The defence industry is facing the toughest time since the end of the cold war. Governments around the world are reducing defence budgets, with cuts by the UK Ministry of Defence (MOD) already having an impact and US DoD cuts in the pipeline.
PA Consulting Group’s Managing Uncertainty survey of 200 global business leaders has shown that businesses that use difficult times as an opportunity to cut costs strategically and transform operations can secure sustainably higher market share and value. These findings provide clear lessons for defence companies
In particular, the survey showed that companies which generated the highest total shareholder returns (TSR) avoided extreme cost cutting; were measured and focused in their response to the economic difficulty; tried to preserve staff who were key to future competitiveness; and did not undertake fire sales of businesses.
It may be tempting to cut both people and investment to focus on the profitable core and immediate returns; however, it is important to recognise that companies cannot cut their way to growth. Indeed, applying blanket cut-backs can lead to a downward spiral, with each new round of cuts reducing future capability and sales. In addition, our survey showed that 82 per cent of companies reduced their costs in response to the financial crisis: while cost-cutting is a natural and correct response to uncertainty, if all organisations do it, then it does not offer strategic differentiation.
In the UK, several defence companies have announced redundancies in response to MOD budget cuts. The Managing Uncertainty survey showed that companies should cut extremely carefully and actively seek to preserve people who will be crucial to future growth and longer-term opportunities. In defence, where, sales, product development and technology cycles are long, it can be tempting to reduce staff in those areas that will not generate returns for a number of years.
However, this can cause major, sometime irreparable, damage to long-term growth prospects. Instead, the survey shows that companies with the highest TSR took a different approach: they engaged staff in changes and put a significant focus on good leadership.
Similarly, slashing investment in areas such as product development, innovation and new business development may provide short-term savings but can lead to long-term reductions in competitive advantage and future business growth.
It is important to recognise that this period of financial uncertainty also offers opportunities. Defence companies that are able to transform their operations and save government money could increase market share. This could be through offering cheaper and more effective products and services than incumbents or by taking work (such as equipment support) from the military. Tough times also provide opportunities for those with the cash to buy competitors (as General Dynamics did with Force Protection).
To find out more about PA’s work in defence transformation or to speak to one of our experts about the Managing Uncertainty survey, please contact us now.