PwC a interrogé 28 dirigeants de 23 entreprises chefs de file du secteur de l’aérospatial et de la défense au Brésil, au Canada, en France, en Allemagne, en Inde, au Royaume-Uni et aux États-Unis, entre février et mai 2012. Retrouvez toutes nos publications sur : http://www.pwc.com/publications
Boost the utilization of your HCL environment by reevaluating use cases and f...
Etude annuelle Aéronautique & Défense "Programmes under pressure" (2011)
1. A new intensity
Programmes under pressure
A&D Insights
Industrial Products
Aerospace & Defence
The third edition in our
A&D Insights series
www.pwc.com/aerospaceanddefence
2. Contents
01 Introduction
02 Executive summary
06 A convergence of pressure
14 Responding to the programme management challenges
27 Delivering for the future
30 PwC aerospace and defence experience
31 Contacts
32 Acknowledgements
Methodology
As part of this report, PwC interviewed 28 senior executives from 23 leading
Aerospace and Defence (A&D) companies in Brazil, Canada, France, Germany,
the United Kingdom and the United States. The combined sales revenues of
the companies exceeded US$338 billion in 2011. The interviews took place
in person between February 2012 and May 2012. Questions focused on
programme management effectiveness and profitability as well as the impact
of changing dynamics from market shifts and globalisation. The results of the
interviews are supported by additional proprietary research, as well as analysis
of publicly available information. The results are reported in US dollars unless
specified otherwise.
II A&D Insights 2011
3. Introduction
A&D Insights 2012, the third in this In a world of convergent pressures,
annual series, looks at the challenges we conclude that companies will
facing programme management as the need a different kind of programme
industry responds to an unprecedented management mindset in which
convergence of pressures in the partnership, internationalism,
environment in which today’s inclusivity and innovation are as much
programmes are being delivered. to the fore as really good ‘get it out of
the door’ programme management.
Healthy order books in the commercial
airline sector sit alongside sluggish In an era of fierce international
recovery in corporate aviation and competition, the winners will need to
retrenchment in defence. Commercial show that they can also use innovation
sector buoyancy is coming largely from as a key competitive advantage to bring
Neil Hampson growth markets such as the Middle value-addition to customers alongside
East and Asia. In contrast, western price-sensitivity. Deploying a host of
Global Aerospace &
Defence Leader markets are considerably more brittle. innovative strategies to anticipate,
The defence sector is adjusting to the understand and match customers’
new reality of western government needs in changing international
austerity measures and seeking to markets will be an important part of
diversify its international footprint. programme success. We conclude our
All this, while the global economic report by looking at the qualities that
outlook continues to be clouded by companies will need to deliver future
considerable uncertainty arising programme management success.
from the eurozone crisis.
4. Executive summary
Aerospace and defence companies face How can companies respond to this
a new intensity in the delivery of their convergence of pressures? In the past,
programmes. The need to be faster, companies would respond to pressure
fitter and lower cost while managing by majoring on excellence in one of
growing programme complexity solutions leadership, operational
goes with the territory. These are excellence or customer intimacy.
considerable challenges in their But today’s environment means that
own right but they are being given a excellence in one alone is not enough.
new intensity by the unprecedented Companies, and in turn their
environment in which today’s programme managers, need to be top
programmes are being delivered. of their game in all three. And they
need to be able to deliver innovation
A&D companies are experiencing
and affordability in tandem.
more pressure from more directions
than ever before—on price, supply We invited the senior executives
chain risk, the need to expand we interviewed to identify the
globally, the risks associated therewith programme management attributes
and broader macro-economic they feel are most important in the
uncertainty. Alongside this, customers current and future environment. They
expect that innovation will continue painted a picture of a different kind of
while costs come down or are capped. programme management mindset in
Innovation is a must-have but can no which partnership, internationalism,
longer come at any price. This inclusivity and innovation are as much
convergence of pressures is leading to to the fore as really good ‘get it out of
a change in programme management the door’ programme management.
that moves it well beyond its For example, 64% of the senior
traditional heartland of scheduling, executives we interviewed stressed
progress tracking, managing risk the importance of innovation as a
and pressurising or sometimes source of competitive advantage when
penalising suppliers. asked to identify the most important
aspects of their programme delivery
strategy. They also emphasised the
importance of being able to deliver
2 A&D Insights 2012 | PwC
5. 64%
of the senior executives stressed
the importance of innovation as a
source of competitive advantage
programmes in a way that is much Innovation, systems integration and
more strongly integrated into the affordability need to go hand in hand.
customer, market and supply chain In the competitive environment faced
forces that are shaping the sector. by A&D companies, it is not good
enough just to wait to compete on
There is a strong trend towards more
contracts anymore. Instead,
inclusive partnering relationships with
companies are bringing innovation
the supply base and with the customer.
into their business model to get really
These partnerships are being used to
close to their customers and the supply
co-define a product or service, share
chain to try to be ahead of what the
risk in the design and production
market needs and wants. ‘Co-creation’,
cycle, enter new markets and deliver
where the customer has significant
through-life services. This trend to
input to the end product through
greater inclusiveness is reflected in
structured approaches, can result in a
the greater emphasis being placed
much closer match between budgets
on joint ventures and partnerships in
and requirements.
programme delivery strategies. Joint
ventures and partnerships, alongside
management of globalised supply
chains and tight control of programme
costs, were second only to the
importance of innovation in the
minds of the senior executives we
interviewed.
