Defence Advisers Council Presentation
“The Impact of the
Strategic Defence and Security Review”
Thursday 17 March 2011
A valuable and essential seminar for companies looking to
solve the problems of selling into the defence sector
www.defence-advisers.com
SDSR
THE HEADLINES
“£38 bn Budget hole at the MoD”
“Future carriers – saved but delayed”
“Nimrods – Scrapped”
“Harriers and Ark Royal decommissioned”
“MoD to name shame contractors”
UK Defence Industry
• Europe’s largest (20% market share)
• Worth over £30bn in 2010
• MOD
~ UK industry’s #1 Customer
~ 23,000 contracts annually
~ 200,000 Service personnel (almost)!
The Defence Advisers Council
(DAC)
The Defence Advisers Council
AGENDA
09.00
Arrival, registration, coffee
09.30
Welcome & Introduction
09.40
The Impact of the Strategic Defence & Security Review
10.30
Mitigating risks to future business (Part 1)
11.00
Coffee
11.30
Mitigating risks to future business (Part 2)
12.00
Enhancing Capabilities & Competencies
12.45
Q&A
13.00
Networking buffet lunch
14.00
One-to-One meetings with presenters
1600
Depart
UK Defence Industry
BUT……..there has been the:
Strategic Defence and Security Review
(SDSR)
What does the Strategic
Defence and Security
Review mean for the
Aerospace and
Defence Industry?
Background
• Aerospace and Defence sector have been under pressure due
to the global economic environment.
• SDSR focuses on industry specific issues:
- need to increase operational efficiency
- cut costs
- diversify and globalise to survive.
• MOD will be looking to increase and broaden the provision of
support services.
• Few surprises, but difficult decisions still to be made.
• Detailed planning required to balance the books and avoid
pushing the problem out to the right, or reducing flexibility.
Secretary of State for Defence Policy
Principles
1.
Operational commitments are top priority and must be
conducted effectively.
2.
Strategic Defence & Security Review will be cross-Government,
policy-led and resource informed.
3.
Core of UK security will remain NATO; US will be our major
partner and bi-lateral co-operation with France will be stepped
up.
4.
MOD’s relationship with defence industry will be reset and
Government will proceed with acquisition reform.
Is this a storm Industry can ride out?
• Big players with diversified products and global opportunities
will remain well placed
• Civil side recovering well since 2009
• M & A expected to increase as bigger players look to manage
risk in the supply chain
• Larger players could be exposed if suppliers are over reliant
on UK defence market
• Big contractors have had close contact with MoD – too close?
• Smaller providers may not have same visibility and may not
have such a good understanding of the requirements for
survival.
So what does it mean for potential
suppliers to the Defence Sector?
1.
Opportunities to provide cost savings for MOD
Procurement.
2.
Opportunities to buy up parts of MOD which they are
offloading.
3.
Opportunities for M&A activity as Primes look to
consolidate.
Working together to procure equipment better
• How we see it : Industry already diversifying and globalising, the military is
under the most pressure to change.
• Budgets have shrunk and provider base may shrink too .
• Suppliers will look to other markets.
• MoD needs its equipment suppliers to offer more by:
- decreasing their margins
- taking on more risk
- accepting more responsibility for R&D
- expanding their services to cover “models” such as availability
contracting & maintenance and support.
• MoD needs a more commercial focus, faster & more flexible contracting and
a more holistic approach eg through life expenses.
Contract Renegotiations
• Very clear signal from the Prime Minister that contract renegotiations
will be a strong focus.
•
MoD is expected to save £4.7bn from reducing the defence estate, civilian
headcount and allowances, (and renegotiating contracts).
•
Not yet clear how much of that is expected to come out of the margins of
suppliers.
•
BUT…. Industry can expect to face a Customer :
- adopting “a much more aggressive drive for efficiencies”
- looking to write significant amounts off existing contracts.
