be incredibly drawn out and not valuing anybody in the end.
MR. GRUNDMAN: I see three hands over here, and then I’ll come over here. But Kristin first.
Q: Good morning, I’m Kristin White from Avascent.
I want to go back to Steve’s initial question about the development of Scorpion and the Shadow development. We see with our clients in the defense industry a big tension between the protection of intellectual property that comes with that sort of IRAD and government expectations about TDPs and the pricing of those.
How – I’d be curious to hear your perspectives on how best to protect that sort of IRAD when you do make these investments and take these risks?
MS. LORD: That’s a very good question. What we fully expect is that open-source, open-architecture, nonconstrained intellectual property is what the government’s looking for. So we typically are being very open about what we’re doing, and we think the secret sauce is more getting to market quickly, thinking innovatively, getting it out there, and then by the time it’s out there and someone can reverse engineer it, we’re onto the next thing.
So I don’t think that holding a lot of proprietary information very close is going to be the way to be successful in the future. I think it’s speed-to-market innovation, making sure you have the workforce that can keep you on that trajectory.
MR. GRUNDMAN: I love these concise, sharp-to-the-point answers, thank you. (Scattered laughter.) Question here.
Q: Francisco (sp), thank you for an excellent presentation.
The whole question of offsets have been a conundrum in the Gulf and agony for both the companies and the governments for a long time. I was intrigued with what you mentioned about automotive spare parts, can you expand a bit on your thoughts on offsets and where you’re going to go with it in the future?
MS. LORD: Absolutely, offsets, I think, is that big, looming, black cloud for all of us in the industry. We’re sort of chalking up all these requirements and we’re not seeing us, you know, really satisfying those. We’re not liquidating all those obligations.
So what we’ve talked about a lot is not only how challenging it is that every country has different requirements – and oh, by the way, they’re all balding as we go along – so many of us have offset obligations in India, for instance, where the requirements have changed since the time we first incurred those obligations.
What we as a company don’t want to do is just do a bunch of business to satisfy the offset obligation without really reinvesting through that offset obligation into growing our company further. So whereas there’s only so much of an integrated supply chain in all of these countries, that we can go out and really qualify and use as second sources, or hopefully, primary sources at times, we need to look at what can we do to have a meaningful output with significant revenues and profits on a product that’s really something we wanted to manufacture in that country anyhow, or manufacture somewhere around the world.
In a perfect situation, you can set up a co-production facility with a series of products in a particular sector where you actually wanted to go to that geographic region and establish a business, anyhow. And then you get a virtual cycle where you’re building your business and oh, by the way, you’re using these dollars, in your FMS case, so they don’t have to come from your bottom line.
Now, that’s easy to say sitting here in D.C. very comfortably; it’s not so easy to actually do out in the field. So I think truly, this is one of the greatest challenges defense companies that truly want to have a significant international business are facing today, because frankly, no one has cracked the code. And I see a really interesting and wonderful collaboration across industry with people talking about how are we all going to do this and really not holding back, and trying to get smarter.
So I think that this is an area of, you know, some up and coming – you know, early career employees really want to sink their teeth into. It’s a great area to make a name for yourself.
MR. GRUNDMAN: If we were to resign ourselves to a world of offsets, which is probably the future, however –
MS. LORD: Sounds rather dramatic, resign ourselves – OK.
MR. GRUNDMAN: However, a propos of offsets, I wonder, is – if you know, could there be an important aerospace and even defense aspect to the prospect of a trans-Atlantic trade and investment partnership, these trade agreements where maybe, at least, among responsible nations, we could all agree we’re going to do without offsets?
MS. LORD: Sounds like a wonderful world. I haven’t really pondered that –
MR. GRUNDMAN: How about with our trans-Atlantic partners? Maybe that’s not too far to imagine.
MS. LORD: Yeah, I think there would be a lot of receptivity. It’s always a question of how do you lay out the framework, how do you define the constraints, how do you enforce it and so forth. But I think industry is looking for a better way, if you will, because there’s an enormous amount of cost that’s going into just understanding what all these requirements are, tracing the changes that are taking place, translating that back to the team at home, so to speak, and then figuring out what the business cases are, because these are non-trivial business cases to figure out.
So there is an enormous amount of intellectual horsepower going into this right now. And I think from a policy point of view, that’s a great thing for, you know, deep thinkers on the policy front to really ponder, because there would be a lot of receptivity in the industry to think of a different way of doing this.
MR. GRUNDMAN: Right, maybe not the unrealistic prospect of abandoning them, but maybe rules, maybe some regular and regulation of them that they –
MS. LORD: Well, some consistency, at least, by region would be fantastic, because literally, you know, it’s changing all the time. And it’s hard to keep up with it and then communicate it and then really implement it, if you will. Meanwhile, each year, we’re all incurring, you know, these requirements that aren’t always being met. So now, we are, you know, finding ourselves in the penalty box, and it’s going to be interesting as the years go by.
