www.defence-advisers.com defence advisers council presentation “the impact of the strategic...

www.defence-advisers.com

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 A valuable and essential seminar for companies looking to

solve the problems of selling into the defence sectorsolve the problems of selling into the defence sector

“£38 bn Budget hole at the MoD”

“Future carriers – saved but delayed”

“Nimrods – Scrapped”

“Harriers and Ark Royal decommissioned”

“MoD to name shame contractors”

SDSR

THE HEADLINESTHE HEADLINES

• 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)!

UK Defence Industry

The Defence Advisers CouncilThe Defence Advisers Council(DAC)(DAC)

The Defence Advisers CouncilThe Defence Advisers Council

AGENDAAGENDA

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


12.00 Enhancing Capabilities & Competencies

12.45 Q & A

13.00 Networking buffet lunch

14.00 One-to-One meetings with presenters

1600 Depart

09.00 Arrival, registration, coffee

09.30 Welcome & Introduction

09.40 The Impact of the Strategic Defence & Security Review


11.00 Coffee


12.00 Enhancing Capabilities & Competencies

12.45 Q & A

13.00 Networking buffet lunch

14.00 One-to-One meetings with presenters

1600 Depart

BUT……..there has been the:

Strategic Defence and Security Review

(SDSR)

UK Defence Industry

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.

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.

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.

STRATEGY

&

PLANNING

“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.”

““By failing to prepare, you are preparing to fail”By failing to prepare, you are preparing to fail”Benjamin FranklinBenjamin Franklin

WHY PLAN?

OPTION 1 – The Business Miracle

THE OPTIONS

“Do today what you did yesterday and

expect a different result tomorrow.”

“Do today what you did yesterday and

expect a different result tomorrow.”

THE OPTIONSOPTION 2 – Manage The Future: Produce a Road MapProduce a Road Map

Define your Vision

Identify your Objectives

Set your Goals/Targets

Create a Strategy

Make a Plan

Communicate your Actions

Define your Vision

Identify your Objectives

Set your Goals/Targets

Create a Strategy

Make a Plan

Communicate your Actions

• Strategy Considerations • Invitation To Tender • Tendering And Contract Award • Contract Administration • Alliancing• Conflicts of Interest www.aof.mod.uk • Due Diligence• Influencing the Supplier Network• More Effective Contracting• Partnering• Private Finance Initiatives• Public Private Partnerships

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”

“The AOF is the authoritative source of policy and good practice for all members of the MOD and our Industry partners concerned with acquisition”

http://www.aof.mod.uk/

1. Prepare and Plan …………………………….….

2. Define your company’s products/services …

3. Determine why MOD should buy from you …

4. Decide on your ‘routes to market’ ……………

5. Identify your ‘strategic’ funding options ……

6. Organise Strategy Reviews ……………………

think strategicallyclearly“USP”

the tactics

rationallyregularly

KEY MESSAGES

James Short 07818 054645 [email protected]

James Short 07818 054645 [email protected]

Supply Chain Management & Development Submarine Solutions

Irshad Booly MCIPS MILTSupply 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 4 Category 3Category 2Category 1

COTS or near – easy to changeNon Critical

Critical equip to boat integrationCost/ Qualification/availability not normally an issue

Less critical items that are Expensive in Time/Cost to change supplier

Critical equipmentOr materials that would requireextensive developmentto change

43 suppliers

Category 4 Sources - The Situation today

• 22% assessed as financially at risk

• 65% stated products unique to Submarines

• 26% stated processes unique to Submarines

• 16% stated resources unique to Submarines

Of the 43 sources identified in this category:

Integrated Supplier Management Process

Supplier Managementand Development

Supplier Performance Review

SC21

Supplier ForumsCategory Management

Fragility Study

2 Year Improvement Plans

QBR 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

– 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 National Progress

1. Accreditation and quality improvement:

need to remove repetition, and unnecessary duplication

AS/EN9100

1. Accreditation and quality improvement:

need to remove repetition, and unnecessary duplication

AS/EN9100

2. Development and performance:

need increased efficiency and remove waste

Manufacturing Excellence

Business Excellence

2. Development and performance:

need increased efficiency and remove waste

Manufacturing Excellence

Business Excellence

Initially SC21 will implement 3 action streams to drive early

transformation and improvement

Initially SC21 will implement 3 action streams to drive early

transformation and improvement

5. Through life capability management

5. Through life capability management

3. Relationships:

Need for better end-to-end communication and collaborative planning

RMM/PPA

3. Relationships:

Need for better end-to-end communication and collaborative planning

RMM/PPA

4. Innovative Supply Chains

Creation of Partnerships & Collaborations to add value to customers & E business

BAE Systems – PPA/SPR

4. Innovative Supply Chains

Creation of Partnerships & Collaborations to add value to customers & E business

BAE Systems – PPA/SPR

SC21- Supply chains for 21st Century

Reduced auditing through recognition of supply chain certificationRecognise and accept certification to AS/EN9100 (or equivalent)Encourage special process approval to NadcapReduced quality visits through co-ordination between customers quality teams

A consistent approach to supply chain development and performance measurementRemove duplication of supply development programmes – achieve 80% commonalityUse common metrics (KPIs) Key Performance Indicators

Improved supply chain relationships Objective measurement of relationships using the RMMRelationships 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

What will the three work streams achieve?What will the three work streams achieve?

