It’s hard to imagine that reasonable people only nine months ago wondered if Northrop Grumman could ever win another defense contract. The company had compiled a long string of embarrassing contract losses, starting with the UK’s Watchkeeper program. The company then unfathomably lost a contract to integrate the US Air Force’s future air operations center. Finally, and perhaps most disturbingly, a Northrop-Boeing team lost a contract to build the next manned spacecraft for NASA.
Now, Northrop seems virtually unstoppable, having won three major contracts in a row: UCAS-D, KC-X and, last week, BAMS.
So, how are they doing it?
Heidi Wood, Morgan Stanley’s aerospace analyst, hinted at a possible theory last week. She cleverly made it part of her question, in which she was really praising Northrop CEO Ron Sugar for his string of success. But pay attention to the last sentence for a clue to Northrop’s success that probably deserves more attention from reporters like myself.
I remember a couple of years it seemed Northrop was really struggling. It seemed like there was a number of things you had lost and were disappointments and I really feel like over the last couple of years I’ve seen that turnaround quite visibly with a number of really impressive wins
Can you talk about fundamental changes you have implemented within the organization that might help explain sort of what we’re seeing, with the change in approach to competition? There might be a charge for some outsiders that you might be aggressively pricing to account for these wins.
Sugar never addressed the under-pricing issue, but I think Wood is right to raise the issue.
The fact is that defense contractors go absolutely unpunished for submitting unrealistically low bids. This goes all the way back to the Lockheed C-5A scandal of 1965, when that company stole a contract from Boeing by submitting a $1.9 billion bid. By the time the C-5A was complete about eight years later, Lockheed’s actual cost had jumped more than 300%.