The New Mission: Are defense mergers good for the industry?

By RALPH VARTABEDIAN

April 6, 1997 12 AM PT

TIMES STAFF WRITER

BALTIMORE —

The 90,000 deadbeat dads in this depressed city of 700,000 are being stalked by a tough new enforcement group, located in a converted department store that is packed with sophisticated computer gear and software systems.

Unlike thousands of other social services offices throughout the nation, however, this one is the property of Lockheed Martin Corp., the well-known giant of the defense industry.

Under a four-year contract worth as much as $50 million, Lockheed is dunning deadbeat dads, holding informal hearings and even drawing blood to confirm parentage. For an arms maker whose products have drawn blood on battlefields throughout most of this century, it is a remarkable departure.

Lockheed Martin has become an “agent of the state” in 33 jurisdictions throughout the country, providing children and family services under contract and taking the company deep into local politics and into alliances with such groups as the Urban League.

Lockheed Martin has become a corporate trendsetter at a time when the nation has arrived at a historic crossroads in redefining the role of government in American society.

As public frustration with government inefficiency grows, and as privatization is increasingly advocated as the solution, Lockheed Martin has emerged as the most powerful player in winning a variety of government contracts. It is without peer in the scope and geographic diversity of its work.

The children and family services operation, part of a management services subsidiary known as IMS in Teaneck, N.J., is already Lockheed Martin’s fastest-growing line of business, but hardly unique in its direction.

Lockheed Martin also processes nuclear waste in Idaho, collects bridge tolls in New York, administers parking fines in Los Angeles and prepares the space shuttle for launch in Florida.

The firm is the dominant contractor to the Federal Aviation Administration, the FBI, Energy Department and the National Reconnaissance Office, among other governmental units. It operates Sandia National Laboratories and ranks as the second-largest supplier to NASA. It is even a big player at the Environmental Protection Agency.

Two years after the blockbuster merger of Lockheed and Martin Marietta created the new company, it has become a far different firm, one with key technology that is vital to a broad range of government operations and with a potentially broad influence over public policy.

The swift changes are alarming to some, who say Lockheed Martin is fast becoming a shadow government whose formidable power has not received adequate scrutiny. Moreover, the company has had embarrassing setbacks in some of its highest-profile programs, raising the question of whether the government may have overblown expectations about exactly what Lockheed Martin can accomplish.

Nonetheless, the Bethesda, Md.-based company’s success rate in winning new business is stunning. It anticipates these new initiatives will fuel double-digit sales increases during the next decade, despite the lackluster outlook in defense.

With its vast defense business helping to throw off $2 billion in surplus cash each year, the company has plenty of options to make defense and nondefense acquisitions or buy back its stock, according to Chief Executive Norman Augustine.

“As the government continues to privatize, it will create new opportunities for us,” Augustine said in a recent interview. “The largest and fastest-growing part of the federal government is in the social services areas, and there are lots of things that we can do to help the federal government.”

Lockheed Martin is the largest defense contractor in the world, with its logo flying on more combat jets, missiles and spacecraft than any other corporation. Its weapons are the backbone of the American military and the intelligence community.

In the defense industry, Lockheed Martin has also become the role model, a giant that Boeing Co. and Raytheon Co. are attempting to emulate in their multibillion-dollar flurry of mergers this year. But Lockheed Martin has big plans beyond aerospace.

“The nice thing about Lockheed Martin’s long-term strategy is that they don’t need a robust defense budget,” said Loren Thompson, a defense industry consultant. “They can thrive even if the defense budget erodes year after year. The nondefense side of this company may eventually become the core of the company.”

In fact, Defense Department sales account for roughly half the company’s $26.9 billion revenue, and that percentage is expected to drop further as the company sees the benefit of rapid growth in nondefense areas over the next several years.

In its most pivotal role, it is the largest seller of information technology to the federal government, an area where public agencies badly lag the rest of American society. The company is a leader in putting together large-scale computer systems that tie together government offices and databases throughout the nation.

Lockheed Martin looks to social services and welfare as a vast, untapped market for its expertise to run the government, and it is preparing to bid aggressively to take over welfare operations in Texas under a new initiative by Gov. George W. Bush. It is eagerly anticipating a chance to bid for California’s welfare business, company executives say.

Asked if the company will someday fight for higher spending for welfare in the same way it has for defense, Augustine chuckled and dismissed the notion. But he acknowledged that Lockheed Martin has “become a stakeholder” in the U.S. welfare system.

“I can see us arguing for more efficiency than more welfare,” he added.

In its Baltimore contract, Lockheed Martin will be compensated based on a percentage of the money it can collect from deadbeat dads, known officially as absent parents.

Baltimore has historically collected only 25% to 30% of the money absent parents owe. Lockheed Martin’s contract, which it received late last year, is supposed to raise that percentage to more than 40% in the first year. The greater Lockheed’s success, the more it will earn. It will receive $50 million if it can meet its contract goals during the next four years.

To meet the ambitious goals, the company has rolled in several hundred computers and a new software system, known as Children’s Pay. The former state operation that collected child support in Baltimore had just two personal computers in its entire operation.

Just as Lockheed Martin routinely hires former Pentagon officials and generals for its defense business, it has turned to government social services officials for its child support business. Lockheed Martin hired Ernestine Jones, the former deputy secretary of the Maryland Department of Human Resources and a board member of the Urban League, to run its Baltimore program.

It also hired the Urban League as a subcontractor to help absent parents find jobs, a move also intended to build community support for its new business.

