The workforce crisis that the Defense Department predicts it will
confront in 2007–as a result of a tidal wave of retirements–surely
will hit the defense industry too. This has been widely acknowledged
by both government and industry leaders, but it remains to be seen
how successful they will be in tackling the problem.
A Pentagon task force called "Acquisition 2005" plans
to spend the next several years trying to revamp outdated regulations
and trying to convince Congress that some laws need to be changed
in order to attract new workers into the Defense Department’s
acquisition career field.
Defense contractors, which typically recruit many senior managers
and scientists from the government, have endorsed the findings of
the task force. But these companies also realize that they need
to take action soon, to preempt a shortage of skilled workers.
The much-publicized Defense Science Board report on the health
of the industrial base summarized the problem: "Key personnel
are leaving or retiring, and recruitment and retention of high quality
technical and management people is very difficult."
The reality is that defense companies are competing for both human
and financial resources with "new economy" companies,
despite the turmoil experienced in recent months by the dot-com
industries. "The technical and management skills critical to
defense also are key for new economy companies, which was not true
in the past," said the Defense Science Board report.
Some sobering statistics emerged from the study, which began in
the fall of 1999, and was released publicly in November 2000.
The bottom line for industry executives is that skilled workers
can give a company a competitive advantage not only to attract customers
but also investors. "We consider the workforce the most important
thing we have," said Frank Marchilena, president of Raytheon
Command, Control, Communications and Information Systems. During
a recent briefing to reporters in Washington, D.C., Marchilena explained
that one of his company’s "strategic initiatives"
will be to "energize, motivate and reward our workforce."
Aerospace industry analyst Pierre A. Chao put it bluntly: "Demographics
are going to provide companies a competitive edge." He noted
that European defense and aerospace firms, for example, have "more
young people in management." That could translate into lost
business for American firms, Chao suggested, given the perception
that companies are more likely to thrive under younger management.
Chao is managing director of global aerospace and defense at Credit
Suisse First Boston.
He noted that not only do companies have to find new workers, but
they also have to figure out how to transition the knowledge accumulated
by retiring employees. One way to prevent losing that knowledge,
said Chao, is to "archive" the expertise of key workers
before they retire.
Among the Defense Science Board recommendations for "immediate
action" is for the Pentagon to support industry efforts to
attract and retain high-quality management and technical personnel,
by revising federal acquisition guidelines that limit how much of
their employees’ compensation companies can claim under government
contracts. The Defense Department, the panel wrote, also should
"increase spending on research and development in areas designed
to stimulate innovation in defense technology and attract/retain
top technical talent."
During a breakfast with reporters last month, the recently-retired
Pentagon acquisition chief, Jacques S. Gansler, said there are "real
problems with scientists and engineers" in the industry. He
said the Pentagon plans to relax some of the regulations that limit
how much of a worker’s compensation package the Defense Department
can reimburse contractors. "We are proposing allowing bonuses
as allowable expenses," Gansler said.
To assist in attracting high-tech workers, the Defense Department
also should "develop a marketing plan to highlight innovative
research and development being performed within the defense community,"
recommended the Defense Science Board. That marketing plan would
be targeted to young people in schools and colleges.
The importance of having an outreach strategy to entice young professionals
to the defense arena cannot be overemphasized, said Chao. From Wall
Street’s viewpoint, he said, the defense sector is a "storehouse
He believes defense companies can be successful at attracting both
workers and investors by creating commercial spin-offs or partnering
with commercial companies. They also should provide employees with
"stakes" in those ventures.
Several companies already have begun doing this. Chao cited TRW
as a example of a large defense firm that has been successful in
establishing joint, profitable ventures with high-tech commercial
Marchilena also stressed that Raytheon is stepping up efforts to
"set up separate companies" for selected products that
have commercial marketability. By establishing a commercial subsidiary,
a defense firm is able to sidestep the regulations that limit how
much it can pay engineers, for example. Most recently, the company
set up a commercial outfit to market a computer network security
software product called "SilentRunner." Last year, the
firm spun off its electronic-commerce Web portal MyAircraft.com,
a trading exchange for the commercial aerospace industry.
Despite negative perceptions on Wall Street about the defense industry,
Chao said, "I am bullish about the sector." One reason
for his optimism is that "government-business relations haven’t
been better in 40-50 years." Both industry executives and the
shareholders should be encouraged by the fact that, at the Pentagon,
"they are talking about the health of the industry."