MR. GRUNDMAN: Well, I will – I will simply use this as an occasion to plug the fact that we here at the Atlantic Council – I personally am interested in whether there is an aerospace agenda within the TTIP, the Trans-Atlantic Trade Investment Partnership. So if any of you have ideas or know that it is being worked on, please bring it to my attention.
Zach Fryer-Biggs is the next question I have.
Q: Thanks, yeah, Zach Biggs with Defense News.
You spent a bit of time talking about the FMS process and how it could be faster. I’m curious, with export control reform that we’ve seen over the last year, have you seen any improvement on that front? I know a lot of it is about moving items away from the FMS process, but there’s also the common systems, a number of initiatives that would hopefully improve the process.
MS. LORD: Zach, I haven’t personally seen the intersection of the two; I think it takes a while. Where we think we could make progress very quickly – and I believe senior leaders in each of the services believe this as well and also at a lot of agencies, I think it’s just hard to kind of trickle it down – I believe that there is a huge fear of failure, a fear of risk in the process right now. So when in doubt, everyone just, you know, does 110 percent. And where this really begins to drag the process down, take a lot of time, are in the audits that have to be done. And these are not, you know, one, two-day audits; these are two, three-month audits.
And what can be particularly frustrating – and I know I speak not only for Textron but other industry members – is you can be selling the exact same system to different countries and you get re-audited and turn the clock back while you have your end customer, you know, calling, saying, I want this; I need this. And if you step back and look at the forest versus the trees, what are we trying to do within the U.S.? We are trying to enable our partners around the world to have the security that they can get by buying our products, and yet, we’re inhibiting getting those products.
So I think they’re just very small efficiencies, really small steps we could take that would make an enormous amount of difference.
MR. GRUNDMAN: I’m going to go to Eric Fischer and then Steve Kappes. Eric.
Q: (Off mic.)
MR. GRUNDMAN: Please wait, thank you.
Q: Erich Fischer, Booz & Company. I very much like the – what is a bit of a back-to-the future concept in terms of the re-emergence of the multi-industrials. Of course, as you know, prior to the 1990s, effectively the entire defense industry was supported by – was multi-industrial, and for all the reasons that you state.
How does Textron – how do you align that view with what has been the preponderance of Wall Street’s view, at least over the last 10 years or so, which is effectively to lower the valuation, denigrate the valuation, if you will, of certain multi-industrials, not necessarily Textron, who hold defense positions? What is Textron’s view on that? And do you see Wall Street’s view changing recently and over the next few years?
MS. LORD: I think Textron has no ability whatsoever to predict what Wall Street’s going to do. And we talk about that a lot. And in fact, over lunch a little later on, I was hoping to ask Byron (sp) and a few others their thoughts on that very question. Very hard to predict. I’m not smart enough to have an answer to that one. I wish I did.
MR. GRUNDMAN: Steve Kappes.
Q: Steve Kappes – (off mic). Your hypothesis of commercial best practice is very interesting, but since you won’t want to insult your customer, let me you for it – do it for you. The United States government’s reached a level of dysfunctionality that many of us thought we’d never live long enough to see. There are things that are as bizarre as contracts being cancelled with no notice, requirements for contracts changing almost in a 48-hour period, and people who were primes dropping out completely, things that are beyond the scope of many of us who’ve had a great deal of experience in the federal government.
How do you take your hypothesis and actually get there on the commercial side, so you actually continue to make money in a market? If your numbers – you said 35 percent of your business is international, so 65 percent of your business is still the United States government. How do you actually make it through this period in which the cycles seem to be getting longer and longer in terms of dysfunctional behavior?
MS. LORD: It’s an enormous market. I mean, we’re talking $600 billion. So we have niches where there are – there is dysfunction. I think all industries, all businesses have that. I think we’re in a pretty sporty environment, and I think we have a lot of people working hard to try to sort that through. I think you have to be analytical and really decide where you’re going to play, and make the best decisions you can. You’re always going to have some of these things come out of left field and surprise you. That’s why we have contingency plans in a lot of areas.
MR. GRUNDMAN: Ambassador Courtney and then Jeff Roncka.
Q: Bill Courtney with CSC. You spoke about the advantages of having commercial as well as federal or defense business. How are the – how do you see the attitudes of the defense acquisition community toward this perspective? Do they see this that Textron is bringing significant advantage because it does have more commercial business, let’s say, than some defense companies that don’t? Are they receptive to it? Are they curious about it? Are they curious about what’s happening in the commercial marketplace?
MS. LORD: That’s a great question. I think there’s a mixed response to that. I think in this environment a lot of people have their heads down working very hard, feeling as if they have an enormous amount to get done every day, so they don’t have the luxury, if you will, of pondering the larger strategic issues. So I can’t say that I have entered into dialogue with many about this. However, I think there are people that are perhaps more experienced, having just been around a little while, who would like to see a little opening of the aperture and more ability to take advantage of some of these commercial practices.
So to answer you succinctly, I think it’s a mixed bag.