A new range of services bring opportunity
• New opportunities are likely to attract increased interest
• Areas likely to be on the table include facilities management ,
equipment maintenance and training
• Some demand likely to be met by larger business service providers who
operate in other sectors
• Expect some mergers in the market
• Not many start ups, as scale and robustness required and cost of entry
likely to be high - therefore look at increased partnering, JVs etc
• Offering these services will require a more customer-centric culture than
before.
Risk
• Some industries might look to have come through relatively unscathed, but
beware complacency.
• Need to balance short term crisis management and long term ambition.
•
Strategic ambitions likely to be dependent on military operations being
scaled back in Afghanistan by 2015, to create the headroom necessary to realise
the vision for 2020.
• If we are still in Afghanistan at the time of the next CSR, industry can expect a
similarly challenging focus on budget cutting.
•
BUT…the difficult work of deciding the detail of “how” to reduce costs is yet to
be done. And these “how” decisions will impact on defence suppliers.
What should industry do?
• Expect to see similar budget cuts from defence reviews across the world.
• Diversifying into other markets won’t mean the pressure on price will
disappear.
• Next UK review is in 5 years.
• Many cost cutting projects have been initiated in industry already.
• Bigger players should consider more transformational corporate
simplification programmes.
• For those who have made acquisitions, consolidation and standardisation
across entities, properties and processes will support efficiency, effectiveness
and agility improvements.
What should industry do?
• We recommend:
- Now is the time to review your strategy, aims and objectives
- Make your structures/models agile enough to deliver the
efficiencies required, as existing contracts come under price pressure
- Realign your market focus
- Therefore ….revisit your overarching business planning and the
operational model supporting it.
• Knock-on effects likely to be:
- A requirement for improved customer service
- An ability of the workforce to deliver new services
- The capability to up-skill to meet any gaps.
BUT - Life goes on ...
• Existing contracts will need strong programme management and governance.
• New contracts can expect even stronger government/customer focus.
• Delivering to time and on budget critical.
• Governance will be important. The new bribery bill: pressure will increase in a
sector where anti bribery and corruption compliance has always been key.
• Still a big sector with lots opportunity.
• Competitive advantage will be important, all aspects of operational and
financial efficiency should be scrutinised.
The Defence Advisers Council
(DAC)
STRATEGY
&
PLANNING
WHY PLAN?
“By failing to prepare, you are preparing to fail”
Benjamin Franklin
“The nice thing about not planning is that
failure comes as a complete and utter surprise
and is not preceded by
long periods of worry, anguish and self-doubt.”
THE OPTIONS
OPTION 1 – The Business Miracle
“Do today what you did yesterday
and
expect a different result
tomorrow.”
THE OPTIONS
OPTION 2 – Manage The Future: Produce a Road Map
Define your Vision
Identify your Objectives
Set your Goals/Targets
Create a Strategy
Make a Plan
Communicate your Actions
Acquisition Operating Framework
“The AOF is the authoritative source of policy and good practice for all
members of the MOD and our Industry partners concerned with acquisition”
•
•
•
•
•
•
•
•
•
•
•
•
Strategy Considerations
Invitation To Tender
Tendering And Contract Award
Contract Administration
Alliancing
Conflicts of Interest
Due Diligence
Influencing the Supplier Network
More Effective Contracting
Partnering
Private Finance Initiatives
Public Private Partnerships
www.aof.mod.uk
KEY MESSAGES
1.
Prepare and Plan …………………………….….
think strategically
2.
Define your company’s products/services …
clearly
3.
Determine why MOD should buy from you …
“USP”
4.
Decide on your ‘routes to market’ ……………
the tactics
5.
Identify your ‘strategic’ funding options ……
rationally
6.
Organise Strategy Reviews ……………………
regularly
James Short
07818 054645
james.short@augmentor-uk.com
The Defence Advisers Council
(DAC)
Supply Chain Management & Development
Submarine Solutions
Irshad Booly MCIPS MILT
Supply Chain Project Leader/Manager
Supplier Management in BAE Systems
•
Within BAE Systems we take a tiered approach to supplier management,
ranging from full strategic and operational performance partnerships with
our most strategic major suppliers to performance management with our
general supply base.
