2013 A&D MARKET SURVEY - Aerospace Industries … · government and commercial sector A&D companies...

2013 A&DMARKET SURVEYPerspectives from A&D Managers on Key Business and Technology Trends

Budget cuts and impact on workforce

Customer demands and pricing pressure

Technology and product innovation

Evolving supply chain relationships

SPONSORED BY CSC AND AIA

2013 AEROSPACE & DEFENSE MARKET SURVEY

2

EXECUTIVE SUMMARYSequestration is having a direct negative impact on aerospace and defense companies throughout the supply chain that provides the needed capabilities to the Department of Defense and other government agencies. Companies are left to juggle the financial impact of delays and cancellations of programs, workforce displacement, supplier disenfranchisement and general uncertainty.

At the same time, commercial companies are under increased pressure to lower aircraft acquisition costs and, more important, ongoing operational costs. These are the main conclusions drawn from the 2013 Aerospace and Defense Survey, conducted jointly by CSC and the Aerospace Industries Association.

More than 150 business and technology executives and senior managers responded to the 13th annual survey, which included questions about business, economic and technology challenges over the past 12 months, as well as near-term expectations.

For the second consecutive year, the leading challenges for A&D companies related to defense cutbacks, program cancellations and uncertainty in government funding. The impact is affecting a wide variety of programs:• Significantdeclineinabilitytoattractthenextgenerationofworkerstoreplaceretiringworkers• FurtherdownsizingexpectedforinternalorganizationsincludingITandsupplychain• Defensecompaniesseekingnewrelationshipswithcommercialsupplierstosellunusedcapacityandassets• IncreasedM&AactivityexpectedtoimpactsmallerA&Dcompanies• Slowadoptionofemergingcomputingtechnologies(e.g.,cloud,infrastructureasaservice)

The 2013 survey indicates that commercial sector aerospace companies are focused on growth and on remaining competitive. Strategies include:• Heightenedemphasisondesigningandproducinginnovativeproducts• Focusingonnewrevenuestreamsinaftermarketservicesornewgeographies• Moreflexiblepricingtomeetcustomercostdemand• Implementationofprocessimprovementprogramswithhighestnear-termROI

The 2013 survey results indicate that the industry’s highest priority is creating competitive advantage through new, innovative products and services and by securing new sources of revenue in both current and adjacent markets while preserving existing revenue streams. In addition, both military/government and commercial sector A&D companies are demanding greater program accountability across the global supply chain network.

Finally, finding and retaining highly skilled scientific, technology, engineering and math resources is a very important but challenging priority for A&D companies, as is the implementation of emerging machine-to-machine, cloud and mobility technologies to transform operations and lower costs.


3

INTRODUCTION AND DEMOGRAPHICSThe respondents to the AIA and CSC Aerospace & Defense 2013 Survey fall into two fundamental industry categories; commercial and government/military.Aminordistinctionistheroledefinedasamanufacturingintegrator.Oftenthisroleisfamiliartoagovernment/militaryOEM.Asmanufacturingmethodshavechanged,commercialOEMsareassumingasimilarroleasthetotalriskofnewprogramsissharedwithprimarysuppliers. Interesting as it is this group of companies that is more involved in the longest, and most likely largest, value portion of the product life cycle,themaintenance,repairandoperations(MRO),aftermarketandfieldservicessolutioncompanies.Thisdoesnottakeawayfromtherole ofOEMortiersuppliersinMRO,butindicatesthreedistincttypesofcompaniesinbothcommercialandgovernment/militarycompanies.

Q. Identifyyourorganization’saerospaceanddefensebusinesssegment(s).Chooseallthatapply:

0% 30%

Military

Civil government

Aircraft manufacturer/integrator

Space systems, lift vehicles, payloads and launch services

Tier-X component supplier

Consulting and professional services

IT provider

Prime contractor/original equipment integrator (OEI)

Logistics, field service, sustain-ment, MRO service provider

Aftermarket components repair facility

Comments

7.5%

9.1%

9.8%

4.9%

4.9%

9.8%

14.3%

10.1%

26.1%

2.3%

Q21. GOVERNMENT/MILITARY RESPONSES

Commercial airline

Commercial aircraft manufacturer/integrator

Business aircraft manufacturer/integrator

Commercial space systems, lift

vehicles, payloads and launch services

Tier-1 component supplier



Consulting and professional services

IT provider

Logistics, field service, MRO service provider

Aftermarket components manufacture and repair

Comments

14.3%

5.9%

7.7%

13.8%

10.5%

5.4%

9.2%

11.0%

10.2%

1.3%

Q4. COMMERCIAL RESPONSES

0% 30%

3.6%

7.2%

1.3%


4

The respondents in both commercial and government/military companies are identical, leading with business development/sales, followed by supply chain management/sourcing and then information technology. The responses later in the survey likely shed some light on the weighting of the respondents. Government/military companies continue to experience spending reductions due to sequestration, with little expectation offuturechanges.Coupledwiththedrawdownofactivityinareasofconflict,Afghanistanespecially,operationalspendingonreplacementequipment continues at a slower pace. Specific programs face continuing pressure to validate their need against the war fighter requirements in an uncertain defense spending environment. Commercial and government/military companies operate as public corporations with an obligation to shareholders for reasonable returns on their investments through profitable growth. It is not surprising that business development and sales professionals are the leading contributors to this year’s survey. It follows that not only do the business developers need to look for new sources of revenue, but the supply chain management and IT groups are also tasked with direct cost take-out to serve A&D company shareholders.