A&D Insights 2012 | PwC 3
6. The downturn in western defence teams under one roof because
markets and the continued certain capabilities are required
internationalisation of both the from partners across the globe
defence and the commercial sectors but the expertise for virtual
have accelerated the trend to greater management of complex tasks
globalisation of supply chains. But as in a breakthrough technology
supply chains extend so too does risk. does not currently exist within
More inclusive relationships across your organisation. You must know
and down the supply chain can help what you do well, focus on that,
manage these risks and ensure they and measure performance.
are jointly identified and mitigated Put an emphasis on
rather than debated and litigated. co-creation and
Such an intense and complex customer intimacy
environment brings dangers. How Develop relations with your
can companies cut through this? Our customers and suppliers that are
discussions with senior executives, really tight, so that requirements
and our review of what they said, led are exactly understood, developed
us to identify the following things that together and put at the heart of
companies need to make sure they programme design and execution.
get right: Paying close attention to detailed
design upfront and aligning it to
Stay focused on your core customer requirements can go a
Identify and understand what you long way to reducing programme
do best and make sure that focus profitability problems. Good
guides your key decisions. Just customer intimacy can be used
because the industry is heading in to pre-plan efficiencies across
a certain direction, such as the programme lifecycle.
globalising the supply chain,
doesn’t mean it is always best for Get innovation and cost
you. A clear understanding of control working in tandem
what you do best and what others The previous ability of customers
do best is fundamental to your to tolerate price drift no longer
make-buy decisions. For example, exists. Companies will need to
there might be situations where deliver more capability at lower
you may need to co-locate design cost, becoming adept at combining
cost reduction strategies with
‘innovation ready’ derivative
platforms.
4 A&D Insights 2012 | PwC
7. These overarching strategies in turn Become world citizens in
provide the context for the programme relationship management
management approach needed to Build the skills and cultural
deliver future programme success. outlook as programme leaders
Programme managers will need to: and within your team to manage
Look hard at systems global programme footprints and
integration the partnerships that go with it.
Programmes generally stand Develop the ‘softer
or fall on how well companies skills’ needed to take a
succeed in managing an collaborative approach
inherently complex network to supply chain risk
of interlocking platforms and Get good at sharing risk
technologies from different information, taking coordinated
suppliers. Unless you can get action to manage risks and being
integration of this jigsaw right, more open about vulnerabilities.
don’t make it even more complex Finally, programme managers need
by extending it further. If you great judgment. The importance of
can’t get it right, then maybe speed and agility means that it’s not
a greater degree of vertical always going to be possible to have
integration is what is needed. 100% of the data before making
Put partnerships and JVs on decisions. In such situations, good
firm foundations judgment based on sound experience
Have the right approach to and a focus on what the company
culture, governance, contractual knows and does best is everything.
terms, transparency and create Companies that can move forward fast
an environment where critical when maybe they only have a fraction
information flows when and of the data are going to gain a
where it is needed. competitive edge. But such talent is in
short supply and companies need to be
Develop real agility and
good at recognising and developing it.
speed in business processes
Use this as a valuable
differentiator, enabling adaptation
to new products, services and
markets in months not years.
Companies are bringing innovation into their
business model to get really close to the customer
and try to be ahead of what they need and want.
A&D Insights 2012 | PwC 5
8. A convergence of
pressure
The intensity and combination of Market pressures
pressures facing A&D companies is
reflected in the range of challenges The simultaneous convergence
identified by the leading senior of pressure is markedly different
industry executives we interviewed from previous periods. The market
for this report (figure 1). Programmes environment in both the commercial
are coming under more pressure from and defence segments is strongly
more directions. Reductions in major price-sensitive. But there is still a need
defence platform programmes are to deliver product that can enable
coinciding with more but higher technological innovation, for example
risk commercial programmes. For in terms of greater functionality,
companies serving both markets, the reduced operating costs and
effect of the upturn in commercial environmental improvements.
orders offsetting the shrinking of At the same time, the banking
traditional defence markets is crisis and tighter financial market
welcome but this can introduce conditions have put pressure on
programme development challenges financing and support for R&D and
where platforms and technologies are access to capital, not just on primes
interdependent. In the background, but most significantly on tier-one
continuing world economic suppliers and beyond. This can
uncertainties, particularly in the introduce significant programme
eurozone and possible softening of risk through the supply chain.
Chinese growth, pose concerns about
economic growth and further possible
pressure on military budgets.
6 A&D Insights 2012 | PwC
9. Figure 1: Biggest challenges for A&D overall programme performance
Globalisation
of new petition,
rs
playe
Co
st o
res
m
su
f en
Gr w m
emergForeign co
res
ne
ow a
erg
e
np
th rke
th
o in
y
ence
of ts
rgi
Co int cha
de
Ma
tec nsta lity ly
m
bi pp
isi su
an
req hno nt n
'd log eed V
d,
to ies of
int , lo ne
eg ng w ners
Rising
rat er
ng part
al factors
e tim
e shari
Declinin Risk
g defen
ce budg
ets International trade
complexity
Programme
pressure environment, intensified
d price compliance
se of fixe
Extern
Greater u in defence def
enc Unce
contracts and gov
ern e prog rtainty
&D
ing Cu men ram on
lop
rR
st t str me
eve om ateg s,
fo
g, d t er ies
ctin talen
t
or
ra re
Gr
pp
Att ining lat
l demands
ow ex
io
su
a
ret ns
Com ket env
d
th po
mar
hip
an
tal
s
to rt
g
pres ironm
in
api
co ma
nc
me rk
to c
Environmenta
na
sed
Fi
fro ets
ess
m
time ent
Acc
to
In defence, there has been an where you have to be more mindful of
extension of the use of fixed price what the baseline is, and to manage
contracts in the US in particular, closely to that baseline.”
elevating contractor risk. The public
At the same time as these potentially
sector is more than ever holding
constraining factors have to be
companies and programme managers
managed, the programme
accountable for failing to meet
environment is also one of great
schedules, budgets, and performance
opportunity and expansion. High
specifications. Nan Bouchard, vice
production rate ramp-up will be
president of program management,
needed across much of the sector.