Jones argues passionately that Lockheed Martin can bring greater discipline to the system and help resolve some of the glaring social problems in Baltimore’s inner city. For example, Lockheed Martin has been encouraging the Maryland Legislature to give the company authority to garnish an absent parent’s wages without a court order, Jones said.

The import of the company’s new role in government is not yet clear, but it has already begun to trouble outside experts who fear Lockheed Martin is amassing too much clout across too broad a spectrum of the public sector.

“What you are seeing is the externalization of government,” said Paul Strassmann, an author and former chief information officer for the Defense Department, Xerox and General Foods. “This is part of a very broad social picture that is not yet complete.”

Strassmann and others believe the push for privatization is the culmination of voter frustration with government ineptitude, particularly in the area of information technology.

Although companies like Lockheed Martin certainly may be more efficient in providing services, the critics say it is fundamentally unhealthy for the public to view its government as incompetent and private contractors as the sole solution. Lockheed Martin may also be more insulated than government employees from the wrath of voters.

“I don’t think the public has thought through this idea,” said Danielle Brian, executive director of the Project on Government Oversight. “We are going to be relying on these chief executive officers to make public policy decisions.”

More troubling to Strassmann is the potential for corruption bred from influence peddling as corporations fight for big federal contracts. In his view, the scandals that seem increasingly commonplace in Washington have their roots in influence peddling.

“Why else do people pay $50,000 for a coffee klatch?” he said, referring to the White House meetings President Clinton held with political contributors.

Lockheed Martin has thousands of employees in states whose congressional delegations make up a voting majority in the House of Representatives, giving it large-scale bipartisan support for its programs.

But Augustine sees little for the American public to fear, because “the overwhelming power is on the side of the government” and “controlling the government is in the people.” He further indicated that he sees no need for limits on the amount of government service work for any private company.

After telling the story of his tortured effort to track down some pension money he earned while serving as undersecretary of the Army in the mid-1970s, Augustine noted: “You do get disaffected. The government should only do those things it can do well. The free-enterprise system is going to be better at providing services than the government.”

Lockheed Martin, however, has had its share of setbacks that seem to show that even its presence doesn’t guarantee success.

The company was the prime contractor for the Internal Revenue Service’s document-processing system, a fiasco the IRS was forced to cancel late last year after spending $300 million. The FBI’s integrated automated fingerprint identification system, under development by Lockheed Martin, is more than a year behind schedule and faces an estimated $120 million cost overrun.

The company has had its share of serious problems in the defense area as well. It is prime contractor for the theater high-altitude area defense, an Army missile defense system that has failed in each of four key tests. And the firm’s Dark Star, a drone reconnaissance jet under development at Skunk Works in Palmdale, crashed on its second test flight last year. The company is now redesigning portions of the flight control system.

Of course, Lockheed Martin is so big that its mistakes can seem disproportionately large. Under its guidance, the company has improved performance in the Federal Aviation Administration’s air traffic control modernization program, which has long been among the worst-managed federal projects. The firm recently delivered the first radar display for the new system ahead of its revised schedule.

Augustine says Lockheed Martin is a better-run company than either Lockheed or Martin Marietta was before their merger in 1995.

Lockheed Martin now has 70 separate companies, organized into five sectors. But many of the companies still operate with incompatible accounting, benefits and payroll systems, a problem Lockheed Martin hopes to rectify by next year.

“What we don’t want is apples and oranges when we count the beans,” said Peter Teets, president of the firm’s Information and Services sector, which is pursuing the welfare business.

Teets has the fastest-growing elements of Lockheed under his control, with nearly $8 billion in annual sales. The company’s powerful reservoir of technology is fueling growth in unexpected areas, he said.

Using its spy satellite technology, for example, the firm formed an operating unit called Real 3D to develop video game chips. Sega Enterprises Inc. is buying the chips for its arcade games, generating income of several million dollars annually for Lockheed Martin.

“It’s been a nice success,” Teets said. Next, he’s hoping Intel Corp. will use proprietary Lockheed image technology in its next generation of personal computer microprocessors, a deal that would have enormous potential.

The job of forging Lockheed Martin from its myriad acquisitions has not been simple. The company is the net result of mergers involving operations of Lockheed, Martin Marietta, Loral, RCA, General Electric Aerospace, IBM Federal Systems, Unisys Defense, Honeywell Electro Optical, Ford Aerospace, Goodyear Aerospace, Librascope, LTV Missiles, Fairchild Weston, General Dynamics Space, General Dynamics Fort Worth Division, Gould Ocean Systems and Sanders Associates, among others.

The firm is constantly tweaking its portfolio of businesses. Under a $525-million deal finalized only last week, Lockheed Martin is spinning off 10 component-manufacturing units with about 5,000 employees and $650 million in sales. The deal is intended to help keep Lockheed Martin focused on making large integrated systems, company executives said.

Whether Lockheed Martin’s profit is adequate in the face of the acquisitions remains an open question. In 1996, the company earned $1.3 billion on its $26.9 billion in sales, resulting in a profit margin of 5%. By contrast, when Augustine operated Martin Marietta before the Lockheed merger in 1993, the company had an 8% profit margin.

“We are not happy with that,” Augustine acknowledged. “We would like to improve. . . . “

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Root of the Matter

This timeline shows the myriad mergers, including the acquisition of Loral in early 1996, that have made Lockheed Martin what it is today.

Lockheed Matin from 1980 to 1995

Lockheed:

GD Fort Worth

Sanders

Martin Marietia:

Gould Ocean Systems

GE Aerospace

RCA