A Commanding Pentagon Role for Two Corporate Execs

Bush is set to name two defense-industry honchos to head the Navy and Air Force. Their ideas about competition could shake things up

President Bush is ready to nominate a pair of reform-minded defense-company executives to head the Navy and Air Force, BusinessWeek Online has learned. Gordon England, a vice-president at General Dynamics, will be named Navy Secretary, and James Roche, a top Northrop Grumman official, will be his Air Force counterpart. Their appointments -- expected any day now -- would signal that civilian leaders will have more clout over the brass in the Bush Administration than they did in the Clinton Administration. Both will require Senate confirmation.

England burnished his reputation overseeing the Forth Worth plant that builds F-16 fighters. General Dynamics sold the plant to Lockheed Martin in the mid-90s. While running the plant for both companies, England managed to cut the price of the fighters as well as the costs of building them even as production volume dropped -- an unusual achievement in the defense industry.

Roche, a conservative Democrat, has a reputation as an innovator and wily bureaucratic infighter. Both men are likely to push for a variety of changes at the Pentagon and in industry. They're expected to look for new ways to bolster the defense-industrial base.


  Among the possibilities: redefining what competition means. Right now, the Navy has two shipyards making the same weapons, such as a destroyer or aircraft carrier, to preserve the fiction of competition. But in fact, contracts often are split 50-50 in the consolidated defense business, and without a winner-take-all approach, it's not real competition. The system forces the contractors to keep production going at uneconomical volumes. Companies can't maintain decent profit margins, and the Pentagon foots the bill for unnecessary and duplicative infrastructure. Everybody loses.

What the Pentagon might do in the future is define competition by the mission to be performed. Let's say that a bomber could perform the same mission as an aircraft carrier. The maker of the bomber, rather than another shipyard, would be the competition for the company that builds a carrier. Ship construction could be more economical if confined to one yard, the Navy could eliminate unneeded overhead, and there could be real competition, reformers often claim. Roche and England are expected to advocate allowing defense contractors to operate more like commercial companies. In the commercial world, a buyer cares about price and quality but not the supplier's cost. If the seller gives the best value but has high margins, it's no big deal. Not so in the defense world. To avoid the political firestorm from "profiteering," which often means normal commercial profit margins, the Pentagon keeps an eye on quality, price, and costs. That keeps margins small, and with big contracts dwindling, defense companies can't make it up on volume.


  A new focus on price would encourage defense contractors to be more efficient, the theory goes, because they could get the benefits from cutting costs -- right down to closing inefficient production plants. Their improved health would boost research and keep U.S. military technology on the cutting edge.

Such a redirection would require a seismic shift on Capitol Hill, within the Pentagon's auditing shops, and among contractors -- and may well spark political and bureaucratic resistance. But both England and Roche like to shake things up. And they have the backing of Defense Secretary Donald Rumsfeld. If they haul out the reformers' heavy artillery, everyone at the Pentagon better duck.

By Stan Crock in Washington

Edited by Douglas Harbrecht

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