Q. Select your primary functional area. Choose one:

0% 0%35% 35%

Business development/sales

R&D/product engineering

Program management

Materials management/ warehouse/transportation

Supply chain management/ sourcing

Manufacturing/ quality engineering

Product support

Repair operations and management

Field service

Manufacturing operations

Human resources

IT

Contracts management

Finance

Comments

Q5. COMMERCIAL RESPONSES Q22. GOVERNMENT/MILITARY RESPONSES

Business development/sales

R&D/product engineering

Program management

Materials management/ warehouse/transportation

Supply chain management/sourcing

Manufacturing/ quality engineering

Product support

Repair operations and management

Field service

Manufacturing operations

Human resources

IT

Contracts management

Finance

Comments

2.0%

2.0%

3.3%

7.9%

2.0%

0%

9.9%

11.2%

1.3%

8.6%

7.9%

2.0%

3.9%

3.9%

34.2%

3.2%

1.1%

5.3%

10.5%

2.1%

0%

2.1%

0%

8.4%

12.6%

16.8%

1.1%

9.5%

2.1%

25.3%


5

STRATEGIC BUSINESS OBJECTIVESA major difference between commercial and government/military companies is apparent in their No. 1 choice. Commercial companies are concerned with designing and producing innovative products. Perhaps this is a response to the demands of their customers and their customers’ customers. Demands on commercial aviation for better efficiency and superior customer experience are likely the driver for this No. 1 choice. Conversely, the No. 1 choice of government/military companies was to seek new relationships with commercial suppliers. As capacityutilizationisreduced,duetosequestrationorprogramdelaysandreductions,capacityisavailableandassetsareunderutilized.In this case, a near-term fix is to offer that capacity to commercial companies, which have order books that extend for many years. This could be a win for both sides of the ledger. When combined, new supplier/customer relationships and improved customer service are fundamental recognition of the importance of the relationships that make this industry strong — the customer and the supplier. New relationships might includealternativepricing,suchaspowerbythehour(althoughthegovernmentmightresistthisidea,similartotheleaseoptionforthenew AirForcetankerthatfailedtosuccessfullymakeitthroughCongress).However,newrelationshipstructuresthatincludeMROsparessupportcould have the outcome of securing a long-term revenue stream and mitigate the government buying cycle for military companies.

Q. Rankyourthreemostimportantstrategicbusinessobjectivesoverthenext1to2years(1beingthehighestobjective,2second, 3third-highestobjective):


Establish new relationships with government suppliers and customers

Establish new relationships with commercial suppliers and customers

Design and produce innovative products

Improve customer service/satisfaction

Manage the total product life cycle to include service support

Improve internal efficiency/lower cost

Grow the sustainment/aftermarket business

Other

Most ImportantMost Important Least ImportantLeast Important


6

MACROFORCESDevelopinganewprogramrequiressubstantialamountsofcashregardlessofcommercialorgovernment/militaryfocus.Onthecommercialside,CEOsarealmostbettingthecompanyonanewdesign.Slightlydifferentonthegovernment/militaryside,developmentofanewplaneorsystemmight be offset by government development funding.

Thereisnodoubtthatsequestrationishavingadirectimpactongovernment/militaryOEMsandtheirtieredsuppliers.Thesecompaniesare juggling the financial impacts of delays, workforce displacement, supplier disenfranchisement and general uncertainty. It is impossible, at this point in time, to predict the next 12 months, much less the next 5 years, in this market. At the same time, commercial companies are under pressuretoloweraircraftacquisitioncostsand,moreimportant,ongoingoperationalcosts.WhenacommercialaircraftOEMclaimsanexpectedefficiency outcome, customers are likely to require some sort of performance guarantee for spares costs.

Tiedforthirdaretwoverydifferentissues.First,thequestionis,“HowwilltheindustrybereshapedthroughM&Aorverticalintegration? WillaircraftOEMsacquiretheirsupplybasetoachievelowercostsandsecurethesupplychain?”Perhapslesslikelybutstillpossible,“Will therebeamegamergerthatbringstogethercommercialorgovernment/militarycompaniesintoamegacompany?”Whileitisdifficultto predicthowtheFTC,DoDorDOJwouldreact,thereisstillthepotentialforamegamerger,especiallyifcompaniesbelievescaleistheanswer to lower costs. This approach might be the answer to the second response in third place, the acknowledgment that more and more responsibility isbeingshiftedtotheOEM.OEMsareexpectedtotakeresponsibilityfordesignandsystemsintegrationaswellasoverallsourcingandafter-market support. Perhaps there is a silver lining in this situation, especially when aftermarket support is considered, as this can create a long-term revenuesourceforcompaniesthatareabletonavigatethisnewfrontier.OrthismayresultintheacquisitionofMROserviceprovidersby OEMstocapturenewrevenueandaddressnewcustomerdemands.

While ranked slightly lower, at number 4, capital and the access to capital is likely the single most important financial driver in keeping both com-mercial and government/military companies viable as economic and war-fighting suppliers.