Boeing Defense, Space & Security
Airbus, Boeing, Bombardier and
(BDS) points out: “We’re seeing an
Embraer have all announced a
attempt to reduce technical risk on
series of record deals for their new
programmes so that cost can be more
generation of commercial aircraft.
assured and contained. We’re also
Military programmes such as the
seeing a shift of risk to industry in
Joint Strike Fighter and Tanker
more of a fixed-price environment. It’s
with extensive supply participants
different than the way programmes
are also ramping up in the next five
have been run in this last cycle. Both on
to ten years, albeit slower than
the customer side and on the industry
previously anticipated.
side; people are not used to running
programmes in a fixed-price context
A&D Insights 2012 | PwC 7
10. But big rate increases also mean Internationalisation of markets
pressure on the supply chain, leaving and supply chains
programmes vulnerable to supply
chain disruption (delay or failure). The globalisation of the A&D industry
It will be important that companies has accelerated over the past few years
learn from previous programme and this trend is further intensifying
issues where delays or failure have as both the defence and commercial
arisen from factors such as immature segments look to capture business in
technologies, engineering and supply growth regions of the world, notably
chain complexity, supplier constraints the Middle East, Asia and South
and over-optimistic scheduling or lack America. On the defence side, there
of planning for contingencies. is the heightened international
competition for these new markets,
highlighted recently by the contest
between the four-nation Eurofighter
“The risk management associated with the
supply base is huge and volatility in the
economy is a change from the past. Cycles
are getting shorter and more volatile, putting
pressure on previous reliance on existing
core long-term business which are needed to
support programme development. International
competition and the whole trade environment is
also one of the biggest challenges we face today.”
Mairead Lavery, vice president, strategy, business development and
structured finance, Bombardier Aerospace
8 A&D Insights 2012 | PwC
11. Typhoon and Dassault Aviation’s engineering, quality and programmes,
Rafale jet to become the preferred observes: “Historically, our client base
bidder to supply medium multi-role was located only in North America,
combat aircraft to India’s air force. On western Europe and Latin America.
the commercial side, the Commercial Progressively, we are extending our
Aircraft Corporation of China (Comac) client base to Asia and Russia.”
is seeking to challenge the duopoly of
Internationalisation was an important
Airbus and Boeing.
theme highlighted by all the
Alongside market globalisation, supply companies that we interviewed for
chains have internationalised, giving this report. French defence company
companies opportunities to source DCNS has moved from a position a
production at optimal cost and in decade ago where its main revenue
optimal locations for offsets and came from French defence and export
subsequent exports. But this adds accounted only for around 15% of
to supply chain complexity and revenue. Now, Andreas Loewenstein,
significantly increases the profile DCNS’s senior vice president for
of risks such as geopolitical, strategy and development, says:
international trade and business “Export accounts for 35% and should
conduct compliance. The emergence jump up to 70% ten years from now.”
of new competition around the world Similarly, EADS’ defence division
is bringing opportunities for western Cassidian, now has a global presence,
suppliers who now have customer having seen its export share rise from
opportunities with a much greater 10% to 30-35% today with a target of
geographic spread of manufacturers. around 55% in ten years.
For example, Laurent Rasmont, Ratier
Asked to compare important sales
Figeac’s vice president in charge of
revenue markets now and in ten years’
time, the companies we spoke to
identified China, India and Latin
America as high growth markets
together with the rest of Asia and the
Middle East as also being important.
The markets of North America and
western Europe are currently the two
largest markets for these companies
but they are relatively mature and
seen as having less future growth
importance compared to newer
markets elsewhere. While western
Europe was expected to deliver fairly
flat growth, central and eastern
Europe, Russia and North America
were identified as offering slightly
better growth prospects.
A&D Insights 2012 | PwC 9
12. Globalisation of new investment
The number of investments in countries outside of North America,
international markets (i.e. invest- the UK and western Europe. Thirteen
ments in markets outside of the ‘home’ of the 21 new manufacturing invest-
country of the investing company) by ments added in 2011 came from
the top 50 aerospace and defence outside these regions. Interestingly,
companies reached a new high in there was also a pick-up of manufac-
2011 (figure 2a). Twenty one new turing investments in Europe and
manufacturing investments and nine North America. Indeed, in 2011
research and development (R&D) unlike in the previous two years,
investments were added in 2011. Two such investments outnumbered
thirds of R&D investments were in those in India and China.
Figure 2a: Number of investments by top 50 global A&D companies in
Investments by Top 50 (2000-2011) companies in international markets
international markets Global A&D
32
28
9
24
6
20
9
16
4
12 1
6 7 21
18
8 2 3 3
2 13 12
4 9 2
7 6 6 7 7
5
3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Manufacturing R&D Source: Company Reports, PwC analysis
Figure 2b: Number of investments by top 50 global A&D companies by
country (cumulative 2000-2011)
R&D and manufacturing investments by country, 2000-2011 (cumulative)
Country/Region R&D Country/Region Manufacturing
India 12 China 23
US 7 India 20
Russia 6 US 15
UK 5 Mexico 10
China 4 Russia 9
W Europe 4 Middle East 8
CEE 3 UK 7
Middle East 3 W Europe 7
Mexico 2 CEE 4
S Korea 2 N Africa 4
N. Africa 1 S Korea 2
Other 5 Other 5
Total 54 Total 114
Other in 2009: Singapore, Australia Other in 2009: Brazil
Other in 2010: Uzbekistan Other in 2010: Brazil(2)
Other in 2011: Canada Other in 2011: Kazakhstan
Notes: Top 50 companies as per Flight International Top 100 Rankings. Includes organic
investments and discrete aerospace JVs where rationale for investment is known.
