On Wednesday, October 11, 2006, Northrop Grumman President and Chief Financial Officer Wes Bush spoke at the Strategic Space and Defense 2006 Conference in Omaha, Nebraska. Below are his remarks.

An Industry Perspective

This is a tremendous conference, and it is great to be here with all of you to focus on our vital strategic space and defense missions.

I am honored to be able to provide an industry perspective today, and I hope that as I offer some thoughts for your consideration you take these views as representative of the thinking of a broad cross section of the industry side of the national security team – not just the views originating from any one company.

The perspective I would offer today centers around an essential question – how do we best define the partnership between industry and government to accomplish the rapidly changing mission before us? While that may seem a somewhat academic question, given the highly defined nature of the way this relationship works today, I feel that it is an appropriate question precisely because the rules of the road are presently so highly defined.

And what better place to ask the question, than here in the midst of STRATCOM – an organization that is leading the way in fundamentally redefining a broad set of missions and relationships throughout the defense community?

Let me be clear about the genesis of the question itself. With the advent of the cold war, there were some well articulated needs, founded in clear and concise foreign policy objectives, that drove the development of the defense industry in some new directions. This development derived from a clear understanding of national defense needs – examples were the ability to know what the Soviet Union was doing, and the ability to assure that no attack on the US could succeed without the assured destruction of the attacker.

Clear mission objectives led to enterprise structures in both government and industry to accomplish the objectives. Dramatic advances in technology were required, and the nation needed to develop and harness as much technical talent as possible.

Industry took up that role, and the capital markets supported the defense companies with robust investments. Talent flooded into the defense community, and the national imperatives shaped the career values of an entire generation. Government organizations formed around the fundamental missions, and the partnership created between government and industry succeeded in delivering what was needed.

It certainly did not come cheaply, but it worked, and most would agree that this partnership not only played a critical role in ending the cold war, but it also created much of the technology fuel that drove the innovation underlying the nation’s long term economic growth. It was truly an amazing success story.

But like many success stories, success itself led to a change in the very environment that created the need for this partnership. In the years just after the cold war ended, the mission objectives were not so clear. Not only did much talent depart the industry and government, but it became difficult to attract new talent, as the alternatives in biotech, telecommunications, and information technology provided other ways to help advance the human condition. Investment in advanced capabilities declined, and innovation languished.

The capital markets began to drive the defense industry to focus more on “return on capital” than on growth and innovation. In fact, the stocks of the large primes came to be seen as another form of regulated utility, although with lower returns and greater volatility than most utilities. The government-industry relationship also migrated to one based more on cost and risk containment than on innovation.

As the turn of the century neared, the recognition of a new set of threats began to take hold – slowly at first, then accelerated at warp speed when our country was attacked. Quickly, the nation’s leadership understood that our force structures and our system capabilities, while offering much flexibility in addressing the new challenges, needed to be transformed. New force structure concepts emerged, and new system capabilities were pursued.

The idea of transformation seemed to permeate everything that the defense community addressed – with one notable exception. The model of the government-industry relationship that was put in place in the early '90s was essentially untouched. And so it remains today.

Now the natural question to ask is – so what? Why can’t we trust fundamental economic market forces to evolve the buyer-seller relationship as the needs evolve?

Perhaps we will be lucky, and things might work out that way. I think we would be foolish to assume that outcome, however – this partnership has never been just an economic relationship, and we have far too much at stake to let it become aligned solely around such market forces.

To get a bit more focus on the central question of the nature of the relationship, let me pose one thought – if the relationship is working as well as we need it to work, why aren’t we, together as the government-industry team, being more successful at getting new capabilities into the hands of the warfighter at the same speed with which innovation was demonstrated throughout the cold war?

We can all identify a lot of reasons, and we don’t need yet another study on acquisition reform to help us identify the problems – in fact one more study would probably do more to delay progress than just about anything I can imagine. The list of issues seems long and it can be overwhelming.

But allowing the problems to overwhelm us is not a path to success. I would suggest that we need to drive change in the way this relationship works, based on a set of common improvement objectives, with the same vigor and focus that we see in the changes being driven at STRATCOM.

I certainly don’t have the answer on how to fix this at the tip of my tongue – it would make a far more interesting speech today if I did! But I do think there are some key issues that merit illumination, and I suspect that addressing these types of issues is key to launching some new dialogue around the nature of the relationship. Let me address three of these issues today.

The first is the appropriate balance between innovation and risk. Transformation has to mean the introduction of dramatically different capabilities and technologies today, just as new capabilities and technologies were needed in the cold war. This can not happen in a risk-adverse environment where careers are lost when programs encounter risk-induced cost and schedule growth.

I’m not saying that risk should not be understood, or that it should not be managed. Risk management is a critical program management capability, needed in both government and in industry. I think the “Back To Basics” approach can do a lot to help rebuild this discipline.