Q. Whatarethetopthreeaerospaceanddefenseindustrymacroforcesaffectingyourorganizationoverthenext2to3years? (1beingthelargest,2second,3thethird-largest):

Globalization of markets, localization of manufacturing

Affordable access to capital

Reductions and reallocations in defense spending, pricing pressures in commercial markets

Reshaping the industry through mergers, acquisitions and divestitures or vertical integration

Workforce demographics — a growing shortage of talent

Compliance with export, tariff/trade, intellectual property, environmental and security regulations

Accepting greater responsibility for “systems” vs. product-specific innovation, design, sourcing, manufacture and aftermarket support


Most ImportantLeast Important


7

MERGER AND ACQUISITION IMPACTS FROM AN IT PERSPECTIVESuccess rates of M&A continue to be disappointing, due to poor strategy, bad deal making and failed systems and applications integration. CapabilitiesthatbringanorganizationsuccessinitsdailybusinessmaynotbethesameonesnecessaryforM&Aintegration.• Moststudiessuggestthatonly25%to33%ofmergerscreateshareholdervalue: – 80%ofthemergersintheU.S.andEuropeoverthelast30yearshavebeendivested,withabout70%beingsoldataloss.• Failureismainlyduetoineffectiveintegrationplanningandexecutionratherthanpoorstrategyordealanalysis: – Totalmarketvaluewithin6to24monthsofclosingisdownabout15%. – Only20%offirmshaveformalintegrationplansandexecutethemagainstspecifictargetsandperformancemeasures.• Narrowfocusonpotentialsavingsopportunities(e.g.,corporateconsolidation)isleavinguntappeddollarsonthetable.

It is not surprising that after a merger, IT is saddled with excess or redundant legacy applications. As the industry consolidates, IT is faced with the challenge of simplifying the IT footprint and reducing unused applications and costs. The next unintended consequence is the absorption of IT staff and infrastructure. For those companies that have fully absorbed applications, staff and infrastructure, success might include a lower overall cost of IT. At the other end of the spectrum, those merged entities that have not absorbed the resources, applications and IT staff could be proportionately at a disadvantage. No matter what, IT spending, while higher in A&D due to the complexity of the products, is still a cost that must be managed against the value delivered to the business.

Q. Ifyourcompanyhashadarecentmergerand/oracquisition,whatimpacthasithaduponyourITorganizationandyourbusiness applications?Pleasecheckallthatapply:


The infrastructure and applications have been fully absorbed into the resulting organization

We have not absorbed these resources and remain with redundant business applications,

infrastructure and IT personnel

The excess applications that remain represent an opportunity to remove duplicate and older

legacy applications and to standardize on applications across the company

The legacy applications are suitable for our com-pany’s current and near-term business functions

The legacy applications are either too brittle or too obsolete and therefore are unsuitable for our

current or near-term business functions10.7%

16.1%

28.6%

21.4%

23.2%

12.9%

19.4%

29.0%

12.9%

25.8%

0% 0%30% 30%


8

OPERATIONAL EFFICIENCY INTRODUCTIONThe CSC Aerospace & Defense Industry Survey has historically focused more on business, process and market-related questions and less on the enablinginformationtechnologystrategiesorobservations.Pastreportshavefocusedontheconsumerizationeffect,cybersecurityissuesandemergingtechnologiessuchascloud,BYODmobility,dataintegrationandvaluechainanalyticsanddatacorrelationsfromexternalsourcestodrivenewbusinessvalue.Thisyear’ssurveyincludesdataonITmodernizationstrategiesrelatedtoemergingmachine-to-machine,always-connectedtechnologies for manufacturing and aftermarket. The manufacturing industry is at the precipice of what many are describing as the fourth Industrial Revolution.Totrackthistrend,thesurveyincludesquestionsonITmodernization,priorities,fundingandadoptionofemergingtechnologiessuchascloud computing. This section addresses the questions and responses for both the commercial and military manufacturers solicited for this survey.

RESULTSThehigh-levelresultsofthissurveyclearlypointtothedifferencesindecisioncriteriaandmodernizationapproachesbetweenthecommercialmanufacturers and those focused on the military market. The model that it presents is not surprising given the budget constraints in the defense sector and the slow recovery in the North American markets. The growth that is occurring is fueled by reductions in energy costs associated with the natural gas boom in North America, which is attracting many multinational manufacturers to invest in manufacturing operations in the region.

Q. WhatplansdoyouhavetoimproveoperationalefficiencyonboththebusinessandITmodernizationfronts?Checkone:


Little to none at this time. We are taking a “wait-and-see” position — awaiting the real outcomes and implications of the global economy

Budgeted plans have been pushed out, awaiting better views of the emerging economy’s financial position, but are still needed/planned

A small number of very selective business and modernization initiatives are planned or in-flight currently

A set of transformational initiatives, in both the business and IT functions, are currently in motion to enable our company to continue and/or gain competitive advantage

Little to none at this time due to the elimination of new and large programs to support funding and modernization investments. We are taking a “wait-and-see” position — awaiting the real outcomes and implications of the government funding process

Budgeted plans have been pushed out, awaiting better views of the government customers’ direction, but are still needed/planned

A small number of very selective business and modernization initiatives are planned or in-flight currently

Government funding has set in motion transformational initiatives in both the business and IT functions to enable our company to continue and/or gain competitive advantage