Excludes acquisitions.
Source: Company Reports, PwC analysis
10 A&D Insights 2012 | PwC
13. Greater complexity interviewed emphasised that it is
not just technological complexity.
A&D programmes have always been As Peter Fielder, managing director
complex. However, the complexity of performance excellence at BAE
of programme requirements has Systems puts it: “It is the mix of factors,
intensified significantly over the not just purely technical complexity.
past few years. Most of today’s major It’s different markets, different supply
programmes have a systems-of- chain partners, different technologies,
systems approach, an inherently different relationships. We’re having to
complex network of interlocking address factors that we have not had to
platforms and technologies that address in the past. For example, you
requires the precise integration and may have multiple partner buyers as
unerring performance of disparate well as multiple partner suppliers.”
pieces. This also requires the
successful programme management of Complexity is also arising from the
each of the systems—an undertaking sheer pace of technological change
that can be significantly challenged which is accelerating in most areas of
when suppliers thrust into an the sector. Bill Fitzgerald, president for
unfamiliar subsystem integration commercial engines at GE Aviation,
role fail to meet schedules, cost observes: “Our market position today
caps or capability promises. comes from a technological legacy that
has been developed over 40 years. But
On top of this, the internationalisation the pace of change now means that in
trends that we have outlined above the next five to seven years we will cover
have further compounded the another 40 years. That’s a challenge
complexity, introducing greater for the industry. One big question is
geographical reach and bringing whether there will be enough
new relationship matrices into play. engineering resources industry-wide.”
Many of the senior executives we
“Complexity is coming from the changing environment.
Customers are facing into difficult budget situations
and, as we internationalise more, there’s more
complexity in those relationships. The challenge for all
of us, both from the industry and the government side,
is to deal effectively with that new environment.”
Nan Bouchard, vice president of program management,
Boeing Defense, Space & Security (BDS)
A&D Insights 2012 | PwC 11
14. Margin pressures to deliver. In some cases, there may
also be scope for shifts in emphasis
The countervailing forces prevalent within programmes to higher margin
in the A&D sector are reflected in opportunities.
divergent views on the outlook for
programme profit margins in the European space company, Astrium,
coming decade. Just under half for example is looking towards more
(43%) of the senior executives in emphasis on services in its mix of
the companies we interviewed felt infrastructure and service business as
margins would improve in the next a route to better profit margins. But,
ten years with the rest split between like other companies, it is also putting
them staying the same or reducing a strong emphasis on exploring lower
(figure 3). cost sourcing opportunities and
keeping tight control of programme
With considerable pressure for price costs. Other companies are facing
reduction or containment from both threats to the higher margin areas
commercial and military customers, of their programme life cycles.
scope for margin improvement will One senior executive heading the
need to come from reduced input costs electronic systems division of a
or programme efficiencies. With much world-leading aerospace company
of the former being dependent on observes: “MROs are up-and-coming—
wider commodity prices, companies taking our aftermarket profitability
will need to look to their own internal away.”
programmes, such as lean initiatives,
In the defence sector, government
austerity programmes continue to
Figure 3: What do you think will happen to programme profit margins exert downward pressure on pricing.
over the next 10 years? It is strongly felt on both sides of the
Atlantic and is coming alongside
other changes by government buyers.
Decrease >10% 5% For example, Klaus-Peter Leinauer,
vice president sales & business
Decrease <10% 24% development at RUAG Aerospace
Services points out: “One of the main
Stay same 29% challenges for our defence division
represents the reorganisation and the
Increase <10% 29% budget cuts of the German Federal
Armed Forces, which will likely also
Increase >10% 14% enforce the monopolisation process
of our market.”
12 A&D Insights 2012 | PwC
15. Programme volume the US, observes that they have 4,000- At the other end of the spectrum,
6,000 programmes under management, defence combat specialist General
Most of the interviewees we spoke to of which 10-20% are over US$2 million Dynamics Land Systems focuses only
expected the number of programmes but that the number accounting for 80% on one or two programmes, currently
that they rely on for the vast majority of revenue is shrinking and that will the Abrams tank and the Stryker
of their revenue to increase rather continue to be the case. “I think the family of light armoured vehicles, for
than decrease in the coming decade. 1990s are coming back to bite us now. its main revenue volume. Similarly
Embraer, for example, has moved As we went through the downturn in the Rolls-Royce’s submarine nuclear
from a single programme for 80% nineties we gathered up a generation of propulsion division has moved from
of its revenue a decade ago to four engineers. And now it’s coming back to 20 or so small contracts a decade
programmes today (Phenom, haunt us 20 years later because we’ve ago to five large contracts today, and
Legacy 600, Legacy 650 and KC 390). lost a generation. We as an industry the division anticipates one single,
It expects the number to double in ten encouraged a generation to get integrated contract for the entire fleet
years’ time. Bombardier has seen out of defence.” management in ten years’ time.
similar programme expansion,
moving from four or five to 11 today
and expects to be delivering about
15 programmes in a decade’s time
for the vast majority of its revenue.