•
We use the SBAC 21st Century Supply Chain Programme - SC21 tools and
techniques for operational performance management and improvement with
our suppliers.
•
We recognise improvement in performance is dependent upon open
communication and clear improvement plans which must be two way to be
effective.
Integrated Supplier Management
Fragility Study
Category 1
COTS or
near – easy
to change
Non Critical
Category 2
Category 3
Critical equip to
Less critical
boat integration 43 suppliers
items that are
Cost/ Qualification/
Expensive in
availability not
Time/Cost to
normally an issue
change supplier
Category 4
Critical equipment
Or materials that
would require
extensive
development
to change
Category 4 Sources - The Situation today
Of the 43 sources identified in this category:
•
22% assessed as financially at risk
•
65% stated products unique to Submarines
•
26% stated processes unique to Submarines
•
16% stated resources unique to Submarines
Integrated Supplier Management Process
Fragility Study
Supplier
Performance
Review
QBR
SC21
Supplier
Management
and Development
Supplier Forums
Category
Management
2 Year Improvement Plans
PPA
Fragility Study looks at:
• Section 1 - Organisation Structure
•
(Contacts, Ownership Structure)
• Section 2 - Industry & Markets
•
(% T/O to Naval, Other Markets, Exchange Rate)
• Section 3 - Product Profile
•
(Technology, Obsolescence,)
• Section 4 - Staff & Employment Profiles
•
(Balance of Skills, Retention, Training)
• Section 5 - General Opinions & Influences
•
(Relationship, Defence Environment & Impact)
SC21 is an industry change programme designed to accelerate the
competitiveness of the aerospace & defence industry by raising
the performance of its supply chains.
• It is a national strategy, executed regionally
SC21 National Progress
–
600+ companies now signed up including MoD
–
Implementation phase underway : >200 companies actively engaged in
multiple customer working groups - 65 Self Starters added to the national
plan since Jan 09
–
Regional aerospace partners have now secured collectively over £8m to
roll out SC21 across the country – steering groups established.
–
Twelve (12) recognition awards made to date – 12 months continuous
world-class performance
–
Trials commenced on joint customer technical oversight of suppliers
–
SC21 is linked with technological innovation through the A&D Knowledge
Transfer Network (KTN)
–
Ethics – one of the seven key commitments : each SC21 signatory has
been asked to sign the Common Industry Standard Ethics document.
SC21- Supply chains for 21st Century
1. Accreditation and quality
improvement:
3. Relationships:
Initially SC21 will implement 3
action streams to drive early
transformation and
improvement
need to remove repetition,
and unnecessary
duplication
Need for better end-to-end
communication and
collaborative planning
RMM/PPA
AS/EN9100
2.
4. Innovative Supply Chains
Creation of Partnerships &
Collaborations to add value
to customers & E business
BAE Systems – PPA/SPR
Development and
performance:
need increased efficiency
and remove waste
Manufacturing Excellence
Business Excellence
5.
Through life
capability
management
What will the three work streams achieve?
