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Defense Firm Rebounds From Federal Penalty

August 2007
By Michael A. Robinson

Company president predicts continued growth despite night-vision technology scandal.

Steve Gaffney vividly recalls the day he literally got a whack upside the head that gave him a lifelong lesson in success—one that would come in handy this year.

An enthusiastic athlete and varsity pitcher at his high school in Morris County, New Jersey, located 50 miles west of New York City, Gaffney enrolled in the U.S. Naval Academy at Annapolis, Maryland, where he hoped to have a strong collegiate baseball career.

In the spring of his freshman year nearly 30 years ago, Gaffney was pitching in a scrimmage game against GramblingStateUniversity. A stocky man who stands almost six feet tall, Gaffney had what he thought was a pretty strong breaking pitch. After all, it had bedeviled plenty of high school batters.

So, Gaffney decided to challenge the Grambling batter with a tough slider. But as the pitch crossed home plate, the batter connected with the ball, which promptly headed out toward the pitcher’s mound and struck Gaffney square in the forehead.

“It was a defining moment,” Gaffney recalls with a laugh. “Everything’s relative. The analogy in business is you need to confront reality, right? You know, you think you’re doing well, but really, you need to be honest with yourself.”

These days, Gaffney is doing quite well. The 48-year-old former pitcher now serves as president of ITT Defense, located in McLean, Virginia. Appointed to this position in October 2005, he runs a sprawling global defense operation with a string of sales gains he expects to continue even though the U.S. military faces expected budget cuts.

Last year the operation posted $3.7 billion in revenues, up 13 percent from the previous year. In addition, orders grew by 21 percent and ITT’s defense colossus ended the year with a $3.9 billion backlog of business, up 12 percent from the previous year. Gaffney’s unit accounts for more than 40 percent of the revenue for parent company ITT Corporation.

And this soaring performance flies in the face of a severe penalty imposed on ITT Defense by the U.S. government. The company had to shell out a large sum of money for improperly transferring classified night-vision technology, which might cause some analysts to downgrade the company’s outlook.

Gaffney says he relishes working with the military, adding that the patriotic fervor he had as a young man has not abated. Eager to serve his country, he applied to only three colleges: the NavalAcademy, the U.S. Air Force Academy and West Point.

Sidelined by injuries and a knee operation, Gaffney left Annapolis and received a degree in electrical engineering from LafayetteCollege in Easton, Pennsylvania. He married his high school sweetheart, Lynn, whose parents live with the couple and their four children in their home, about a 10-minute drive from Gaffney’s office.

“In fact, my only jobs have been in the defense industry,” Gaffney says. “So it’s always that pull, like a magnet, you know, pulling me back to serving those who will protect our freedoms. I think that’s pretty much the thing that keeps me focused in this market space.

“And I get to meet lots of employees all over the country and outside the continental U.S., and in general, that’s the pull that most employees have who work in the civilian space. It’s supporting the mission however we can. And I think that’s what keeps me focused.

“I spend a lot of my time on leadership. My job is to help the leadership team come up with the right strategy, the vector for our company, and really make those tough calls on the leadership we put in place to make sure we have the right people on the bus and in the right seats.

“I wasn’t a Green Bay Packers fan, but I was a coach [Vince] Lombardi fan. I’m a student of leadership techniques: how to motivate, how to keep people out of complacency and to keep trying to make improvements in their company. How do you inspire?”

Gaffney recently faced arguably his toughest leadership challenge to date when ITT suffered a black eye from its largest client, the federal government. In March 2007 the parent company of a leading manufacturer of night-vision gear for the U.S. Defense Department agreed to $100 million in penalties for allowing the transfer of classified information overseas.

Prosecutors noted it was the first conviction involving a major defense contractor under the Arms Export Control Act. By arrangement with the government, ITT agreed to pay a $2 million criminal fine, invest $50 million in night vision technology as a deferred prosecution penalty, forfeit $28 million to the U.S. government and pay a $20 million penalty to the U.S. State Department.