Programme volumes vary considerably “We’ll be going from a fewer number of
according to the nature of the product
being manufactured and some huge programmes to many smaller and
companies report that they expect more developmental type programmes.
future revenues to be concentrated on
a smaller number of programmes. For
Yesterday there were hundreds of massive,
example, Dan Gobel, vice president multi-year programmes with more being
and deputy general manager of BAE cost-plus type contracts. Today and in the
Systems Electronic Systems sector in
future there will be thousands of smaller,
shorter, development type programmes.
It’s a different environment and requires
identifying and managing risks way up
front much more effectively.”
Major US defence contractor
A&D Insights 2012 | PwC 13
16. Responding to the programme
management challenges
The new environment of multiple and Indeed, three in every ten gave
converging pressures intensifies the themselves a top ranking of ‘excellent’.
challenges faced by programme This comes despite the number of
managers. They are working in an examples of cost overruns and delays
environment where customers are in the sector. But a quarter were much
asking for increased capabilities but more modest, rating their company’s
at lower cost. This puts pressure on programme management ability only
programme management to innovate as ‘fair’. The remainder, nearly half,
while also containing cost. How well while believing their company to be
positioned are companies? In general ‘good’, also recognised that there was
terms, the senior executives we room for improvement before they
interviewed are satisfied that their could feel it was ‘excellent’ (figure 4).
companies have the ability to manage
complex programmes well.
Figure 4: How would you rate your company’s ability to manage
complex programmes?
Poor 0%
Fair 25%
Good 45%
Excellent 30%
14 A&D Insights 2012 | PwC
17. The main challenges challenge for companies is to
achieve these goals in the current
When invited to identify their top
changing and, in many ways, unique
three programme concerns, the
environment. We drilled down further
familiar imperatives of delivering on
and invited the senior executives to
time, staying on budget, and meeting
rank the issues they are focusing most
and managing customer requirements
closely on in the delivery of their
were the most frequently mentioned
programme goals (figure 5).
challenges. But, of course, the
Figure 5: Most important aspects of company programme
delivery strategy
Using innovation as a key competitive advantage 64%
Managing globalised supply chains 45%
Keeping tight control of programme costs 45%
Relying more on JVs/partnerships 41%
Risk sharing with the supply base 27%
Delivering programmes more quickly (better time to market) 27%
Opening up innovation
(e.g. collaborative R&D with customer or supply base) 14%
Protecting intellectual property 9%
“By definition, large and highly complex engineering
programmes carry risk and hit problems from time
to time. It’s a competitive environment out there and
with the current affordability challenges, it means
that the industry has to be agile, innovative and bold
in supporting our customers. So growth without risk
seems a bit unlikely to me. Those who get it more right
than wrong are the ones most likely to earn the right
to be trusted with the next challenges.”
Peter Fielder, managing director of performance excellence at BAE Systems
A&D Insights 2012 | PwC 15
18. Using innovation as a key to develop as programmes develop. As
competitive advantage Ratier Figeac’s Laurent Rasmont points
out: “New technologies need to be
The responses from senior executives mature right away. Airbus or Boeing
highlight the extent to which a can’t give suppliers time to develop their
technological and innovative edge is technology over the course of a aircraft
seen as the key way to survive and programme anymore. The technological
thrive in a highly competitive step is too big to take any kind of risk
environment. Putting innovation and the ramp-up is too important as
into the heart of programme delivery Airbus and Boeing have a record number
strategy was emphasised time and of new orders. They can’t have any
time again by the senior executives delays because of immature
we spoke with. But innovation technologies.”
brings technology risk. Recent big
Strong and well financed research and
programme examples show how
development plans are essential for
difficult it is to introduce innovative
companies to produce robust and
technologies on time.
reliable technology. In the past,
A vital part of success is aligning manufacturers such as Airbus or
innovation with clear customer Boeing helped their suppliers finance
benefit, most importantly cost their research programmes but, as
reduction for customers. Company Rasmont observes: “Those days are
innovations need to be rooted first clearly over. Tier-one suppliers must
and foremost in understanding of show that they’re able to finance their
customers and how their problems can R&D on their own. In that regard,
be solved better. Energy affordability, government actions such as R&D tax
for example, is a big concern for credits have been a great help.”
customers and the introduction of
Aerospace and defence companies
lighter aircraft and more fuel efficient
are deploying a range of strategies to
technology is now a ‘must have’ in the
ensure innovation is an integral part
commercial sector. But to survive,
of programme delivery. Among them,
aircraft and engine manufacturers will
Dassault uses ‘technology roadmaps’
need to be able to introduce further
to identify 15 technologies that give
fuel efficiency ‘game changers’.
it differentiation and then converge
Unlike in earlier periods in the these onto a single product. One major
evolution of the sector, the industry US defence contractor uses innovation
cannot afford to wait for technologies websites that employees and suppliers
have access to and puts an emphasis on
incentivisation of innovation by its
engineers with awards and CEO
involvement.
