By all accounts, the Halliburton (HAL ) subsidiary Kellogg Brown & Root has few equals as a provider of logistics support to the U.S. military. Even so, KBR is dogged by controversy over its close ties to the Bush Administration (Vice-President Dick Cheney spent five years as Halliburton's CEO) and concerns that the military is becoming too dependent on civilian contractors. In late June, BusinessWeek Senior Writer Anthony Bianco and Dallas Correspondent Stephanie Anderson Forest sat down for wide-ranging interviews with David J. Lesar, Halliburton's chairman and CEO, and Robert "Randy" Harl, KBR's chairman and CEO. Here are edited excerpts:
David J. Lesar
Q: There are questions about the economics of military outsourcing, whether in fact it does save the taxpayer money. Are you convinced that it does?
A:The military wouldn't keep coming back to KBR and other companies in this industry if they weren't convinced that from an overall standpoint that it was a more effective way to accomplish their mission. It's hard for me to say what the true apples-to-apples economic comparison would be because I think it's impossible to quite understand what the cost within the military was before they went to outsourcing.
Q: How does the growth potential of KBR's military support business compare with that of Halliburton's other lines of business?
A:The bread and butter for the company now and in the future is going to be related to the energy sector. The government-services sectors is one that we are very good at and have a lot of experience in. Therefore, as the trend continues to move toward outsourcing of what has been traditionally done by the military, clearly it's an area that we will continue to look at and an area that we think we can compete effectively in.
In terms of comparing it back to the energy business, at a time like this when there is an action around the world like Iraq or five years ago in Bosnia, obviously that business grows faster than your energy business does. But it really is a hit-or-miss business, and you don't want to build a business plan around the U.S. military being deployed in various places around the world because that's unpredictable.
Q: Do you expect Iraq to account for an increasing share of Halliburton's revenues and operating income over the next five years?
A:The reserves are there, so that means eventually the business will be there. Anybody's guess is as good as mine as to when that will be. But the reality is that oil and gas is there, so that means that the need for Halliburton's traditional kind of services is going exist there at some point in time.
Clearly, we want to build up a market presence there. But the building up of that market presence is not something that we can drive. We have to react to whoever is spending money there, be it the national oil company or international oil company partners, if that's the direction they chose to go.
Q: Do have any idea when the opportunity might really start to open up in Iraq? Will it be this year?
A:I think it's a multiple-year scenario. I don't see that there is going to be an establishment of the kind of legal regime or ownership regime or tax regime that are necessary to attract sufficient or large amounts of international capital into Iraq.
Almost every customer I talk to is interested in it. They have their eye on the country in terms of wanting to partner in whatever way the country ultimately goes. But I think you're looking at many, many years before there's any significant level of capital spent on the Iraqi oil fields.
Q: Given your view of the unpredictability of the military business, how do you build it into your corporate budget?
A:In our earnings forecasts, in our look-forwards, we tend to talk only about what we have in backlog at that time and not to try to speculate when you might get an event that would spike your revenues one way or the other. If you focus basically on what you have in backlog, that's generally a pretty good one-year look-forward at what the business could become.
In dealing with the public markets, that's really all we try to talk about. What is the backlog? How much of that backlog is funded? How much is unfunded? And some estimate as to how fast that would get spent. The rest of it we try to dampen down any speculation someone might have as to the impact it would have on earnings.
Q: Why does KBR hire mostly ex-military officers for the military business?
A:Mainly because they understand the customer, they understand the chain of command. What the government is looking for is a contractor that knows how to work with their customer. We feel that retired military officers know how to work with the Defense Dept. as a customer.
If you look at where we recruit in the U.S., we typically try to recruit out of areas with large military populations in them. You do have a lot of people who either know how the military operates or have a predisposition to be supportive of how the military operates. When we do our newspaper advertising, or however we recruit people, we tend to look around the U.S. where there are military bases and hire specifically, but not exclusively, from those cities.
And then, of course, when you need a specific kind of worker, like the truck drivers we deployed into Iraq, we basically just advertise all the way through the U.S. for truck drivers.
Q: Are you also able to lure officers away from active duty by offering higher pay?
A:No, there's enough retired military out there. You really have to be careful. There are lots of rules and regulations, if you're a retired military officer, about who you can work for and how long. We've got to follow all those rules that apply to everybody who's in the military-contracting business.
But what you find is a lot of people that have over the years of their active military duties seen the kind of work we do in the Balkans, in Somalia, in Haiti, in Rwanda -- you can go right down the list. They have interfaced with the KBR people with respect to what they've seen us do, and when they retire they do express an interest in, "Hey, if you ever get a deployment in this particular area, or you need this particular resource, I would like to think about coming to work for you."