9.7%NEEDED BUT

PUSHED

18.4%WAIT AND SEE

35.0%SELECT INITIATIVES

PLANNED OR IN-FLIGHT

36.9%IN MOTION

11.9%IN MOTION

45.8%SELECT INITIATIVES

PLANNED OR IN-FLIGHT

18.6%WAIT AND SEE

23.7%NEEDED BUT

PUSHED


9

TheresponsestotheITquestionsinthisyear’ssurveyregardingITmodernizationaretypicalforaneconomicdowncycle.Commercial manufacturers are taking advantage of the lull in production to drive process improvement programs, which include transformational improvements inITsystems(applications,infrastructureandintegration).MajorOEMsneedtostayleanandcompetitiveinatightmarket.Operationalefficiencyimprovementsbringbusinessvalueandreducecoststhataffectbottom-lineprofits.CommercialOEMsareoftenwillingtoinvestintheseperiods to prepare for the next upturn in the market. In stark contrast are the responses from the military or defense providers, which can only afford to focus on a select field of initiatives that remain funded and are already underway with government programs and/or specific program funding.

Defense manufacturers confirmed that they have pushed back enterprise or corporate-funded initiatives due to the cost pressures from the lower production and lack of government orders in the pipeline. In addition, it’s difficult for these companies to allocate costs across multiple programs when they provide corporate-level services to a government program. Therefore, they are less likely to spend their own profits when the future revenues are at risk.

Thisparadigmshiftreflectsthetypicalshiftininnovationtothecommercialsectorsduringlowgovernmentormilitaryspending.Inpeakwarcycles,innovation and spending is the opposite, and innovation is driven by government initiatives.

Q. LookingatyourbusinessapplicationsandITinfrastructure,whatisyourmodernizationstrategygoingforward?Chooseallthatapply:


Application replacement or modernization

IT infrastructure modernization

Migration off the mainframe onto less expensive platforms

Transitioning our applications to a virtualized infrastructure

Moving our applications to the cloud

Integrate what we have for better data sharing

All of the above

None, we don’t have an application or IT infrastructure modernization strategy

Comments

9.3%

8.2%

17.6%

6.0%

8.2%

3.3%

22.0%

23.6%

9.3%

8.3%

21.3%

9.3%

8.3%

2.8%

17.6%

18.5%

0% 0%25% 25%

1.6% 4.6%


10

WhenlookingatthekindsofITprogramsthatcommercialOEMsareengagedin,itisinterestingthatmuchoftheirfocusisonapplications modernization.Obviouslythedrivetoaddnewfunctionalityandfeaturesoraddressneedsfornewproductsorservicesmakessenseastowhy the user experience or the customer-facing part of IT is continually enhanced to protect the brand. The second-highest IT spend, according to our surveyrespondents,isforinfrastructuremodernization.Itwouldsuggestthatasnewapplicationsareintroducedornewerfeaturesandfunctionsareadded,thetransformationoftechnicalhardwareallowscommercialOEMstotaketheaddedadvantageofbettercomputeandstoragecapacityand performance. In addition, the commercial respondents noted that data integration and seamless visibility into core processes are the next major priorities in a down business cycle. Later in this review of the results, we will also see that these improvements in efficiency and performance for the end user and increased functionality, availability and scalability are also driving improvements based on the customer’s priorities.

MilitaryorDoDmarketprioritiesforreducingcostsbymodernizingapplications,infrastructureandsomespendingondataintegrationweresimilarto commercial sector priorities. More surprisingly, few respondents really commented on the focus of IT, suggesting that again the business is driving changesandinnovation,ratherthantheITorganization.ManyOEMsinboththecommercialandthemilitarysectorsarewillingtotakeonariskprofilethat includes older applications and infrastructure, as they are fairly reliable, and the cost of transition may not be worth the risk exposure to changing existing program-based systems. Newer technologies are not necessarily as well understood as the legacy or near-term applications and hardware. Therefore, this is a key period for defense manufacturers to get better educated on the potentials of these emerging technologies on their business.

Q. New tools and technologies like cloud computing are now superseding traditional IT services for many new and existing application compute and storagerequirements.Forwhichofthefollowingbusinessrequirementsareyoulookingfornewtoolsortechnologies?Chooseallthatapply:


Do not have knowledge of this subject

Accelerate time to implement new application solutions

Deliver the IT agility needed to keep up with the pace of the business

Lower overall IT costs

Lower human resource investment costs in IT

Deliver IT services on a cost-per-use basis

Provide self-service infrastructure provisioning for business and IT users

Deliver increased levels of automation in IT services and administration

Be able to support high system demand during peak processing times

Government customer requirements do not allow the use of these tools

Comments

0% 0%25% 25%

9.0%

N/A

12.9%

5.8%

3.2%

7.1%

13.5%

16.8%

8.4%

21.3%

4.0%

11.0%

7.0%

5.0%

4.0%

17.0%

11.0%

11.0%

11.0%

17.0%

1.9% 2.0%


11

The responses to this question were some of the most intriguing and enlightening. When asked about cloud computing and nontraditional IT servicessuchasX-as-a-Service(XaaS)offeringsininfrastructure,platform,software,storageorbusinessprocess,itseemsmanyofthetraditionalmanufacturers are not fully aware of the potential business applications or derive value that can be obtained from this new paradigm in IT service offerings. It is interesting though that IT agility, shorter time to market and lower operational costs are drivers for evaluating the new service offerings, but the respondents do not appear to have fully leveraged the potential savings or transformation nature that such adoption can drive.

