Lockheed Martin's Augustine Looks Ahead

Norman Augustine Lockheed Martin photo

Lockheed Martin's Augustine Looks Ahead

Norman Augustine, Lockheed Martin Corp.'s outgoing chief executive, says applying emerging technologies to new markets is the greatest challenge facing his company and its domestic rivals.

Augustine, who retires Aug. 1, will likely be remembered for not only prophesizing the consolidation of the U.S. defense industry but actually fulfilling that prophesy. Along the way, he transformed much of the information technology business.

During his decade-long reign as the leader of what is now the nation's largest government contractor, he pulled together more than 20 companies to establish what will be a $37 billion conglomerate when the Northrop Grumman acquisition is approved by regulators. Completion of the deal is expected by the end of the year.

Augustine will be staying on as chairman, but will spend most of his time teaching an engineering, management and policy course at Princeton University and pursuing a myriad of hobbies, including hiking, writing and maybe even going to the North Pole.

Augustine spoke with WT staff writer Nick Wakeman about the company's future prospects and the direction of the industry.

WT: How will Lockheed Martin's planned buy of Northrop Grumman Corp. affect its ability to keep up with the market?

Augustine: Size has significant advantages in terms of staying power, market presence, depth and breadth of technology and financial strength.

But size also can cause you to not be nimble and not be quick. We have tried to derive the benefits of size at the same time as we have developed the benefits of speed.

Whenever we pursue a specific objective, we pull together a team to chase it. That team brings along only those parts of Lockheed Martin that it needs to reach that objective.

We call that a virtual company within a company. Each of those companies has the great advantage that it can draw a particular expertise from the rest of Lockheed Martin.

Northrop Grumman happens to fit us very well in terms of their manufacturing skills and their technologies. Northrop Grumman gives us a bit of an entry to the commercial aircraft business, which is a huge business.

We have no desire to pursue [commercial aircraft] as a prime contractor but Northrop Grumman is a world-class supplier of commercial aircraft components. We would like to continue and hopefully enhance their reputation.

WT: What is the biggest challenge facing your replacement?

Augustine: One of his major challenges will be to take all this technology we have and apply it to new markets. That has to be done with great care because the record for our industry doing that is not very good.

One reason industry [has not been good at this] is that this industry has been technology driven, whereas the commercial world to a considerable degree is market driven.

When we wanted to expand, the tendency in this industry has been to go to the engineers and say, "What can you build?" Whereas commercial companies tend to go to the consumer and say, "What do you need?"

That may not sound very profound, but it would have saved a lot of companies in this business billions of dollars if they had followed that model.

WT: Is consolidation in the defense industry finally over? Do you see consolidation in the civilian market?

Augustine: There is still some consolidation left for the U.S. defense market, [mostly] a few smaller companies that have to set their course for the long term. Many of the suppliers need to consider consolidation. [And] there are pieces of the industry such as shipbuilding and rotary wing aircraft that have yet to take the steps they must take.

And of course there is international consolidation. So there is still work to be done, but in terms of the domestic market for major companies, that is over.

The driving force for consolidation is different [in the civilian market]. In defense, there was this sudden precipitous event, mainly the Berlin Wall fell down, that created a huge pressure.

Whereas in the civilian marketplace, the pressure tends to be less digital and more analog. There is a gradual increase brought about by some change in the marketplace or technology. Just as we have in most businesses today, we are moving in a direction of a couple major competitors.

WT: Government unions have opposed outsourcing. What can industry do to get the unions and government workers to support outsourcing?

Augustine: The first thing one has to decide is if you believe in the free enterprise system or not. If one believes in socialism then one should not outsource. If we really believe the government can perform some of these functions better, then we should shut down industry and move everything into the government.

But every country I've traveled to with the exception of two has arrived at just the opposite conclusion - that the free enterprise system does work. That being the case, our government should give it the opportunity to work.

Having said that, there are some functions that can only be performed by governments and we should be very sensitive to that fact.

WT: What is the future of risk sharing on projects between contractors and the government?

Augustine: Risk sharing requires a great deal of responsibility on the part of the government and on the part of the contractors. [The responsibility] is particularly demanding of the government. The government has the power to set the rules, interpret the rules and enforce the rules.

Industry, particularly large corporations, can take virtually whatever risk the government wishes it to take. But the government has to understand that the rewards have to be commensurate with the risk.

People tend to forget that government suppliers must compete for the same shareholders and borrow money from the same banks as Pepsi Cola and Ford Motor Co. As a consequence, we must have a risk-reward structure that matches those companies.

WT: With fewer primes, how can you ensure that there will be competition for federal contracts? And does a company the size of Lockheed Martin squeeze out independent subcontractors?

Augustine: In the best of all possible worlds, one would like to have a large number of very strong competitors. But that is not an option available to us with today's defense budget.

Clearly, one never wants to get to where there were less than two competitors. But as long as there are two strong competitors, one gets almost as much benefit as if there were a much larger number of strong competitors.

Regarding suppliers, Lockheed Martin does about 50 percent of its business with suppliers. That's been true for years, and it's true today. We don't anticipate changing that.

It is not something we necessarily do out of a gratuitous spirit. We do it because it is good business. To be a good systems supplier you must have the best components. We want the best components wherever we can get them.

WT: What kind of role will you play in the high-tech community around Washington?

Augustine: For the foreseeable future, my predominant focus will be on being a good teacher. And on helping Vance Coffman in any way I can help. Which in many cases will mean staying out of the way. Beyond that, I expect to play a much smaller role in the high-tech industry in this area just because of the demands of my teaching.

I want to have time for the hobbies I've had to abandon in recent years. There are several books I want to write. I want to do a lot of traveling. I've been to the South Pole, but not quite to the North Pole so I want to take another shot at that. I could be busy for the next 20 years if I don't get any other ideas.