Reduced auditing through recognition of supply chain certification
Recognise and accept certification to AS/EN9100 (or equivalent)
Encourage special process approval to Nadcap
Reduced quality visits through co-ordination between customers quality teams
A consistent approach to supply chain development and performance measurement
Remove duplication of supply development programmes – achieve 80% commonality
Use common metrics (KPIs) Key Performance Indicators
Improved supply chain relationships
Objective measurement of relationships using the RMM
Relationships workshops to facilitate improvement
Creating a relationship platform to address and progress the accreditation and
development work streams
Enablers to support development from Build to Print to TLCM
Platform assembly
Past
Emerging
Future
OEMs
System
Integrators
System
Integrators
Large scale integration
Small scale integration
Value – added parts
& assemblies
Evolution of the Supply Chain to Supply
Networks - TLCM
Make-to-print parts
& assemblies
Raw materials
•Primarily direct supply
•Many “supplier paths”
•Fewer “supplier Paths”
•Many direct suppliers
•Fewer, still many direct
suppliers
•Fewer direct suppliers
•No real role for
“integrators”
•Limited role for
“integrators”
•Larger role for value
adding suppliers
•Extensive role for
“integrators”
•Larger role for value
adding parts suppliers
Value
Added
Regional funding for the Aerospace & Defence Industry
2010
North West: Aerospace
Alliance:
ADS Northern Ireland
ADS Scotland:
Northern Defence Industries
North East + Yorkshire:
East of England
Midlands Aerospace Alliance:
Aerospace Wales Forum:
ADS Project office:
National oversight and
co-ordination of the
programme
Farnborough Aerospace Consortium:
West of England Aerospace Forum:
REGIONAL POINTS OF CONTACT
REGION
RTA
Point of Contact
SOUTH EAST
FAC
Kim Yeomans
SOUTH WEST
WEAF
Barry Warburton
WEST MIDLANDS
MAA
Tim Holmes
EAST MIDLANDS
MAA
Tim Holmes
NORTH WEST
NWAA
Martin Wright
NORTH EAST
NDI
Robin Fox
NORTHERN IRELAND
A|D|S Northern Ireland
Ian Watson
WALES
SCOTLAND
Aerospace Wales Forum Paul Lindsay
A|D|S Scotland
Ian Watson
e-mail
kim.yeomans@fac.org.uk
barry@weaf.co.uk
tim.holmes@midlandsaerospace.org.uk
tim.holmes@midlandsaerospace.org.uk
martin.wright@aerospace.co.uk
robin.fox@ndi.org.uk
ian.watson@adsgroup.org.uk
paul@aerospacewales.aero
ian.watson@adsgroup.org.uk
For Further Information and to sign up for SC21:
Visit : Aerospace/Defence/Security (formerly SBAC)
www.sbac.co.uk
A|D|S is the trade body advancing UK
AeroSpace, Defence and Security
Industries
ASTUTE BOAT 1
“SUCCESS IS ACHIEVED THROUGH A STRUCTURED PROGRAMME
ALIGNED WITH A COLLABOARTIVE AND CAPABLE SUPPLY CHAIN”
First in Class Astute exits Barrow
15th November 2009
“It is not the strongest species that survive, nor the most intelligent, it is the
ones most responsive to change”
The Defence Advisers Council
(DAC)
Crossing the legal minefield
Richard Brown, Aerospace & Defence
Farnborough Aerospace Consortium
17 March 2011
Lawyers & Parliamentary Agents
Crossing the legal minefield
Richard Brown
Aerospace & Defence Sector
Veale Wasbrough Vizards
- Lawyers to MoD/Primes/Defence supplier
- Defence Advisers Council
- Farnborough Aerospace Consortium
Helpline
Crossing the legal minefield
Key messages for today:
SDSR will impact on your contracts
Get your contract right
Avoid the mines!
Defence buyers want suppliers to collaborate
Crossing the legal minefield
Impact of the SDSR on defence contracts:
Can defence buyers cancel a contract?
Can prices be renegotiated if a contract has been
signed?
Can a defence buyer require a supplier to offer more for
less?
What legal documents?
Defence standards (DEFSTANS)
Defence forms (DEFFORMS)
Defence conditions (DEFCONS)
Contracts with the Primes
MoD contracts
Strategic Defence & Security Review
Cancellation rights?
MoD Defence Conditions
DEFCON 534: Prompt payment
• Credit period for your suppliers = 30 days
• Credit period for MoD = 60/90/120 days
DEFCON 566: Change of control
• Duty to advise MoD
• Effect on possible sale
• Mergers and Acquisitions Section
MoD Defence Conditions
DEFCON 703: Intellectual property rights
• What are “intellectual property rights”?
• Normal rules under English Law
• Ownership of IPR passes to MoD
• More beneficial to MoD
DEFCON 649: Vesting
• Normal rules under English Law
• Title (ownership) passes to MoD
• More beneficial to MoD
Supply contracts: the mines
You, the bank and your shareholders
Termination rights
Reduced orders
More for less
Renegotiation of prices
Impact of SDSR
How do you collaborate?