Many IT service providers have experience in moving portions of the application or infrastructure portfolio to public, private and hybrid clouds. The responses seemed to indicate either a rift in knowledge share or a potential lack in trust in the new delivery model. As the industry as a whole gains a better understanding of the true value of as-a-service deployment and the varying risk profiles of each approach, cloud-based technologieswilllikelybecomemoreattractive.Commercialmanufacturersarelookingforwaystoreducethetotalcostofownership(TCO) andhavetheflexibilitytomodifytheirsystemdemandsasrequirementsshifttonewproducts,marketsorbusinesses.Thisconfidencefactor will come as availability, capacity and resiliency are proven in key business applications and processes.

Responsesinthemilitarysectorweresimilartothoseinthecommercialsector,withalittlelessofafocusonagilityandmoreofafocusoncostreductions. Again, this was driven by the systems, including software, hardware and business processes, which tend to be more static in ongoing government programs. As the contracts are often very fixed on the program delivery, innovation for new products is not always as dynamic as in the DoD sector. The other major factor driving this lack of adoption is the security concern over military records being on a public or hybrid cloud. Private cloud models have been adopted by some major government initiatives, but cross-sharing of that approach is not widespread.

Q. Manyfactorsdriveorganizationstofocusonmodernizingbusinessapplications.Chiefamongtheseisusersatisfaction.Withinyourown organization,aboutwhichofthefollowingITissuesdouserscomplainmost?Checkallthatapply:


Lack of new features or capabilities

Application usability

Poor performance or response time

Poor quality or downtime

Length of development cycles

Expensive legacy application maintenance

Failure to meet customer business/contractual requirements

Comments

16.1%

20.1%

22.1%

7.4%

14.1%

14.1%

0% 0%25% 25%

6.0%

N/A 6.3%

10.4%

20.8%

24.0%

8.3%

14.6%

12.5%

3.1%


12

As stated earlier, several factors are driving transformational change in the IT systems: user acceptance and functional capabilities. As noted by mostofthecommercialmanufacturers,thismodernizationisdrivenbyimprovingoperationalefficiencies.Withanysystemtheusersarethebiggestinfluencetotransformation.Ifnewcapabilitiesareneededandthelackoffunctionalityisnegativelyimpactingrevenue,thentheROIformoderniza-tion can result in a pretty clear business case. Poor performance is often a function of inefficient design or testing, or it may be a symptom of a legacy systembeingstressedbynewdemands,suchasuseraccessibilityvianewdevices.Toresolvethesechallenges,organizationsaredecouplingbusinessprocessintorestfulservicesandcallingthemfromnewpresentationlayers,whichoffersmoreflexibilityasnewdevicesandaccessmethodsevolve.

Responsesfromcommercialmanufacturersreferencelegacysystems,pooravailabilityandlongdevelopmentcyclestoaddnewfeaturesas challenges. Many of these symptoms point to the need for developing a new application strategy, for mobile access, designed around composite applicationsthatcanleadtolessdependencyoncustom-builtsystems.Theconsolidationofmanycommercialoff-the-shelf(COTS)vendors building even more complex monolithic systems with very broad and deep functionality is still a factor, but traditional software vendors are seeing tremendous pressure for the cloud-based application vendors and a demand from clients to pay for software more by the use than by the seat.

The defense sector is even more entrenched in this dilemma, with a higher proportion of legacy applications, legacy home-grown applications and less leverage of the SaaS model. This is also driven by the contractual obligations to keep many of these systems around and available throughout the lifetime of some major manufacturing programs. Very few military respondents selected lack of new features as a major driver. Many of the re-spondents skipped this question altogether, possibly due to a lack of control or desire to change the status quo in government defense programs.

SUMMARYRespondentstothe2013A&DSurveyreportedthatthemanufacturingindustryinNorthAmericaisonaroadtorecovery;however,theDoD spending is expected to stay at its current lows even if the party in power changes with the next presidential election. The trend is clearly leading to thecommercializationofgovernmentservicesinavarietyofprograms,includingspace,healthcareanddefense.Privatedefense-relatedfirmsareexpected to deliver military services and mission capabilities that in the past were reserved for the DoD/MoD or like government defense agencies. The manufacturing sector is undergoing a revolution with machine-to-machine technology connectivity of things, machines, products and people, enablingcompaniestotransformoperationsandlowercosts.TheA&Dmarketisclearlyinterestedinmodernizationprogramsandwouldbenefitfrom more information on next-generation IT services and case studies to demonstrate the value of emerging technologies and deployment models.


13

PROGRAM MANAGEMENTINTRODUCTIONTheperceptionofbothcommercialandgovernment/militaryrespondentsindicatesthatprogrammanagementremainsacosttobeminimized, constrained by real-time information, infrastructure, and process and information integration.

Q. Whatarethemajorchallengesofeffectivelymanagingprogramsbothfromaprofitablystandpointandthatofensuringcontractcompliance?Choose all that apply:


Constrained by real time program status information to make decisions

Lack of Program Office process infrastructure within the company

Poor definition of roles and responsibility

Lack of information from the government customer

Lack of updated financial information

Information from partners and suppliers is not adequate

Information technology is lacking or not integrated in order to have timely data

Comments

11.9%

26.7%

6.8%

11.9%

12.5%

9.7%

17.6%

7.5%

17.9%

2.8%

29.2%

16.0%

8.5%

15.1%

0% 0%30% 30%

2.8%2.8%

RESULTSBothcommercialandgovernment/militarymarketsseeflexibleprogrammanagementandreportingtoolsassignificantconstraintstobusinesssustainability and growth. The lack of appropriate tools and process infrastructure can draw the conclusion that visibility into real-time program status information is missing or hard to get in a timely manner. The data also lends itself to a general lack of critical program decision data, not only internally but across the partner and supplier network. As found in the previous A&D surveys, program management is universally seen as critically important but still lacking the tools and processes to improve. Based on survey results since 2009, the A&D community has made little progress on project management. With such high focus and intensity on program management as one of the handful of critical-to-success factors and the apparent lack of focus by the industry, we continue to wonder why program management remains underserved.