16 A&D Insights 2012 | PwC
19. Most companies emphasise technology performance-based or outcome-based
innovation and underutilise business contracts is also an illustration of
model innovation. Some companies business model innovation.
are looking at more innovative models
This is having a significant impact
for their business processes and
on programmes, as programme
doing this in conjunction with their
management teams need to
customers. General Dynamic Land
understand how their programme is
Systems (GDLS), for example, is
expected to deliver value (figure 6)
developing an innovative government
and to feel comfortable managing it.
contracting approach to secure the
Michael Joyce, senior vice president,
best mix of vehicles and lock in future
operations and programme
prices. GDLS’s Mike Cannon, senior
management with Lockheed Martin,
vice president ground combat systems,
observes: “For the past eight to ten
also adds: “With all the pressure on the
years, government and industry have
domestic market and a lot of saturation
developed an impressive portfolio of new
as well, taking our product global is a
innovation. Now the programmatic
big priority. But innovation is probably
challenge is to produce and field these
number two. And it’s not innovation in a
new innovations in an affordable
traditional sense. It’s innovation in how
manner.”
we approach our clients.” The trend in
the defence sector towards
Figure 6
Business Model Innovation Technology Innovation
• Performance and
• Customer experience Value Products/ feature improvements
• Brand value proposition services • Packaging integral
to customer value
Customer
• Value network/ Insight
• Manufacturing and
supply chain Value Process assembly
• Ecosystem of network technologies • Service delivery
value offerings
• Buyers and
non-buyers Target Supporting • Information systems
• Marketing methods customer technologies • Logistics/inventory
Source: Making Innovation Work, Davila, Epstein, Shelton: Wharton School Publishing, 2006
A&D Insights 2012 | PwC 17
20. Relying more on joint ventures The complexity of modern A&D
and partnerships programmes and the need for
genuine collaboration also means
Many senior executives emphasised that partnership participants need
the growing importance of joint to be ready to change their style and
ventures (JVs) and partnerships. approach to joint initiatives and leave
JVs are an important way into new hierarchical or contractual attitudes
markets and continue to be an at home. Again, Rolls-Royce’s Adrian
important popular business model Ellis observes: “We see a much more
to share risks and leverage the partnered type of management
complementary resources and emerging as the future of complex
capabilities of the participants. programmes rather than one party
But they also present challenges in being in the sole lead and directing
financial risk sharing rules and in the others. No one party has all the
structuring clear and well-documented capabilities to deliver these complex
technical and managerial interfaces. programmes.”
These challenges are even more
onerous when the JV relationship Risk sharing with partners
spans multiple countries and cultures.
It is essential for companies to be clear In past years, ineffective management
about when it is appropriate to choose of supply chain risks has resulted in
a JV approach and when other cost overruns, production delays,
partnership approaches may be better. quality failures and, in some cases,
penalties and order/programme
Whatever the chosen model, it is
cancellations. And the increasing
important for the participants to invest
search for international partners
time in making it work. Important
and customers is creating ever more
building blocks for any such initiatives
complicated risks. Individual suppliers
include a shared ‘whole partnership’
cannot always identify and respond to
approach to risk, as well as visibility
these risks alone and, often, processes
and transparency right across the
and controls at prime contractors don’t
programme, a coherent master
capture them. Working in isolation,
schedule linked to all partners, shared
both primes and suppliers can be blind
programme management space and
to many emerging supply chain risks.
capacity. Adrian Ellis, Rolls-Royce’s
director of next generation Taking a shared approach to risk
submarines, recalls the commitment identification is increasingly important
needed to establish the operating in the aerospace and defence supply
model for the UK’s Successor new chain. Bombardier’s Mairead Lavery
nuclear submarine programme: “It says: “We have been very public about
took considerable senior level time and the fact that we enter into risk sharing
effort. You can’t expect a complex project partner relationships. We focus very
team to just work. It needs investment.” much on what we call supplier
development, which includes supplier
assessment and development and
monitoring to make sure we have
the right risk partner.”
18 A&D Insights 2012 | PwC
21. Being able to properly monitor and Effective partnership relationships
take a shared approach to risk also are delivering significant benefits in
means capacity-building down the a number of ways:
supply chain. Lavery’s colleague,
• arge risks that transcend, what
L
Robert Dewar, vice president
were in the past, individual company
and general manager CSeries at
boundaries are jointly managed and
Bombardier Aerospace, says:
mitigated rather than debated and
“When we started the Global Express jet
litigated.
programme we managed the tier-ones
but had a lot of learning as well. Of • aste is removed from programmes
W
course, a lot of the tier-one suppliers by joint governance which smoothes
have to manage the tier-twos and, in the partner interfaces and optimises
turn, the tier-threes so they are also in resource costs, usually the largest
a learning curve on how to do that. We proportion of development
make sure we have good governance in programmes.
place and that they’re able to manage • Co-creation’, where the customer
‘
that well with our help.” This overall and the supply chain have significant
governance is especially important as input to the end product through
Safran’s Jean-Pierre Cojan, deputy structured approaches results in a
CEO for strategy and development, much closer match between budget
points out: “Tier-one contractors and requirements.
cannot really flow-down the risk-
sharing partnership concept as But the experience of the AD industry
tier-two and tier-three companies also shows that effective partnerships
are financially too small.” are not always easy to deliver. For
example, while the cost of risk can
One senior US defence company be shared throughout a commercial
executive stressed the importance aircraft supply base, there’s little
of “vetting suppliers early, sharing point in the Original Equipment
information across the business Manufacturer (OEM) extracting
and getting them involved with the ever greater financial penalties from
customer early.” Risk sharing needs a failing supplier when the entire
to be reflected in contract design: aircraft is delayed. Also, in meeting
“If we have a fixed price with a customer, the requirements of export contracts,
then suppliers need to share in that ‘offsets’ of design and production
accountability. There should be the contracts are almost always required
same rules for suppliers as the prime to help the receiving country establish
has. There should be a flow-down of its own capabilities. If the chosen
requirements, quality standards and partners cannot deliver, this can
fixed cost pressures. Without it, no jeopardise an otherwise successful
amount of engineers can solve a contract. And, if decisions in supplier
fundamentally bad contract.” selection are based on offset
obligations to create capability in an
unproven supplier, it does introduce
additional risk even though it may
be required by the agreed offset
obligation.