Through a Contract for supply of goods or services
By forming a partnership
By forming a joint venture company
Others: e.g. European Economic Interest
Groupings, Secondments etc.
Contractual collaboration
Blank sheet of paper
Good for manufacturing or supply arrangements
Bad for R & D
Advantages and disadvantages
Partnership collaboration
Unlimited liability
Limited Partnerships
Limited Liability Partnerships
Good for small or informal ventures
Bad for large or high risk ventures
Advantages and disadvantages
Joint Venture collaboration
Separate legal entity
Good for large, complex or high risk ventures
Bad for small ventures
Advantages and disadvantages
The Defence Advisers Council
(DAC)
ab
c
How do we assess lending proposals?
Matt Hatcher
Head of Structured Debt, South Region
17th March 2011
Topics of Discussion Today
•
How robust are your financial reporting systems?
•
How do we assess a lending proposal in today’s environment?
•
Coming out of recession - avoiding the ‘O’ word
58
Financial Appraisal
59
How robust are your financial reporting systems?
•
Is your financial reporting package appropriate for your size of
business?
•
•
Do you produce a cash-flow statement alongside P&L and B/S?
•
•
Can you articulate profitability per customer?
Monthly management accounts are by their very nature backward
looking so do you have an effective suite of KPI’s to track
business performance (daily/weekly)?
When you finalise your audited accounts to your opt for
production of a cash-flow statement?
“Cashflow is the life blood of your business – how closely do you monitor?”
60
Management
Financial
Appraisal
Appraisal
Non
Financial
Appraisal
“The start point is always with the Strategic Business Plan”
61
“In the business world, the rear view mirror is always clearer than the
windshield.”
Warren Buffet
62
What analysis lies beneath these three themes?
Financial
Non Financial
Management
Track Record v Forecast
Sector Dynamics
Depth & Experience
Competition (Porters 5
Strength of Finance
Contract Risks
Forces)
Function
Net Working Capital
Supply Chain
Cohesive Strategy?
Operational Leverage
Revenue Visibility
Customer Concentration
+
Characteristics
+
Key Employees
Capital Expenditure
Legislation
Multi Layer Customer
Financial Leverage v
Political
Relationships
EBIT/DA
Environmental
Employee Incentive
Technology
Schemes
Cash Generation
Current Trading v Budget
Tangible Net Worth
Succession
Management
= Thorough assessment of the business model and lending
proposition
63
Avoiding The ‘O’ Word
•
More businesses fail coming out of a recession than going into it,’ but why? The key risk of managing
out of recession is overtrading.
•
Overtrading is when a business has insufficient finance to sustain its level of trading - it tries to engage
in more business than the investment in working capital will allow. The business could well be profitable
but it has insufficient working capital / equity base to support increase in turnover.
•
Keep an eye on current ratio (current assets / creditors falling due within 1 year) – do you have positive
or negative cover?
•
An illustration of Working Capital in action using a Net Working Assets ratio
64
Finance - opportunities
• Raising finance for expansion, investment or acquisition – be prepared
• Getting your house in order: robust systems & controls improve efficiency
and reduce the risks
Efficiency/competitiveness – some opportunities:
• Plan to optimise your tax position
Focus on two opportunities in the sector:
• R & D tax credits regime can generate CASH or reduce tax burden
• Grant funding still available BUT requires planning
PwC
Research & Development Tax Credit Regime
• SMEs (<500 e’ees and t/o < €100m; or balance sheet total < €86m)
- “Super” deduction of 175% for revenue and 100% relief for capital
- Surrender loss for a payable tax credit (14%) to generate CASH
• Large companies
- 130% deduction for revenue and 100% relief for capital
• Qualifying Indirect Costs – widened definition
• Possible impact of Dyson Review
- Focus on high-tech advancements
- Favourable for SMEs
PwC
Background to grants in the UK
• UK Government typically spends an estimated £2.5 billion per annum on
business support
• European Commission makes a significant contribution via grant to R&D,
infrastructure and training
• Grants landscape across the UK has changed (RDAs and EZs)
• In England the Regional Growth Fund is now a major source of funding in
the regions
• RGF supports Capital Investment, Training and R&D and Infrastructure.