14

Q. WhichofthefollowingProgramManagementissueshasthebiggestimpactonthesustainabilityorgrowthofyourbusinessinthenext1to3years?


Training, retaining or hiring skilled program managers to run complex, outcome-based programs

Having consistent program management tools, systems or automated workflow processes that allow program managers to run multiple programs or be effective in any line of business

Having flexible program management tools, systems or automated billing and service processes to allow program managers to allocate costs appropriately to each program and thereby reduce waste

Using automation tools to meet customer contractual requirements

Comments

Training, retaining or hiring skilled program managers to run complex, outcome-based programs

Having consistent program management tools, systems or automated workflow processes that allow program managers to run multiple programs or be effective in any line of business

Having flexible program management tools, systems or automated billing and service processes to allow program managers to allocate costs appropriately to each program and thereby reduce waste

Using automation tools to meet customer contractual requirements like reporting/CDRLs

Comments

29.4%CONSISTENT

TOOLS

39.3%TRAINING

AND HIRING

28.6%CONSISTENT

TOOLS

16.1%FLEXIBLE

TOOLS

7.1%AUTOMATION

TOOLS

11.8%AUTOMATION

TOOLS

7.1%COMMENTS 8.9%

COMMENTS

15.3%FLEXIBLE

TOOLS

36.5%TRAINING

AND HIRING

SUMMARYIn an industry dominated by programs and associated cost and schedule reporting, respondents feel that program management tools, business processes and the information they provide are not providing the timely information required to manage and grow the business.

AFTERMARKET AND SUSTAINMENTINTRODUCTION

Product support and sustainment continues to be an important part of the respondents’ businesses. Perhaps it is just the slow economy, worsened bytheeffectsofsequestration,orperhapsitisincreasingcompetitionforMROandsustainmentwork,butprovidingmoreservicesforlessrevenuecontinuestobeamajortrend.ThereisaperceptionoffewerdollarsbeingspentinMROandsustainment,andmorecompetitorsgoingafterthesamedollars.CertainlyexpectinggreatervalueforMROdollarsspentisacommontheme.Interestingly,thesesameconcernsareexpressedbybothcommercialandmilitarycompanies.Militaryprovidersseeincreasingpricingpressureandmoremovestowardperformance-basedlogistics(PBL)contracts. Commercial providers see the pressure to move service and sustainment to outside providers, with their biggest issue being meeting customer requirements within ever-harsher financial constraints.


15

ChallengesalsoincludealackofvisibilityintohowbigtheMROandsustainmentmarketis,howtheaircraftarebeingoperated,andwhere planned and unplanned maintenance occurs. This lack of knowledge as to how the aircraft are used and where they fail limits the ability to replace investments in inventory, facilities and labor with better information. Parts usage information was highlighted as particularly difficult to forecast. Acquiring immediate and situational actual failure information is core to improving forecasting, planning and deployment of spares.

Finally, the outsourcing trend continues for both direct and indirect services, while finding and retaining skilled labor are cited as major concerns.

COMMERCIALQ. WhatdoyouseeasthetopthreeemergingtrendsintheProductSupport/MROarea?(1–beingthetoptrend,2–second,3–third-biggesttrend)

Operators outsourcing core repair services

Operators outsourcing non-core services (e.g., IT, administrative services, etc.)

Operators in-sourcing services that were previously done by the contractor

Lack of skilled employees available to perform repair work

Industry consolidation

Extreme pricing pressure and RFP competition

Vendor base shrinking or leaving the market

Most ImportantLeast Important


Commercial A&D companies view the outsourcing of core repair services as the top item in this year’s survey. This follows last year’s theme as manyOEMsandlargeprovidersmovedintoproductsupportandMROtosupporttheiroperator/customers.Thismoveisdrivingcompetitivepricing,forcing less competitive providers to fall out.

Extreme pricing pressure continues to be a theme this year. The slow global economy continues to push down margins, while the outsourcing trend mentionedabovefurtheraggravatesMROpricing.Low-cost-countrystrategiesarecontributingtopricingpressuresinthelargermarkets.

Lackofskilledresourceswasthethird-highestemergingtrend.Thisfollowsthelong-expectedretirementofskilledMROemployeesacrossthe industry, with inadequate replacements. Increasing labor costs of the available skills are likely outcomes of these top trends. The race to the bottom for maintenance costs may eventually bottom out as the lack of skilled resources is felt across the industry.


16

GOVERNMENT/MILITARYQ. WhatdoyouseeasthetopthreeemergingtrendsintheProductSupport/MROarea?(1–beingthetoptrend,2–second,3–third-biggesttrend)

Move to Performance-Based Logistics (PBL) type service contracts

Move back to a T&M environment

Depots/units outsourcing core repair services

Depots outsourcing non-core services (e.g., IT, administrative services, etc.)