AD Insights 2012 | PwC 19
22. Finally, we heard from one senior performance and withhold payment
executive involved in a large defence if goals are not met. In today’s
contract who said that the contract programmes, leaders must pay much
partners were willing to cooperate more attention to the set-up and
and the cultural environment was running of partnered relationships if
supportive. But because the different they are to succeed. PwC’s experience
partners’ design and production in establishing successful partnerships
systems did not talk to each other, identifies some critical elements:
exchanging critical programme
• Culture – matching styles to ensure
information relied on an intensive
no unnecessary friction, includes
manual check of thousands of data
assigning personnel who are suited
items to identify any changes made
to the joint environment.
since the last data exchange. Another
senior executive, Hervé Multon, senior • Governance – low overhead but
vice president of strategy for Thales, effective management at all levels
highlighted the importance of not just through traditional review
creating a wider common culture as meetings.
programme management becomes • Environment – programme data,
increasingly global: “It is necessary to design data, production information,
harmonise programme management communication links, all are
processes. Our programme managers essential to get right before critical
come from different cultural information starts flowing.
backgrounds. This is an internal
training challenge to provide an • Contractual terms – must promote
enterprise culture to our people who the desired operating model not lead
have different backgrounds and to protectionism and claims against
training, as well as living in societies other partners.
with very different cultures in place.” • Transparency – to build trust which
What all these cameos show is that is the foundation of successful
programme management has moved relationships.
beyond the mechanistic: create
schedules, track progress, manage
risk, pressure suppliers for improved
20 AD Insights 2012 | PwC
23. Deeper customer intimacy
Deeper customer intimacy is delivering throughout the programme chain,
benefits in a number of areas. In the resulting in a more tightly managed
UK, for example, the Ministry of programme. Another UK defence
Defence (MoD) is a full partner in the example is in Complex Weapon
Submarine Enterprise Performance Systems where the MoD works in
Programme (SEPP) along with Rolls- partnership with industry members
Royce, BAE Systems and Babcock making trade-offs between new
Marine. From this position, the MoD, equipment design and existing
as the customer, can engage with its equipment support to give maximum
partners in dynamic trade-off capability from a fixed budget.
decisions and risk mitigation actions
Globalising or just exporting?
In a recent PwC study, 30 companies were industry can be forced to respond. But,
interviewed on how they are addressing as a general rule, progression through
the globalisation challenge. The research the phases depends on the maturity of the
revealed that the globalisation journey company’s globalisation strategy and on the
occurs in three distinct phases, which we complexity of the challenges in question.
have named Export, Regionalise, and The research also confirmed that senior
Originate. Companies and industries do managers consider the same nine
not move smoothly through these phases. dimensions in their globalization efforts,
Progression is disruptive, and, when one regardless of the company’s industry or size
company changes the game, an entire (figure 7).
Figure 7: Many companies are struggling to move beyond the ‘export
mindset’
Market Reach National Champions, still dominated by the ‘Export’ mindset
Market Offering Focusing on home region offerings at emerging market prices
Operations Driving cost-down and managing offsets
Procurement Improving Low Cost Country supply of lower-end technologies
IP Development Mainly tightly-controlled from the home region
Capital Accessed through home markets
Talent Hiring locally but home region dominates the leadership team
Operating Model No consistent view on the best model for partnerships
Governance Struggling to Integrate Regional requirements priorities
Source: PwC survey of 30 global businesses
AD Insights 2012 | PwC 21
24. Managing globalised supply changing fast as defence companies
chains look for lower cost sourcing
opportunities to protect margins
Don Burch, chief program manager and seek to establish a better
for Spirit Aerosystems, highlights the global footing to secure orders in
critical importance of global supply non-traditional markets. However,
chain management: “Managing our strategic trade controls such as the
global supply chains really well is going US International Traffic in Arms
to be critical for getting to where we Regulations (ITAR) place many
want to be in five or ten years.” The restrictions on the transfer of
development of global supply chains technical data from US primes to
has been an important strategy for overseas suppliers, thus limiting the
companies to reduce costs as well as potential pool of suppliers (see panel).
to serve a worldwide customer base.
The scale and complexity of modern
The historic focus on national home programmes introduces a host of
markets has meant that the defence potential risks. As one of our
sector has been slower to develop interviewees from a major aircraft
globalised supply chains. But this is producer observes: “The production of
Adding to programme risk –
strategic trade controls
Strategic trade controls represent an area The US has recently created an Export
of growing complexity for AD companies, Enforcement Coordination Centre to facilitate
particularly in the defence sector. These interagency cooperation in investigating
measures are imposed by governments to allegations of export violations. Risks to
restrict access to sensitive equipment, materials companies increase exponentially as the
and technical data. In many cases, these government increasingly moves towards
restrictions are based on commitments made to enforcement actions that involve multiple
multilateral export control regimes. In the US, agencies, and thus the risk of exposure
export control policy and regulations are also to prosecution under different laws
used to promote national security and foreign and regulations.
policy objectives. Strategic trade controls
The globalisation of sourcing, manufacturing,
include economic sanctions and embargoes
assembly and RD carries additional risks as
as well as restrictions resulting from United
companies strive to comply with the import
Nations Security Council resolutions aimed
and export regulations of various countries.
at curbing proliferation activity.