MR. GRUNDMAN: Does – this is an interesting question. I work with another multi-industrial company that creates a hard divide between their commercial business and their military business because they believe the cultures are different and therefore the people are different and they just can’t cross-fertilize. And I think that is actually more the rule than the exception. You’re describing a more exceptional case at Textron. Do you have systems or other practices by which you make this work, this cross-fertilization?
MS. LORD: Well, first of all, let me say – (inaudible) – we had a painful past.
MR. GRUNDMAN: Sure. OK.
MS. LORD: Because when I came over from the commercial side to the defense side, it was like walking into a different world.
MR. GRUNDMAN: Right. This is the general rule.
MS. LORD: Yeah. It was – it’s sort of we all spoke the same language but we didn’t understand one another. So I think it takes time, but if you go back to basic principles and talk about customers are customers, products are products, and best practices are best practices, and forget all of the hurdles and barriers we might have sometimes with government procurement, and rise above that and think about what’s the right thing to do and apply that as much as possible, you can get there.
We do take people back and forth. Not everyone, you know, finds it to their taste, so to speak. But what’s really fabulous is when you get someone from a commercial company coming in and, if they don’t stay the whole time, at least having a couple of years and then going back to the commercial side, because we’re being fairly, I think, critical here of defense practices, but there are a lot of fabulous things about the defense industry that can be taken back to the commercial side. And we have things go the other way around.
So I think it’s like most things; you’ve got to keep practicing doing it, and you’re going to get a few kind of thought leaders in there, and once you get some momentum and see that there’s life on the other side, we have to be very careful with our talent, to support them when they go into a different environment. It’s just like if you have a weak company and a strong company in the same corporation, one is being very unprofitable at the moment and one’s being very profitable, you don’t want all the people at the profitable company to say, I’m not going over to the unprofitable one because it’s going to kill my career. You’ve got to tell that individual, tough situation, we’re behind you regardless of what happens; as long as you do your job well, we’ll be with you.
I think if you do a little bit more of that, you can make it work.
MR. GRUNDMAN: Sounds like a leadership solution.
Q: Hi. Jeff Roncka from Renaissance. I think all my two questions have been asked and answered in – (inaudible) – but let me –
MR. GRUNDMAN: You can come up with another one.
Q: Let me leave you with one that says – you’ve outlined a model of success during the downturn and the trough that I think is admirable and untested. So are there specific areas of the industrial base and supply, sort of, side where that model lends itself or is more apt to succeed? So some of the examples you’ve given are in aviation and aircraft related, and given who Textron is and its other businesses, it makes sense that there’s a lot of commercial and military synergies. I think we’ve seen this on the automotive side with some of the ramp-up in the MRAP and things. But there are other areas of the industrial base in some ways where it’s harder to do that, whether it’s certain missiles or munitions or sort of harder things.
Are there lessons learned? I mean, do you think your proposition is generalizable across the industry, or is it really sector by sector and that’s how the government should think about it?
MS. LORD: Jeff, it’s nice to see you, It’s been many years. It’s a good question because you can draw analogies between, you know, armored security vehicles and, you know, an SUV. You can draw analogies between a small Cessna aircraft and, you know, a light attack jet. When you talk about a missile, you know, you don’t usually go to the hardware store and buy a missile. But if you kind of step back and look at first principles, you say, what are the challenges you have there?
It’s like any assembly. You want to have the fewest parts; you want to make sure that it’s designed for the functional purpose that it is supposed to perform; you want to make sure you can manufacture that the same way every time; you want it to be the lightest weight; you know, on and on and on. So I think what you have to do is extrapolate what are the similarities. So I think that you can apply that to just about anything in the defense industry. Sometimes you just have to step back and think a little harder about how you take a lesson from one to the other.
MR. GRUNDMAN: I see no other hands, and so I’m going to begin to draw our hour to a close. Before I give Ellen the last word, I want to say a couple things. First of all, thank you to all of you for coming. Thanks very much. Your questions and your energy and your attendance is absolutely essential to the success of this series.
Point two, the next event in this series is on the 14th of February, same time, same station, with Dave Zolet, who is the head of CSC’s – I think it’s called North American Public Sector Business, a big, kind of $6 billion business within Computer Sciences Corporation. He will be here on the 14th of February, and I would welcome all of you to come back.
And then, of course, not least, I want to thank you, Ellen, very much for coming, and through you to the whole of Textron, whose team has been very helpful in facilitating this and whose support of the Atlantic Council is now longstanding and, as Fred said, also much appreciated.
So, my having said those things, I want to give you the last word.
MS. LORD: all right. All right.
MR. GRUNDMAN: And then we’ll adjourn.
MS. LORD: OK. Well, thank you, Steve. Thank you to the whole Atlantic Council. I think it’s a great showing today you have.
This is a great opportunity for me, as a representative of industry, to really come to the intersection of industry and policy. I don’t often have the luxury, if you will, of thinking about how policy affects what we do. So I think this is really an important forum. I think it’s thought-provoking. And I appreciate the opportunity and hope that the dialogue continues. And I hope you all think about multi-industry companies and how they can help our national industrial base.
MR. GRUNDMAN: Thanks, Ellen. Thanks very much. (Applause.)