System Integrators

OEMs System Integrators

Past Emerging FuturePlatform assembly

Large scale integration

Small scale integration

Value – added parts & assemblies

Make-to-print parts & assemblies

Raw materials

•Primarily direct supply

•Many direct suppliers

•No real role for “integrators”

•Many “supplier paths”

•Fewer, still many direct suppliers

•Limited role for “integrators”

•Larger role for value adding suppliers

•Fewer “supplier Paths”

•Fewer direct suppliers

•Extensive role for “integrators”

•Larger role for value adding parts suppliers

Evolution of the Supply Chain to Supply Networks - TLCM Valu

e Adde

d

Regional funding for the Aerospace & Defence Industry

2010

North West: Aerospace Alliance: ADS Scotland:

Northern Defence IndustriesNorth East + Yorkshire:

Aerospace Wales Forum:

Farnborough Aerospace Consortium:West of England Aerospace Forum:

Midlands Aerospace Alliance:

ADS Project office:National oversight and co-ordination of the programme

ADS Northern Ireland

East of England

REGIONAL POINTS OF CONTACTREGIONAL POINTS OF CONTACT

REGION RTA Funding securedPoint of Contact e-mailSOUTH EAST FAC Kim Yeomans [email protected] WEST WEAF Barry Warburton [email protected]

WEST MIDLANDS MAA Tim Holmes [email protected] MIDLANDS MAA Tim Holmes [email protected]

NORTH WEST NWAA Martin Wright [email protected] EAST NDI Robin Fox [email protected]

NORTHERN IRELAND A|D|S Northern Ireland Ian Watson [email protected] Aerospace Wales Forumup to £500k indirectlyPaul Lindsay [email protected]

SCOTLAND A|D|S Scotland Ian Watson [email protected]

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

http://www.sbac.co.uk/

““SUCCESS IS ACHIEVED THROUGH A STRUCTURED PROGRAMME SUCCESS IS ACHIEVED THROUGH A STRUCTURED PROGRAMME ALIGNED WITH A COLLABOARTIVE AND CAPABLE SUPPLY CHAIN”ALIGNED WITH A COLLABOARTIVE AND CAPABLE SUPPLY CHAIN”

ASTUTE BOAT 1 ASTUTE BOAT 1

“It is not the strongest species that survive, nor the most intelligent, it is

the ones most responsive to change”

First in Class Astute exits Barrow

15th November 2009

Crossing the legal minefieldRichard 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

suppliers

- Defence Advisers Council

- Farnborough Aerospace Consortium

Helpline


Key messages for today:

SDSR will impact on your contracts

Get your contract right

Avoid the mines!

Defence buyers want suppliers to collaborate


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


Joint Venture collaboration

Separate legal entity

Good for large, complex or high risk ventures

Bad for small ventures


How do we assess lending How do we assess lending proposals?proposals?

Matt HatcherMatt HatcherHead of Structured Debt, South Head of Structured Debt, South RegionRegion

17th March 2011

58

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

59

Financial Appraisal

60

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?

• 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)?

• Can you articulate profitability per customer?

• 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?”

61

Financial

Appraisal

Non

Financial

Appraisal

Management

Appraisal

“The start point is always with the Strategic Business Plan”

62

“In the business world, the rear view mirror is always clearer than the

windshield.”

Warren Buffet

63

What analysis lies beneath these three themes?Financial

Track Record v Forecast

Operational Leverage

Revenue Visibility

Contract Risks

Net Working Capital

Customer Concentration

Capital Expenditure

Financial Leverage v

EBIT/DA

Cash Generation

Current Trading v Budget

Tangible Net Worth

Non Financial

Sector Dynamics

Competition (Porters 5

Forces)

Supply Chain

Characteristics

Legislation

Political

Environmental

Technology

Management

Depth & Experience

Strength of Finance

Function

Cohesive Strategy?

Key Employees

Multi Layer Customer

Relationships

Employee Incentive

Schemes

Succession Management

= Thorough assessment of the business model and lending proposition

+ +

64

• 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

Avoiding The ‘O’ Word

PwC

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

2. Timescale – Applications will take time, build this into your critical path

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

6. Advice – Speak to your advisors to ensure you have explored all opportunities

7. Time and reward – Balance the size of grant with timescale and information requirements

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.

DAC - Key Messages

www.defence-advisers.comwww.defence-advisers.com

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……”.


DAC - Key Messages


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


DEFENCE ADVISERS COUNCIL

AugMentor: Mike Teasdale [email protected] 07831 118300

Nat West: Matt Hatcher [email protected] 07748 887450

VWV: Richard Brown [email protected] 0117 314 5296

AugMentor: James Short [email protected] 07818 054645

PwC: Duncan Stratford [email protected] 07980 669540

BAE Systems: Irshad Booly [email protected] 07540 628018

…QUESTION TIME……QUESTION TIME…

mailto:[email protected]






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