While many companies have processes for
The US is in the midst of a comprehensive implementing multilateral export control
export control reform initiative that is likely regime requirements, it can be challenging
to introduce the most dramatic and sweeping to maintain current knowledge of new and
changes in decades. In particular, the proposed changing laws in different countries. Malaysia
movement of items from the US Munitions List and the United Arab Emirates (UAE), for
(USML), subject to the ITAR, to the Commerce example, have both enacted export control
Control List (CCL) will introduce new licensing legislation. In 2011, Mexico joined the
regimes and unanticipated complexities. The Wassenaar Arrangement, which is the
proposed change requires Congressional multilateral export control regime that
approval but companies would be well advised implements controls on dual-use items
to carefully consider potential impacts before and technologies. Keeping abreast of these
they become a reality. While many AD and other ongoing regulatory developments
companies are familiar with ITAR, moving around the world will be both challenging
items to the CCL may be completely new and essential to maintaining effective trade
territory for programme leadership and compliance programs.
back office support.
22 AD Insights 2012 | PwC
25. Improving identification of rate ramp-up
risk in commercial aerospace
Managing risk in the supply chain is all the more that is required2. This highlights the importance of
important in commercial aerospace where the companies using practical and rigorous approaches
industry operating model has pushed much of the to assess supply chain risk and develop effective
design and manufacturing work to suppliers, often mitigation strategies. PwC has developed a model that
in the form of risk-sharing partnerships. The current allows companies to continually monitor and assess
rapid programme rate ramp-up will place risk in the AD supply chain and use that as the basis
considerable strain on suppliers’ capacity. for pinpointing suppliers that need more detailed
scrutiny and possible action.
PwC analysed the potential capacity risks in the
aerospace supply chain by identifying which suppliers’ In our experience, many tier-ones still need to
operations will be most strained by projected rate upgrade their core capabilities to improve the
ramp-ups on key 2011–2016 growth programmes. reliability of their end-to-end performance in the
We then mapped that against which suppliers may be value chain. This includes the maturity to manage
worst positioned financially to invest in additional their interface with their customers and the joint
capacity. Our study covered 12 key growth interface with other tier-ones, particularly the
programmes from five commercial and defence integrated performance of their core capabilities.
OEMs. We calculated required capacity growth There remains a tendency to ‘firefight’ or ‘muscle
and financial readiness scores for 93 suppliers across through’ to meet the ramp-up challenge. This can
nine different component and system segments. come at the expense of ways to really structure,
monitor, and dynamically collaborate as part of
The results showed that a fifth (21%) of suppliers
an extended supply chain.
aren’t financially ready to support the high ramp-up
an aircraft involves a very complex because managers perhaps feel chain risk or apply an undifferentiated
logistic process. We need 65,000 parts comfortable with its product or and resource-intensive approach of
from several suppliers. If one supplier personnel, or because production performing a detailed due diligence on
delays the delivery, the whole process is volumes are considered too low for a each of their suppliers. At the other end
affected.” In a recent example, dual source. This might come at the of the spectrum, companies sometimes
software problems in a remote cost of overlooking vulnerabilities in rely on internal or supplier surveys to
electronics unit tied to the fly-by-wire the supply chain. obtain a qualitative view of supply
control system for the new Embraer chain risks. Both the in-depth and the
Our experience with many industry
Legacy 500 and Legacy 450 business ‘lighter touch’ approaches have
players suggests that current
jets have led to a reported one-year limitations. Instead, companies should
approaches to AD supply chain risk
delay in first flight and certification1. develop approaches to map risk
management are either too complex or
Also, at a time when banking and too simple. We have seen companies continuously and quickly so that effort
market uncertainties remain high, trying to assign an absolute can be prioritised on the suppliers
the importance of checks on probability percentage to each supply where risk is greatest.
financial as well as operational and
capacity vulnerabilities can’t be
underestimated. There is also the
need to identify ‘self-inflicted risks’, “The difference between good and bad
such as a preferred reliance on a single risk management has a huge influence
supplier for certain components on margins.”
Bernhard Gerwert,
chief operating officer, Cassidian
1 Flight International, November 2011
2 PwC, Soaring or stalling: can aircraft manufacturers prevent rate ramp-up problems, February 2011.
AD Insights 2012 | PwC 23
26. Keeping tight control of costs out: “The biggest cause of variability in
and scheduling programme profitability can be traced
to design, mostly detailed design.
Tight control of costs and scheduling Profitability is impacted by technical
has always been a key focus for AD discrepancies even if one strives to
companies but the current era of identify them early in the program
government austerity budgets and and correct them throughout the
greater international competition and programme with good programme
pressure in the airline market has management skills.” Another senior
intensified the need to make sure executive in a US defence company
controls are effective. As one senior reflects that customer indecision
executive in a US defence company and lack of planning are sometimes
comments: “The military went from something that is beyond their control:
being a client to being a customer. We “Our biggest challenge is that the
need uniformed military leadership to government does not have a plan that
convert the buyers back into clients. we can build around. It makes us
Customers just look for the lowest reactors rather than planners.”
prices.” His counterpart in a European
Managing customer expectations is a
company serving both the commercial
recurrent theme that came through
and the military markets points out:
in our senior executive interviews:
“Keeping tight control of programme
“Programmes are more complex and
costs is a leitmotif for the aeronautical
developmental than they used to be.
industry.”
This makes requirements volatility
Understanding requirements and greater, which introduces significant
defining them as clearly and as early budgetary risk. There can be an
as possible is an important way of insatiable appetite for more features
preventing cost and scheduling and more functionality. You need a
difficulties. But this is not easy, as constant and disciplined contracts and
DCNS’s Andreas Loewenstein points configuration management or you will
be left holding the bag,” says one senior
defence company executive.
24 AD Insights 2012 | PwC