Articles and blogs on the topic of sequestration have been
loud and voluminous. For most executives
in the aerospace and defense (A&D) industry, it may feel as if you’re on a
boat headed somewhere in the midst of a raging storm and no way to get
off. A feeling of helplessness is
explainable yet it seems most have chosen to take the ostrich approach – head
in the sand hoping the turmoil around them will just pass. Is this really your best strategy?
For most A&D companies, their portfolios are
particularly vulnerable to the whims of Government decision makers. This places financial performance equally in
the hands of those for whom a company has little control over. The traditional model has been to leverage
influence to ensure that key programs remain adequately funded through a
combination of legislative engagement and working directly with Government
officials. When funds have been robust,
this strategy worked – most of the time.
However, we’ve entered a period where these tried and tested methods are
no longer effective. For any A&D
company that hopes to not only survive this fiscal train wreck, but to grow
through it, a new approach is called for.
The conventional wisdom circulating around the “Beltway” is
that Congress will simply delay the effects of sequestration by ‘kicking the
can’ down the road for a few months. In
practical terms, that means a continuing resolution (CR) under which current
programs are only partially funded and new program starts are delayed
further. Regardless of the election’s
results, it’s highly unlikely that sufficient clarity will emerge to prevent
additional deep cuts to defense spending nor will a clear path with greater
stability emerge. Keep in mind that
sequestration is only one factor in a complex web of fiscal policy decisions.
Many A&D companies have placed their bets on the global
market. While in past defense
contractions this may have softened the blow, the global financial crisis makes
this strategy tenuous at best. The
Middle East and Asian markets may have calmer waters, but in the global web of
finance, even these nations will be slow to make major financial investments in
defense, and the European market will continue to create a drag. My advice – be cautious in placing your bets
on exports as a primary strategy to fill the gap of decreasing US sales. It can be very expensive to implement an
international campaign and the timetable for decisions can drag out for years
while you’re draining your budgets chasing customers.
Another option for some A&D companies is the commercial
market. Most A&D executives can tell
you horror stories about trying to break into the commercial market and failing
in grand fashion. One of the key reasons
for this is that A&D companies are wired to comply with FAR and other
Government policies and trying to adapt those internal governance mechanisms
for commercial markets is nearly impossible.
This is why any commercial endeavor has to be a break-away strategy from
the Government-compliant model.
If you’re an A&D company whose portfolio is currently
dependent upon Defense spending, here are some things to consider as you revise
your strategy for the years ahead.
First, do some scenario analysis around the potential impacts of
sequestration and the increasing likelihood that years of uncertainty in
Defense budgets lie ahead – this is the new reality and the sooner you can
understand the downside (and occasional upside) of these scenarios the
better. If you’ve been keeping your head
in the sand, it’s time to look up and embrace the environment. Second, if your firm has international sales
opportunities then by all means pursue them.
However, select a few markets where your potential is high and you can
manage the investment required. In
addition, be realistic about timing and understand that procurement cycles don’t
follow the US model and you should expect numerous delays, opaque decision
processes, and setbacks. Lastly, if you
chose to consider a commercial play, be prepared to make a clean start. Separate your commercial endeavors from your
core A&D approach. Consider setting
aside a new team and perhaps even bring in new talent that is more experienced
in commercial pursuits.
If your team is wresting with the issue of navigating the
current budget environment and are interested in help, contact Connect2Action
at info@connect2action.com or
visit our website at www.connect2action.com.
Duane Grove is founder of Connect2Action, a strategy
execution specialist at the intersection of employee engagement and executive
leadership, igniting innovation as a lever to accelerate your growth. Follow Duane on Twitter @connect2action, his
blog at connect2action.blogspot.com, or follow him on Google+ at connect2action@gmail.com and Facebook at duane@connect2action.com.
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