Depots in-sourcing services that were previously done by the contractor

Lack of skilled employees available to perform repair work

Industry consolidation

Extreme pricing pressure and bidding competition

Move away from sole-sourcing

ITAR/international trade barriers

Vendor base shrinking or leaving the market

Least Important Most Important


SequestrationhasfurtherincreasedthealreadysubstantialpricepressuresthataircraftoperatorsandMROprovidersareexperiencing.Withpricingpressureincreasing,itisnotsurprisingthatnewmodelssuchasPBLandoutsourcingarefindingtheirplaceinMROandsustainment.

Morecompetitors,includingtheOEMsandtheTier1suppliers,arereplacinggapsintheirnewprogramrevenueswithMROandsustainmentservices.This trend is leading more customers/operators to move away from servicing their own products or defaulting to sole-source contracts to try to make the most of this highly competitive market.


17

COMMERCIALQ. WhatarethetopthreechallengesyourcompanyfacesinsupportingyourproductintheProductSupport/MROarea?(1beingthebiggest challenge,2second,3third-biggestchallenge)


Meeting customer requirements within financial constraints

Lack of visibility into installed base including warehouse location(s)

Need better understanding of component parts, service use and reliability

Lack of information for forecasting and provisioning

Inadequate IT systems and processes

Insufficient information to make accurate business decisions

Technical data management and configuration control

Contractual issues

Growing competition/consolidation

Third-party/low-overhead competition

Margin erosion

Workforce availability/culture/training issues

Worldwide logistics and service coverage

Most ChallengingLeast Challenging

The top themes for this year are meeting customer requirements within financial constraints and having the tools to meet customer expectations. Inadequate IT systems and processes, including the lack of information around parts use and reliability. were identified as major roadblocks to meetingcustomerandmargindemands.ITinvestmentinMROlagsthebusinessneed.

Onekeystrategyformaintainingmarginsisthroughimprovedinformation.Betterunderstandingofsparesandservicefailuredata,real-timewithsituational data, not bundled and disconnected, is a prime example of the importance of information in reducing costs. Forecasting, planning and deployment of spares and service capabilities depend upon having information as close as possible to the event. Lack of event information means safety stocks and capacity must be calculated that exceed the actual requirements. This drives excess capacity and cost throughout the system. New, emerging technologies in predictive maintenance and configuration management show great promise for reducing the cost to provide service.


18

GOVERNMENT/MILITARYQ. WhatarethetopthreechallengesyourcompanyfacesinsupportingyourproductintheProductSupport/MROarea?(1beingthebiggest challenge,2second,3third-biggestchallenge)


Meeting customer requirements within financial constraints

Lack of visibility into installed base including warehouse location(s)

Need better understanding of component parts, service use and reliability

Lack of information for forecasting and provisioning

Inadequate IT systems and processes

Insufficient information to make accurate business decisions

Technical data management and configuration control

Contractual issues

Growing competition/consolidation

Third-party/low-overhead competition

Margin erosion

Workforce availability/culture/training issues

Worldwide logistics and service coverage

Most ChallengingLeast Challenging

The responses for commercial and military are very similar regarding challenges. Information about installed base, usage, configuration, environmentandactualfailureratesareseenascrucialtodeliveringeffectiveMROandsustainmentservices.Meetingcustomerrequirements within tight financial constraints is also a common theme across the survey questions. As with the commercial segment, the common thread in the military segment seems to be replacing costs with better information.

Improving cost and delivery is worsened by the lack of information that could be used to replace labor time and materials and reduce turnaround. The lack of good information to develop forecasts and manage provisioning was the No. 1 issue cited.


19

COMMERCIAL Q. What steps are being taken by your company to improve your supplier relationships to provide greater visibility into costs and schedules thereby resultinginamoreagilesuppliernetwork?Chooseone:


Currently have a collaborative and secure network to review and discuss costs and/or schedules

Currently have formal and regularly scheduled supplier interactions where real-time costs and/or schedules are shared collaboratively

Currently planning or have underway an agile supplier network environment pilot to share real-time costs and/or schedules

No activity in this particular area is being considered due to budgets

No activity in this particular area due to having a satisfactory environment 23.0%

13.8%

16.1%

29.9%

17.2%

0% 35%

Thetopthreeresponsesreflecttheimportanceofsupplierrelationshipstosuccessfuloperations.Thetoptworesponsesemphasizethatcompanieshave formal and regularly scheduled supplier interactions in process or being piloted. The third-highest response is from companies that believe their supplier relationship is currently being effectively managed.

Responsesreflecttherealizationthateffectivelymanagingthesupplybasehasbecomemoreimportanttobothmanufacturingandaftermarket,particularly with recent examples of major supplier network breakdowns impacting the A&D industry.

GOVERNMENT/MILITARY Q. What steps are being taken by your company to improve your supplier relationships to provide greater visibility into costs and schedules thereby resultinginamoreagilesuppliernetwork?Chooseone:


18.9%Currently have a collaborative and secure network to review and

discuss costs and/or schedules

Currently have formal and regularly scheduled supplier interactions where real-time costs and/or schedules are shared collaboratively

Currently planning or have underway an agile supplier network environment pilot to share real-time costs and/or schedules

No activity in this particular area is being considered due to budgets

No activity in this particular area due to having a satisfactory environment 20.8%

13.2%

15.1%

32.1%

0% 35%

Military responses are similar to commercial responses regarding managing supplier networks. The supplier network has become essential to both production and support functions. Additional risks exist for the military business, however, as the effect of sequestration has fallen hardest on thesmallestsuppliers.ManyoperatorsandOEMsaresteppingupsuppliermonitoringtoidentifysmallercompaniesthatarestrugglingand, in extreme cases, purchasing or supporting these suppliers through the downturn.