But I would argue that our present value system has the needle set too far over on risk containment and not far enough in the direction of risk tolerance -- and this environment leads to a set of relationships between industry and government that is largely based on risk containment. Long term sustainable technological advantage will not derive from a relationship that is primarily based on risk containment. And the innovators will not be attracted to work with us – they will go to other domains where the needle is set in a different place.

A good example of our emphasis on risk containment is highlighted by the debates we are having on how to create new programs like TSAT, Space Radar and the Space Based Surveillance System. I’ll be the first to admit that the recapitalization efforts in space of the last five years have been plagued with more problems than any of us would have projected, and that we need to restore the credibility of the space community as trusted stewards of the taxpayers’ investments.

But I submit it is a strategic error to conclude that technology advancement in the space programs is the root cause of the problems. That conclusion, though, seems to permeate much of the debate about the strategies for the new systems.

With the right form of tightly interwoven partnership, amazing advances can be made and delivered in cost and schedule envelopes that represent tremendous value. Most of the companies represented here today can point to their own examples of this type of outcome in recent years.

I’ll describe one Northrop Grumman example to illustrate the point. In the late 90s under an NRO contract, our company worked with the Aerospace Corporation, two industry partners and MIT’s Lincoln Lab to create a lightweight geosynchronous satellite. This 635 kilogram spacecraft, called GeoLITE, was designed to test laser communications technologies and also to serve as an operational telecommunications satellite for the NRO. By combining a program culture of innovation and being willing to take on substantial process improvements, we were able to design, test and deliver the satellite in just over three years.

GeoLITE was launched in May 2001 on an expected nine year mission. The satellite has a modular bus design that provides flexible capability for a variety of applications, including geostationary communications, weather observation and exploration. The bus is built of lightweight composite materials that allow for increased instrument weight and reduced launch costs. The system has been a real success.

I can’t emphasize enough how important a particular program culture turns out to be in achieving this type of success. It’s not about creating lots of new acquisition policies and procedures – it’s about the way the government-industry team gets the job done together. There are several essential ingredients:

  • strong program and technical teams that understand and are committed to the user’s mission
  • constant give and take among co-located government, industry and, in many cases, university team members, and
  • an aura of urgency anchored in a common commitment to a fixed schedule.

What our government-industry partnership needs to disavow, I believe, is the view that advancing the technology envelope is what causes problems in satellite programs. Quite frankly, I believe the reverse can be true – technology often holds the solutions.

Our military advantage today has a lot to do with technology advantage – and we will not retain that advantage over the long term if risk containment dominates our decision space.

The second issue I will touch on is the need for recognizing the international nature of the government-industry partnership. Most defense missions today take on an international alliance form of implementation. The same should be true of defense acquisition strategies: we need to recognize that not all the best technologies and capabilities needed for international security will derive from within the boundaries of the U.S. We need a government-industry partnership model that values and enables the cross border interactions that will lead to the best solutions for our security.

About a decade ago, in 1997, U.S. Defense Under Secretary Robert Davis gave a speech discussing the greater need for international military space cooperation in a post Cold War era characterized by new threats, missions and alliances. He stated that the United States would be pursuing greater levels of international partnership and cooperation in defense space activities. He concluded with the assurance (and I quote): “the prospects for international defense space cooperation are excellent.”

The reality of the last decade has certainly not been true to that forecast.

One of the biggest obstacles has surely been the U.S. State Department’s administration of export policy as part of ITAR, the International Traffic in Arms Regulations. In the time since satellites of all types went back on State’s munitions list in 1999, America’s share of the commercial spacecraft market has declined from 83 to 50 percent. While export regulations didn’t cause all this change, they did play a significant role in it.

Many international customers simply give up on U.S. satellite deals to avoid the risk of being able to get through the red tape involved in dealing with ITAR. In fact, one of the European companies decided to invest in a satellite design that specifically avoids the inclusion of any ITAR regulated components - it now successfully advertises its satellites as ITAR-free. It was a pretty clever response to the opportunity, I must admit.

I focused a bit on ITAR because it’s hard to see how we can even get out of the starting blocks without some reform of this restrictive policy. We do need to achieve the all-important goal of keeping military technology out of the hands of adversaries. But we must do this with rules that also enable us to collaborate with our allies in joint development relationships, joint economic ventures and bilateral and multilateral programs. Our government-industry partnership must work together to drive new policy directions that will facilitate such endeavors.

U.S. export policy ought to be geared to the profoundly different environment of the post Cold War world: today the issue is not protecting technology from the one other nation capable of challenging us; it is collaborating in technology projects with many allies who can help us advance our security capabilities, stretch defense budgets and improve interoperability with coalition forces.

The lost innovation resulting from our failure to form international partnerships in defense emerges clearly when we consider the breathtaking technology feats chalked up by international partnerships in civil space.