£1.4 billion over 3 years but competitive
• Recent search identified over 250 grants available to companies in the
manufacturing across England!
PwC
Background to grants in the UK
• Discretionary Grants are also available from other sources:
- Seventh Research Framework Programme (FP7)
There are grants available from FP7 that encourage Europe-wide
collaboration and the sharing of knowledge eg Clean sky
 Technology Strategy Board (TSB)
A programme of funding is available from the Technology Strategy
Board (TSB) which supports innovative business ideas.
PwC
Grant funding from Government
• Main criteria:
- Degree of innovation and policy fit
- Not automatic. Discretionary / some negotiable / competitive
- Subject to an upper limit, typically linked to the proportion of capital
expenditure, R&D or employment costs that can receive aid.
- Never 100%
- Viability of applicant
- Cumulation (can’t get grants for same project costs)
- Commitment
- Private sector funding (needs to be substantial)
PwC
10 Key Tips
1. Commitment – Do not make an
irrevocable commitment to the project
prior to receiving a grant offer
6. Advice – Speak to your advisors to
ensure you have explored all
opportunities
2. Timescale – Applications will take
time, build this into your critical path
7. Time and reward – Balance the size
of grant with timescale and
information requirements
3. Competitive – You cannot begin to
negotiate grant until you have
shortlisted at least one UK grant
location. Doing so could undermine
your case
4. Due diligence – Research grant
availability by geography, sector,
activity and understand in detail the
grant providers key criteria
5. Need for grant – Genuine choice of
location options have a better chance of
success in demonstrating need for
grant. Need to have robust alternative
PwC
8. Contract – Public sector will tie you
into a contract which may lock you into
conditions beyond the period of
investment
9. Payment – Grant will always be paid
in arrears.
10. Period – Grants in the UK are likely to
be reduced by 2013 but recent
announcement of Enterprise zones as
well.
The Defence Advisers Council
(DAC)
The
Defence
Advisers
Council
DAC
- Key
Messages
(DAC)
The SDSR announcements are unlikely to change the world dramatically for many
providers…BUT…..
 MoD and primes increasingly looking at supply chain in more depth from both
financial and operating perspective, be properly prepared.
 SDSR is another aspect of the changes the A&D industry is already going
through…. and a specific example of the need for the customer-provider
relationship to evolve to meet the financial challenges.
 Nevertheless, Industry will have to work and think hard in response to SDSR.
 In the midst of uncertainty & dangerous security developments around the world,
particularly in the Middle East and North Africa, Defence Secretary Liam Fox
confirmed at the end of last month:
“Difficult decisions have to be taken to tackle the £38bn deficit at the MOD……”.
www.defence-advisers.com
The
Defence
Advisers
Council
DAC
- Key
Messages
(DAC)
 Preparation: prior preparation & proper planning is crucial
 Implementation: a well thought out strategy will achieve the best results
 Avoid the mines: Use specialist advisers when supplying the Defence Sector
Ensure your own company is:
 Financially well organised
 Legally well prepared (get your contracts right)
 Value-driven - moving towards the same objectives as a team
 Collaboration: Understand MOD’s encouragement for SMEs to form “clusters”
Integrated Supply Chain Management: SC21 is a vital part of the future
www.defence-advisers.com
…QUESTION TIME…
DEFENCE ADVISERS COUNCIL
AugMentor:
Mike Teasdale
mike.teasdale@augementor-uk.com 07831 118300
Nat West:
Matt Hatcher
matt.hatcher@rbs.co.uk
07748 887450
VWV:
Richard Brown
rbrown@vwv.co.uk
0117 314 5296
AugMentor:
James Short
james.short@augmentor-uk.com 07818 054645
PwC:
Duncan Stratford duncan.d.stratford@uk.pwc.com 07980 669540
BAE Systems:
Irshad Booly
irshad.booly2@baesystems.com
07540 628018
The Defence Advisers Council
(DAC)
www.defence-advisers.com