She’s been called one of the most powerful executives in defense contracting. Now, BAE Systems North America’s new President and CEO Linda Hudson gears up for her greatest role yet:strengthening industry-government partnerships to take on the “bad guys” of tomorrow. How does she plan to succeed?

Every leader has a defining moment. For Linda Hudson, it came in 1999. She’d just been named a business unit president at General Dynamics Corporation — the first woman to ever hold that title. Her first day, Hudson showed up in a new suit, with a scarf tied just so. The very next day, no fewer than a dozen women in the office had scarves tied exactly like hers. Hudson realized something then: People would be looking to her to set the tone.

These days, Hudson isn’t just being asked to set the tone for an organization, but, in many respects, for an entire industry. Now at the British-owned defense and aerospace giant, BAE Systems, Hudson has come to be known as one of the most powerful executives in defense contracting. FORTUNE magazine named her one of its “50 Most Powerful Women” in business. The British press crowned her the “first lady” of the defense industry. But forget gender. Hudson is, inarguably, one of the most influential executives in defense contracting, period.

The purchase of Armor Holdings, which she secured for $4.1 billion when she was president of BAE Systems’ Land & Armaments Operating Group, is one reason why. It amounted to the biggest acquisition in the company’s 11-year history.

Now the stakes are even higher. This past fall, Hudson was named president and CEO of the BAE Systems’ entire U.S.-based operations, a role in which she now oversees 50,000 employees. Hudson’s role comes at a critical juncture not only for the company but for defense contracting as a whole. It’s something Hudson speaks candidly about.

“It feels good to achieve something I never imagined I would have the opportunity to do,” says Hudson, whose parents were schoolteachers. “On the other hand,” she adds, “we expect to face a difficult environment in defense going forward … after years of rapid growth, and more money than we knew what to do with, all of us in the industry are facing changing priorities.” And, once again, all eyes are on Hudson.

At a Crossroads

To be sure, the past year has been a whirlwind for industry: from increased in-sourcing at the Department of Defense to growing discussion over the definition of “inherently governmental.” At times, that debate, spurred, in part, by reports of contractor fraud in Iraq and Afghanistan and corresponding concern over steady decline in the government’s acquisition workforce, has erupted in some pretty heated words by high-ranking officials, leading at least one industry analyst to declare a “global war on contractors” is underway.

Hudson agrees, to a degree. “We find ourselves in a much more adversarial role, contractually, with our customers,” she says, settling into a conference room one recent morning at BAE headquarters in Rosslyn, Va., where the Washington, DC skyline is within view. There’s fault on both sides, she adds, with a bit of Solomonic wisdom: “An experiment [outsourcing] was tried, and, in some cases, it went too far.”

So, what’s inherently governmental? “Managing, particularly a multimillion dollar contract where the government has virtually none of the technical, program management, and contracting expertise … I just don’t think that works; that’s an abdication of what is inherently governmental,” says Hudson, citing the U.S. Army’s Future Combat Systems, and accompanying reports of organizational conflict of interest by contractors, as an example. “There ought to be a government program office that manages programs with sufficient fields.”

Hudson remains optimistic of that happening — with industry contributing where it should. “It will sort itself out,” she says. Part of that “leveling out,” as she puts it, will come through ongoing dialogue between government and industry.

Hudson’s been playing a leading role in those efforts. Recently, she joined several executives from major defense contracting firms in a roundtable discussion with Deputy Defense Secretary William Lynn, Pentagon acquisition chief Ashton Carter, and Defense Secretary Robert Gates, who, in what has triggered more than a few nervous glances through industry, recently withheld $615 million in fees from one defense contractor for cost overruns and technical failures.

The roundtable touched on another big issue: fixed-price contracting. “Fixed price contracting in and of itself does not disturb us,” says Hudson, who, as previous head of BAE’s land and armaments group, oversaw contracts that were 90 percent fixed price. “Given the right circumstances, our view is, ‘Bring it on, we’ll be happy to perform on a fixed-price basis,’” she says. The challenge, she adds, comes when contractors are asked to develop state-of-the-art systems with technologies that don’t exist today. “Since the scope is difficult to define when developing the next generation night vision system or combat system, for example, the government and contractor should share the risk,” says Hudson

The current dialogue is a step forward. “Secretary Gates did indicate that he would continue, periodically, to engage with us,” she says. “I have no idea what ‘periodically’ will be but [Pentagon leaders] are already engaging with industry in a much more open dialogue than we’ve seen in a long time.”

