High Stakes, Big Bets

"A small war erupted within Lockheed over which team -- Skunk Works or Fort Worth -- would lead the JSF effort," recalls Micky Blackwell, who led Lockheed's military-aircraft business before leaving the company in 2000. "There was no doubt that Fort Worth should have the lead. But Skunk Works was extraordinarily innovative. Trouble was, both sides competed in Washington over who should be prime. The Pentagon got tired of it. They were unhappy that Lockheed couldn't make peace inside its own house."

In fact, the Pentagon's JSF overseers were so angry that they awarded Boeing and McDonnell Douglas $20 million each for the second phase of the competition but funded Lockheed just half of that amount. The penalty, says Blackwell, "was a two-by-four to the head -- a warning for Lockheed to get its act together."

To settle the dispute, Blackwell drew up an agreement, which he dubbed the "Magna Carta." The document stipulated that Skunk Works would take charge of the prototype but that Fort Worth would lead the program. Still, the damage had been done.

"The Pentagon's memory runs deep," says Blackwell. "All it took to reinitiate the dispute was one discordant note from one of our guys. Then we had to reassure the customer all over again that there was peace in the family. It was a constant battle."

Situation Report: One-on-One With Boeing

Despite the early missteps, Lockheed never took its eye off of its biggest customer -- the U.S. Air Force -- which is slated to purchase 1,763 JSF aircraft. Instead of attempting a radical new design, Lockheed's JSF technical team set out to produce the plane that the Air Force really wanted: a lighter, single-engine version that incorporates the technologies of the F-22. "We never forgot that the Air Force loved the F-22 dearly," says a Lockheed executive. "They'd give their firstborn for that plane."

In November 1996, the Pentagon gave Lockheed and Boeing the go-ahead to move to the final phase of the JSF competition. The third contractor, McDonnell Douglas, was eliminated -- and therefore doomed as an independent company in the tactical-fighter business. The very next month, Boeing CEO Phil Condit met with McDonnell boss Harry Stonecipher in downtown Seattle's Four Seasons Hotel. The two men shook hands on a deal that would make McDonnell a part of Boeing.

The Boeing/McDonnell combination created a big-league threat to Lockheed's chances of winning the JSF contract. "At the outset, the JSF competition was a gross mismatch. Lockheed was the underdog," observes a defense analyst with high-level Pentagon connections. "Boeing could bring all sorts of resources to a competition like this. Its strategy was to produce a plane that was far more visionary than anything Lockheed could safely afford to offer."

Knowing that it lacked the manpower to compete one-on-one with Boeing, Lockheed's JSF team took a dramatic, almost logic-defying gamble. It made a bid to partner with two of its mortal enemies: Northrop Grumman and British contractor BAE Systems. Northrop would add significant depth to Lockheed's knowledge base in stealth technology. BAE would offer the team its expertise in short-takeoff and vertical-landing technologies.

"Running a three-partner team is not easy, but the deal bought us the power of three corporations to combat Boeing," says Blackwell, who spent countless hours overseas courting BAE. "We realized that if we didn't change the entire way we did business, we'd never beat Boeing."

On the surface, a joint partnership to build the JSF was not so unusual. BAE and Northrop had teamed with McDonnell Douglas on the first round of the JSF competition. Lockheed had partnered with Boeing on the F-22 program. Typically, these projects consist of a prime contractor that doles out parts of the jet's development to dozens of subcontractors and hundreds of smaller suppliers. But such arrangements encourage predictable behavior: The prime browbeats the subs, and the subs overcharge the prime, resulting in delays and cost overruns.

"We've all had bad experiences with teaming," says Peter Shaw, who leads Northrop's JSF program. "Our partnership with McDonnell Douglas on JSF was a prime-subcontractor relationship. McDonnell made it clear that they were in charge, and we made it clear that we could be treated like a sub."

Lockheed proposed something different. It offered BAE and Northrop a full-fledged strategic partnership whereby the two companies would command a combined 30% stake in the program. Lockheed, Northrop, and BAE people would work shoulder to shoulder to develop the entire aircraft. And the "best athletes" would lead those teams -- regardless of whether they were employed by the prime or by a partner.

Still, people had grave misgivings. "Lockheed and Northrop have battled each other for 60 years," says Martin McLaughlin, Northrop's JSF airframe manager. "In my career alone, we lost three out of four programs to Fort Worth. Those were knock-down-drag-out battles. At the time, I couldn't believe it: We're supposed to partner with these guys?"