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Lockheed Martin retools to meet new Pentagon rules on conflict of interest

By Marjorie Censer
Capital Business Staff Writer
Thursday, June 3, 2010

Bethesda-based Lockheed Martin announced Wednesday it is reshaping the company -- including divesting most of two units -- in part to head off conflict-of-interest concerns.

The Pentagon recently drafted rules to remove potential conflicts of interest within government contractors -- conflicts created, for example, when the same company that is hired to build a system is also retained to evaluate the work.

Lockheed said it would divest most of its Enterprise Integration Group (EIG) and Pacific Architects and Engineers (PAE), two units within its Information Systems and Global Services business. EIG provides systems engineering and integration services.

"Increasingly, the work that has been done in EIG has fallen under this general discussion area of a potential conflict of interest," said Lockheed chief executive Robert J. Stevens. "We just simply respect the fact that the government wants to raise the standard here."

Lockheed Martin isn't the first company to react to the focus on potential conflicts. In December, Northrop Grumman divested Chantilly-based TASC, its advisory services business, because of similar concerns.

Philip Finnegan, an analyst with Teal Group, said he expects future divestitures by other firms.

In the case of PAE, Stevens said the unit no longer aligns with Lockheed's strategy. Lockheed bought the firm, which supports operations at facilities such as embassies and base camps, in 2006. When it acquired the firm, Lockheed thought it could move the business toward an expanded use of information technology and integrated systems, Stevens said.

Much of the opportunity, however, has been in adding services such as maintenance and security.

According to Lockheed, EIG and PAE together make up less than 3 percent of its revenue, not an inconsequential amount for a contracting giant that reported $45.2 billion in revenue in 2009.

Additionally, the company announced Wednesday its Information Systems and Global Services business will be renamed Information Systems and Global Solutions.

Lockheed will also form a new business unit called Global Training and Logistics under its Electronic Systems business by combining two information systems units -- Readiness & Stability Operations and Savi Technology -- with its Simulation, Training and Support unit.

RSO offers logistics and engineering support services, while the Mountain View, Calif.-based Savi -- which Lockheed purchased in 2006 -- specializes in wireless tracking.

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