“I’m very confident,” adds Hudson, “even hopeful, that we’ll see much more dialogue between government and industry — because if we can’t work together as partners we’re all doomed to fail.”

“Forget What You Did Last Year”

Fostering bonds with defense clients is one thing. Staying relevant in a changing market is another. The Obama administration’s proposed 2011 budget highlights the critical nature of that need; it includes a 30 percent drop in funding for U.S. Army tracked and other ground combat vehicles.

“I think Linda needs to balance out the business mix,” says Loren Thompson, a defense industry analyst at the Lexington Institute. “The company is very good in its hardware operations, both in its armor and electronic systems operations,” says Thompson. “But,” he adds, “I think [Hudson] will probably want to build up the services component since that’s the area of the defense marketplace likely to grow the fastest.”

None of which appears to be a newsflash to Hudson. “The challenges of today are very different from the challenges many of us grew up with in our careers … we’re seeing fewer new systems and cutting-edge technology,” she says, citing declining demand for next generation fighters and land vehicles. Certainly, innovation is still essential, but the question now is more: “How can we adjust to an ever-changing and emerging threat on the battlefield? Because, the bad guys of today move very, very quickly — and we’ve got to do the same,” says Hudson.

And what’s important now is readily apparent: cybersecurity, intelligence, and operations and maintenance readiness, among others. “I’m very much a ‘follow the market’ kind of person,” says Hudson, adding, “Forget what you did last year. Forget what you did 10 years ago. It’s all about what’s important now.” The trick, she continues, “is to position ourselves to do better — and get there faster — than our competitors, and that’s certainly not something I’m going to talk about publicly.”

A Career of Firsts

Hudson may not be talking strategy, but if the past is any indication she’s well on her way to breaking new ground. That’s been the case almost from the start.

Growing up in Florida, near Cape Canaveral, Hudson could see rockets being launched into space. That sense of limitless possibility is something she’s carried with her ever since. She was, reportedly, the only woman to graduate from the University of Florida in 1972, with a degree in systems engineering. She was the first woman manager at Ford Aerospace, at a time when the company had no maternity leave policy and women were routinely turned down for a mortgage. She was also the first female vice president of General Dynamics.

By many accounts, Hudson brings out that same possibility in her teams. “Linda has the rarest of abilities, to bring together competing interests and personalities, unifying them in a common direction and supporting a single goal,” says Erin Moseley, a former senior executive at General Dynamics who’s known Hudson since 1998.

Accessibility is another reported strength. This past fall, Hudson told The New York Times that she reads all her own emails. Personally. Every day. At the time, Hudson was still president of BAE’s land and armaments group, overseeing 20,000 employees. Now that she oversees more than double that number, any change in her policy?

“Anyone in the company can send me an email and I’ll respond,” says Hudson, looking upbeat and energetic the day we stopped by. “What’s really interesting,” she adds, “is that people don’t abuse that.”

Talking to Hudson, you get the sense her mission is two-fold: to level the playing field for others to come up through the ranks — “whether ethnic minorities, women, or the disabled,” she says — and to save lives. “Many of us have relatives who’ve been in the military … it’s not hard for us to have an emotional attachment to what we do,” says Hudson, whose son-in-law is a U.S. Marine.

Among Hudson’s proudest moments, she says, was the role BAE Systems played a few years ago in producing Mine Resistant Ambush Protected vehicles alongside industry colleagues. The company built roughly 50 percent of the original MRAPs, resulting in a substantial drop in U.S. troop casualties in Iraq.

It’s those kinds of successes that buoy Hudson amid the current industry challenges. “Most of us come to work everyday feeling good about what we do, and knowing there’s some sense of greater good in the equipment that we build and in the services that we provide,” says Hudson. “All in all,” she adds, “those efforts protect our citizens and generally make the world a better place — I don’t think it gets any better than that.”

With that, Hudson got up to start a new day for BAE Systems, and, what many anticipate, industry as a whole.