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Industrial Future Shaped by Demographics.

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A Pentagon task force called "Acquisition 2005" plans to spend the next several years trying to revamp outdated regulations and trying to convince Congress that some laws need to be changed in order to attract new workers into the Defense Department's acquisition career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 (related story p. 16).

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.

* According to Booz, Allen & Hamilton, one-third of the technically oriented workforce is within five years of retirement eligibility.

* The next generation of senior managers (age 45-55) will come from a shrinking pool of talent (currently 35-45 years old).

* The share of top engineering school graduates going to the defense industry is down sharply.

* Technical talent in the 30s and 40s age group is not "locked in" by retirement programs.

* The best people within defense companies often migrate to non-defense work.

Competitive Advantage

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 of technology."

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 enterprises.

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, 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."
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Article Details
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Author:Erwin, Sandra I.
Publication:National Defense
Article Type:Brief Article
Geographic Code:1USA
Date:Jan 1, 2001
Previous Article:Encouraging News to Report On the State of the Association.
Next Article:Military Goes to Where (Potential) Recruits Are.

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