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Execs: Sequestration Hype Could Hurt Firms

Jul. 22, 2012 - 12:11PM   |  
By ZACHARY FRYER-BIGGS   |   Comments
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As the rhetoric on Capitol Hill continues to rage over the pending automatic U.S. budget cuts known as sequestration, senior defense executives and industry representatives are forming into two camps.

The first camp has no shortage of dire predictions over the devastation to the nation’s industrial base if the cuts take effect next January.

A second, less visible group is quietly wondering if the fire and brimstone might be excessive — and even damaging — to the cause.

On the vocal side, four CEOs testifying before the House Armed Services Committee last week repeated many of the points recently offered to the press. Many members of Congress and the executives — Robert Stevens of Lockheed Martin, Sean O’Keefe of EADS North America, David Hess of Pratt and Whitney, and Della Williams of Williams-Pyro — were not shy about their dislike of the sequester.

In less than two hours, sequestration was repeatedly called devastating, stupid, catastrophic, crippling and traumatic, among other disparaging terms. Less than a day earlier, Aerospace Industries Association (AIA) CEO Marion Blakey predicted the cuts would lead to “employment Armageddon.”

Pentagon officials have not been bashful in their language, either, calling sequestration “fiscal castration,” among other colorful descriptions.

But the magnitude of the cuts — millions of jobs, according to the AIA, and the industry’s destruction — is overblown, according to several senior industry executives. Even some of the declarations about the complete lack of guidance on how sequestration would be implemented are excessive, one senior executive said.

“It’s not that complicated,” the executive said. “There’s a little drama being played out. There’s a little fire for effect being played out.”

The executives interviewed by Defense News expressed doubts about the predictions, but several asked not to be named to avoid publicly sparring with the AIA and one of the industry’s most vocal members, Lockheed’s Stevens.

Stevens has led the charge against sequestration in recent weeks by emphasizing his intent to issue Worker Adjustment and Retraining Notification (WARN) Act notices to many of Lockheed’s 120,000 employees. His efforts, paired with statements from other company heads saying they’re considering issuing notices, have pushed the little-known law to the front of the sequestration debate. At the July 18 hearing, the WARN Act was mentioned 25 times.

The 60-day warning period happens to begin just before the election. “It’s an extraordinary coincidence; each of you [has] identified a date prior to November the 6th, which is Election Day,” said Rep. Joe Wilson, R-S.C.

The act requires companies to notify employees 60 to 90 days, depending on the state, in advance of potential layoffs. However, the notices do not have to be followed by firings.

Stevens has said that absent specifics on where the government will cut, he will be forced to notify many of his employees so that come January, when sequestration would take effect, he can quickly eliminate the positions he no longer needs even if many who receive notices are not ultimately laid off.

But the specter of potential layoffs, and employees receiving the notices, may undermine talent retention, an executive said, and leads some to question the WARN Act tactic.

“If someone’s offered a job, they’re going to grab it someplace else because they don’t know if they’ll have theirs here,” the executive said. “You get in a death spiral, and that’s one of the things that we’re trying to avoid.”

The argument that defense companies need to be issuing notices was well-received at the hearing.

“I think these gentlemen are legitimately trying to figure out how to proceed, and I think they made a very good case,” said Rep. Adam Smith, D-Wash, the HASC’s ranking Democrat, after the hearing. “If you’ve got to give 60 days’ notice, then you’ve got to give 60 days’ notice.”

In a recent interview with Defense News, Raytheon CEO William Swanson emphasized the need to remain calm in the face of the cuts.

“This is all about not panicking,” he said. “This is about both feet on the ground, looking at it and making sure you’re prepared. I realize some bad things will happen to good people out of this thing, but how do you minimize that? The best thing that we can do as a company is to be able to provide the best amount of security that we can for our workforce.”

Swanson, one of the few executives to publicly question some of the more dramatic declarations by the industry, is also one of the few who was in a senior position during the last defense downturn, a fact he emphasized.

“I’ve lived through this,” Swanson said. “The light at the end of the tunnel is not a train. I’m not a person who says, ‘Oh woe is me.’ When you look at this situation, I understand the danger, but there’s also an opportunity. And the smart companies, smart leaders, smart businesspeople know how to take advantage of opportunities.”

Fiscal 2013, the first year that will suffer from automatic cuts, will affect the industry but will be more of a speed bump than a roadblock, he said.

“You go over the speed bump, you slow down, then you come out of the speed bump, you now know what your customer priorities are, and now you adjust to be able to [address those priorities].”

The dramatic statements may be a result of the fact that sequestration is designed as a scary device that pushes both sides of the aisle into action.

“The logic was this resource management mechanism was so stupid that the threat of it would be a prompt, all by itself, to public leaders to avoid it any cost,” O’Keefe said in reference to the original legislation of a sequester in the 1980s. “That was the logic, quaint as it sounds, 25 years ago.”

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