Gaffney and other ITT executives are quick to point out they did not sell or transfer night vision technology to foreign governments or concerns. Instead, for several years ITT sent technical details overseas as part of the company’s manufacturing operations.

Nevertheless, Gaffney says he understood that news of the guilty plea would stun employees and ITT’s federal customers alike, and he moved quickly to shore up the company’s reputation. He notes that, by design, internal investigators kept him out of the loop until late 2006 so they could determine what actually happened and how to correct deficiencies without any question of bias in how they handled the matter.

Even before ITT announced the guilty plea and fines in late March, Gaffney had an action plan designed to rebuild employee morale and shore up sagging customer confidence. He decided to conduct a series of meetings with key constituents.

“I know it’s going to take time, but we’re committed to rebuilding the relationships we need to have with our employees and our customers,” Gaffney explains. “Let’s start with our employees.

“I was doing our first-quarter business reviews and had all-employee meetings leading up to the announcement, talking to them about the things that they would be hearing later in the month. I was laying the pipe for what they were going to hear. Then, on the day of the announcement, we had a telecom at Town Hall where everybody could listen about the details and we could answer any questions they had, and there were many.

“I did that, our CEO [chief executive officer] did that, as did the leadership team of the defense group. The six division presidents and the functional leadership here in McLean also carried that message out throughout their command and control system.

“I had face-to-face meetings primarily with the Army because that’s where it started. They are our largest customer. But then I went through the Air Force and the Navy as well as some of the other federal agencies to make sure they could look into our leader’s eyes and feel confident that we are committed to putting in the policies and procedures to make sure that this doesn’t happen again … that we are supporting the mission by doing the right thing always.”

Meanwhile, Gaffney has put the finishing touches on a restructuring of the defense group intended to improve overall efficiencies while seeking to increase overseas sales. The group merged its Gilfillan radar concern in Van Nuys, California, with its avionics division in Clifton, New Jersey, to create a single electronics business and bring the number of defense operations down to six.

In the foreign market Gaffney continues his drive to increase overseas revenues from the current amount of roughly 5 percent to 20 percent, a goal that serves to reduce dependence on domestic spending. Gaffney’s unit opened new offices in Korea and in Warsaw, Poland, and it expanded its presence in Dubai and in the United Kingdom.

ITT’s defense sector already has deep international expertise, Gaffney notes. Of the unit’s roughly 16,000 employees, nearly half work on U.S. contracts outside the United States.

Defense industry analysts say large providers such as ITT could get clobbered as military spending declines with the wind down of the war in Iraq and in attempts to cut ballooning deficits. But Gaffney remains undeterred. He previously predicted annual growth of 6 percent to 9 percent over the next three to five years, with revenues climbing in 2007 to approximately $4 billion.

He acknowledges military budgets will no doubt get tighter soon but points out that overall spending still will constitute an enormous market. And with the military’s continued transformation and the nation’s focus on homeland security, he believes ITT has the right products in place—communications, ground- and space-based sensors and surveillance as well as integrated systems and services.

Not all of the predicted growth will come internally, Gaffney adds, because the company seeks to make strategic acquisitions that expand or improve its products and services reach. He has business specialists finding and evaluating companies on a regular basis and will promote candidates to the parent company’s board of directors when acquisitions make economic sense.

Nevertheless, finding the right targets remains difficult because of relatively high stock values in the defense sector driven by four years of war. Even without acquisitions, Gaffney says, the defense business will remain vibrant until at least the end of the decade—and probably much longer.

“Our vision remains pretty much constant,” Gaffney concludes. “We want to be that trusted provider of systems, products and services for our customer base. And the only way we’re going to get there is by delivering high levels of customer satisfaction, flawless execution and a leadership team committed to building through teamwork, creating the future, leading with character and inspiring commitment.

“I do believe we can continue our growth trajectory. It’s a complex, competitive landscape. It’s only getting more complex, and we need to remain agile and focused and do it quicker than any other company. And that’s what we plan to do.”

Web Resource
ITT: www.itt.com