Q: Does it help KBR's military business that a former CEO of Halliburton now sits in the White House?
A:My guess is that it has no impact on our ability to get a specific contract. As an added editorial comment, the government-procurement process and that within the Defense Dept. is as open and transparent as it is anywhere else. You cannot have any individual direct a company to get a piece of work. You have to go out and qualify, you have to bid it correctly, you have to answer lots of clarifications. The process by which it is awarded is fair, and I think it is very transparent.
Robert "Randy" Harl
Q: In the Balkans, KBR operated on a scale that seemed to be a step up from previous military operations, correct?
A:It was a step up in scale from what the government had ever done before with private contractors with this type of contract. In terms of scale for the company, it's not a step up. If you took a look at a large facility that we might build in a very remote place in Nigeria, in Malaysia, in Indonesia, where there might be 10,000 to 15,000 workers working on that project, and we're out there managing that.
The logistics are difficult. Getting all of the people that you need to the right place at the right time to deliver the right quality of work from a technical standpoint, to deal with it -- that's what we do well. Our core competency is going places that are hard, compared to the norm in the world, and performing something that is quite large and complex.
Q: But isn't doing these things in the middle of an armed conflict especially difficult?
A:Sure, it is. From a force-protection standpoint, you have to be concerned. But remember that while we are close to the where the hostilities are, for the most part we are not out in front of it.
The military has always done a very good job of protecting us from the hostilities and providing us an environment where we can do our work, where it is safe for our people to be there. So while you're very close and you're there first, for the most part that's not the biggest challenge. The biggest challenge is the same ones we face everywhere: getting the right stuff in the right quantities at the right time to where it needs to be.
Q: KBR covers a lot of ground geographically. Are there competitors you see all the time, or are you basically a one-of-a-kind company?
A:I wish we were a one-of-a-kind company. But no matter what we do, we find a number of competitors that are always there to challenge you for any contract. Depending on what business you are talking about, we find different contractors that are our competition. They range from companies doing aerospace business through people that are on the small end that provides some of the services. You have everything from big diversified companies to specialty small companies. We end up bidding against those guys in different kinds of contracts.
Q: Do you think the trend of increased outsourcing by the Pentagon is inexorable, or are there factors that might halt or even reverse it?
A:As long as you have companies that can get the right competencies to bear, the right management, I think it's a trend that will continue. In the private sector, the outsourcing of these kinds of services from companies of all kinds has been very successful.
If you look at the life of any kind of business, in the beginning they tend to do everything themselves with their own employees. As competition increases, businesses start to look for ways to decrease their costs. The kinds of things we do for the military are the same things we do for international oil companies and power companies and paper companies and all kinds of business. They basically are just done more effectively by a service-sector employee than a company employee.
Q: Are there places that are just too dangerous for the company to operate in?
A:Absolutely. There's places like Algeria, for example -- a great deal of the cost of doing business there is security. We as a company have operated in Algeria very successfully for a long time, since the early 1990s.
But we sometimes run into comments from our customers that maybe you don't need to do that. Brand X over here is not doing that for their people. Our response to that is, that's fine. But as long as we're going to be here, we assess the threat as X, and in view of that, this is what it takes. That's part of our cost of doing business. I heard complaints while I was in Kuwait last week from some of our employees that wanted to go out on the economy. The answer to that is, "No, you can't do that."
Q: On the economy?
A:To be free to go on the street and do whatever they want to do in their free time. The response to that is, "You can't do that as long as you work for us." We believe that the threat level is too great, so it's just not going to be possible for you to do that. If that changes, we will evaluate that, and only then would we take a decision to do something differently. But we are going to control that situation.
Q: When Dick Cheney was CEO of Halliburton you were running military contracting for KBR. To what extent was Cheney, a former Defense Secretary, involved in the company's dealings with the military?
A:I saw how much he could help us -- I thought. But he never would. Now we're getting credit for all the stuff he did for us, and he didn't do anything. He couldn't. That man has such high integrity when it comes to dealing with professional military officers and the government in general. He gets a lot of credit for that now, but I can tell you that he wouldn't go to an installation with me, he didn't make a sales call, I mean, he wouldn't go near the Pentagon. He was just very, very careful not to do that.
Now the criticism we get for the help that we got -- we had to win those contracts on our own merit. They were hard work. Our people did a great job in securing that work, and Dick had nothing to do with it. Of course, he's highly revered by the military. But the government-procurement process just doesn't allow that kind of influence. The government does so much to level the playing field and make that kind of influence impossible.