A Bold Experiment in Indianapolis Puts Navy Base in Corporate Hands

At the cavernous, World War II-era Naval Air Warfare Center (NAWC) in Indianapolis, workers pedal three-wheeled bicycles down long corridors. In one room, a bearded machinist drills holes in steel aircraft parts. In another, white-coated lab technicians peer through microscopes as they assemble circuit boards for advanced electronics hardware.

The sprawling, 1-million-square-foot naval engineering facility, a beehive of hundreds of distinct projects that employs an eclectic mix of 2,300 employees, appears to defy most measures of corporate efficiency.

But at 0000 hours on Jan. 1, 1997, the US Navy will hand over the warfare center to Hughes Electronics Corp. in the largest full-scale privatization of a military facility in US history.

Hughes's overnight takeover of the giant Navy operation - known in industry lingo as a "hot turnover" - is a major test of the private sector's ability to incorporate military facilities targeted for closure in the downsizing of the US defense department.

If successful, experts say the NAWC privatization could advance a bold new strategy for salvaging valuable military resources for commercial use. The Pentagon estimates that from 20 to 30 percent of its technical infrastructure is excess capacity, according to a May report to Congress.

The privatization option, endorsed by President Clinton, was first raised during four successive waves of hundreds of base closures beginning in 1989. In addition to NWAC, four military installations in Ohio, Kentucky, California, and Texas are now either undergoing or considering various models of privatization.

Experiments in Indianapolis and elsewhere will shape the thinking of Pentagon officials and defense industry executives in a new round of military downsizing, which the Clinton administration is expected to initiate within two years, experts say.

"As we go into this next shrinkage, these success stories will be looked at very hard," says Jim Wheeler, an economist and senior fellow at the Hudson Institute, an Indianapolis-based public-policy think tank.

Hughes's takeover is a major test of privatizing military facilities set for closure.

"Before there was no precedent; now we have several," says Mr. Wheeler, who is also an analyst for NAWC.

So far, preparations for the handover of the $300 million-a-year Navy facility have gone smoothly, with the privatization hailed as a "win-win-win" deal for the city, the Navy, and Hughes.

A win-win-win deal?

By keeping NAWC open, Indianapolis avoided an estimated $1 billion economic loss. Instead, the city was able to promote local interests with bargaining power it gained through running the competition that selected Hughes and negotiating the terms of the takeover.

The city guaranteed that Hughes would employ at least 2,000 workers at the site in 1997 and increase that figure to 3,000 by 2002. Worker wages and benefits would match or better those offered by the Navy. Hughes will invest $180 million in employee training and pay some $3 million in property taxes on the site, which before generated no tax revenue.

The agreement is also a feather in the cap of Indianapolis Mayor Stephen Goldsmith, who has a national reputation for bidding out government services.

The Navy was able to meet its downsizing goals by relinquishing NAWC, while at the same time retaining access at reduced cost to the facility's technical expertise. The Navy will save an estimated $140 million under a five-year, $1.2 billion contract with Hughes. The company has pledged to cut hourly labor costs to the Navy by at least 15 percent.

Hughes, by merging with NAWC, broadens its market by gaining a foothold in the naval avionics industry. The company gains control of hundreds of highly trained engineers at NAWC, the Navy's core avionics design facility, which is unique in its ability to take products from the design stage to final production under one roof.

Still, key tests await Hughes.

One central challenge for the defense contractor lies in melding the corporate and military cultures. Hughes must instill its profit-driven corporate ethic in NAWC's thousands of employees without quashing their patriotic, "can-do" spirit and inventiveness.

Hughes's task is complicated by NAWC's highly compartmentalized work force, which produces items ranging from the weapons guidance systems used in Desert Storm to electronics for satellite systems.

Separate teams of workers now answer to distinct divisions of the Navy, Air Force, National Aeronautics and Space Administration, and other government agencies.

Yet the costs of failing to make this "cultural conversion" are potentially high, says Steve Kaspar, the Hughes vice president who will become general manager of the facility. He offers an example.

"When you are a government agency and you make a mistake, it's just a mistake - not a contract noncompliance.

"I don't think the people here understand what kind of scrutiny defense contractors are held to," Mr. Kaspar says, noting that in the private sector, contract violations can bring criminal penalties.

Adapting to profit motive

Employees at the center, while encouraged that NAWC will not shut down, remain apprehensive about the privatization. Attrition of the original work force of 2,800 has continued as hundreds of employees transfer to other government jobs or accept outside offers.

Even employees who plan to work for Hughes expressed strong feelings of betrayal over the Navy handover as well as worries about increased job insecurity and the profit motive's demoralizing effect on their work.

"Hughes has made it very clear that our jobs rest on our ability to make money for the company - it's a different mindset," says Ron Brown, a program manager in missile avionics who has worked at NAWC for 20 years.

"This forces the work force to become more self-reliant, but the drawback is that it destroys loyalty," Mr. Brown adds.

Jack Jones, a mechanical engineer for a missile support group, agrees. "I worry about the mindset. Will the employee have the drive to make a quality product just for profit if the loyalty is not there? I don't know."

To retain the lucrative Navy business, Hughes must maintain top quality even while cutting costs. The firm intends to save money by lowering inflated labor rates, releasing nonessential legal, medical, and security personnel, and streamlining procurement and other functions, Kaspar says.