Consider some of these feats: The James Webb Space Telescope, with seven times the light-gathering ability of the Hubble, will look back much farther in time – providing a window into a period when the universe was only a few hundred million years old. In this project, we are relying on European partners for two of the four instruments as well as the launch.

The Cassini Huygens mission, launched in 1997 and now orbiting Saturn for a four year period, will make an extensive survey of the ringed planet and its moons. The associated Huygens probe landed on Titan, Saturn’s largest moon, the first landing in the outer Solar System. The Cassini mission is a joint effort of NASA, European Space Agency and Italian Space Agency. The mission is managed for NASA by JPL. Partners include the U.S. Air Force, Department of Energy, and academic and industrial participation from 19 countries.

Our government-industry partnership must find a way to harness this remarkable creativity that is being generated in other nations. We in the American defense industry community are ready for international cooperation – we see the value of it for the U.S. But to move forward, we need some substantial policy changes -- and it will require a close partnership between government and industry to effect these changes.

Let me turn now to a third issue - the human capital crisis in defense.

Government and industry managers both find it increasingly difficult to staff our organizations with the skilled people we need to develop systems for military missions.

The problem has two aspects. In the post-Cold War defense consolidation, we lost many experienced people. As a result, across the industry, we have a population gap in our ranks between the ages of about 38 to 52.

At the same time, the defense industry is having difficulty recruiting enough new hires to meet our requirements. While aerospace hiring is now more competitive against that of the other disciplines, we’re finding that the overall supply of talent is insufficient. One factor is the nation’s inability to graduate enough qualified engineers.

It is likely that both of our problems, the population gap and shortage of new hires, will have more serious impacts soon, because 27 percent of the aerospace workforce is eligible to retire by 2008. In some key skill sets, about half of the workforce will be retirement eligible in five years.

I think this issue is well understood, and we’re all working hard to build additional strength in a broad range of critical competencies.

Already, there is much we are doing together to increase the supply of new hires by working with the nation’s educational system so that it produces more engineers and the other specialists we need. I would not say we are yet doing enough, but our government-industry partnership today is working hard to develop a pipeline:

  • We are working to improve K-12 education in math and science, and also give teachers experiences that will allow them to bring the excitement of science and engineering into the classroom. I think the work being done by the Space Foundation is setting a great standard in this area.
  • We are working with university engineering and business schools to provide counsel about curriculum, and opportunities for cooperative working assignments that help us graduate more engineers and program managers.
  • There are also useful policy initiatives being pursued: tax incentives for investment in engineering education; lower student loan interest rates for those entering university engineering or technical programs.

So if we are doing all of this, what is the big worry? There are two things I would point out that concern me – and concern me greatly. First, these initiatives take a long term commitment and energy to really make an impact, and it has just been in the last few years that the efforts have really began to catch hold.

Second, and this is really a big concern – we may succeed in generating more scientists and engineers, and still have a problem staffing the needs of the future in the defense enterprise if the best talent chooses to go elsewhere. It is not enough to create the supply – they have to want to commit their careers here. So what will it take to make that happen?

Certainly, many will commit to our government-industry defense enterprise because they feel that deep commitment to our mission. But for many young people, this commitment builds only after they have the opportunity to see what we really do, and how important it is – we have to get them in the door to spark that part of their thought process.

There is a simple rule that applies here, and I’m sure it will strike home for many of you here today – technology attracts talent. It is that simple. The rate of change and innovation in any domain can be correlated with the intellectual capacity being applied – and the more talent that arrives, the faster the change cycle that results. Domains where innovation declines see talent departing - and not entering.

We need to carefully understand this close link between the culture we establish when it comes to innovation and the ability to attract the talent we will need for the future. This is key to our national security agenda, and should be a central topic as we explore the appropriate government-industry relationship to support transformation.

You will observe that the three issues I’ve discussed today have a common thread – innovation. Innovation must be valued in creating and acquiring our products; must be harvested from international cooperation; and must be generated by a talented workforce. It has long been a key strength of our partnership – and it will prove even more useful as we address our 21st century challenges of uncertainty and change.

We obviously have much to do here, and it is going to be a work of decades. But we must succeed: for only by preserving our advantage in technical innovation can we sustain our nation’s military, industrial and economic leadership.

So back to the basic question – how do we best define the government-industry partnership in a rapidly changing environment? Like many things, I do think it comes down to leadership. We need to jointly define the key issues – I’ve given just a small sampling – and together lay out a framework that makes sense.

It likely requires changes in policies, and perhaps even laws. Industry alone can not, and should not, try to make it happen. Government alone would fail as well. It takes both, together as partners, redefining the way that we move forward to create a new future. There are no better places to start this dialogue than gatherings such as this, and I would hope that we increasingly see an open discussion of the government-industry relationship as a key part of our collective agenda.

Thanks for the opportunity to speak with all of you today.