20

Commercialandgovernment/militarycompaniesfacethesameissues,pricepressureanduncertaindemand,asreflectedinprogramdelays andcancellation.TheseconditionslikelydrivethesearchfornewsourcesofrevenueattheOEMlevelaswellasconstantcosttake-outefforts. Thisconditionisthenewnormal.Inordertosustaincompetitiveadvantage,commercialandgovernment/militaryOEMsmustdesign,buildand service superior products with superior customer experiences.

Q. Whatisthetoptrendinyourcustomer’sbuyingbehaviorthatisaffectingyourabilitytogrowrevenueandimproveprofitability?


Extreme pricing pressure from customer budget

Extreme pricing pressure from competitors

Declining workloads

Program cancellation or push-out

Pushing program risk to next tier

Requiring us to take over program risk

Tying equipment purchases to support contracts

Requiring long-term maintenance contracts

Extreme requirement in work statements

Pulling work back in-house

10.2%

1.1%

2.3%

0%

1.1%

1.1%

14.8%

10.2%

20.5%

38.6%

11.3%

3.8%

0%

1.9%

3.8%

1.9%

20.8%

5.7%

9.4%

41.5%

0% 0%50% 50%

WORKFORCEINTRODUCTIONSince 2010, A&D Survey respondents have reported moderate to relatively high confidence in their ability to meet workforce requirements. In contrast, the 2013 A&D Survey has surfaced a marked decline in the level of confidence in meeting the demand for skilled scientific, technical, engineeringandmathresources.Analyzingthisyear’sdatashowsthistobetrueforbothcommercialandgovernment/militarycompanies.Althoughthese companies are implementing specific strategies to address the longer-term skilled-resource shortage, barriers in finding and retaining knowledgeanddomainexpertiseseempersistent.Thefactremainsthatcriticalhumancapitalassociatedwiththe“grayingoftheworkforce”causesanincreasedrelianceonlessexperiencedemployeesortheneedtosourcenon-ITAR-relatedworkfromdesign-and-buildthird-partyproviders.

RESULTSCompanies are reporting a significant knowledge gap based on the retirement rate. The need to fill or at least partially fill the gap in skilled talent is leading many A&D companies toward engineering service providers, both onshore and offshore. Investigating this a bit further, the forecast for thesetypesofskilledserviceisexpectedtogrowata12%compoundannualgrowthrate(CAGR).AsA&Dcompaniesseekcostsavingsusingthird-party workforce resources, these companies are also demanding quality of services. CSC observations and analysis in this area among our ownA&Dclientswereusedforthebasisandtypesofquestionsweserveduptothisyear’srespondents.Oneinquiryinparticularonthesurface


21

is interesting enough but will require more in-depth research to truly understand the more far-reaching implications. That probing question has to do with teaming and trust within a heretofore close community where the workforce is undergoing dramatic shifts in demographics. Therefore, a potentially broader and more systemic issue is that for the first time in the past five CSC A&D Surveys, the lack of workforce camaraderiehassurfacedinthetop3%ofresponses,cominginat21.4%and45%forcommercialandgovernment/military,respectively. It stands to reason that a younger workforce and knowledge gap will result in a company’s product know-how and overall enterprise intellectual propertybeingatadditionalrisk.Ourhypothesis:Combingtheeffectsofthelossduetothemoreexperiencedandlongertenuredskilledresourcesto retirement, the growth in younger replacement resources and the outsourcing of critical work to as-a-service entities results in a loss in shared “team”accountability.Itisbeyondthisreporttoestablishthevalidityofthefinding,butonlytoacknowledgethependingorganizationaldynamicand its effect, if any, on an A&D company’s products, processes and culture.

Q. Which of the following labor/workforce talent issues do you anticipate having the greatest impact on your ability to attract and retain the next generationofknowledgeandITworkers?Chooseallthatapply:

Q17. COMMERCIAL RESPONSES Q34. GOVERNMENT/MILITARY RESPONSESOur aging/retiring workforce has resulted in the

erosion of knowledge about our industry in addi-tion to critical company systems and processes

Our company simply hasn’t kept up with the tools, systems and practices that new college graduates expect when starting their careers

The loss of productivity from a potentially distracted teleworkforce

A workforce that lacks camaraderie and loyalty to the business

Lack of a pool of younger workers who are interested in A&D

0% 0%35% 35%

27.3%

15.7%

12.4%

10.7%

33.9%

25.0%

26.3%

5.0%

8.8%

35.0%

The competition for highly educated and skilled workforce resources in the A&D domain may be anchored in the combination of a lack of general interestintheA&Dindustry(27.3%forcommercialrespondentsand25.0%forgovernment/military)andthelackofinvestmentsinthetools,systemsandpracticesyoungerskilledworkersexpectinperformingtheirjob.A&Demployeractions(aswellasthebroaderindustryverticals)takenduringtheeconomicdownturnmayalsobeapplyingdownwardpressureandinfluenceonthoseresourcesseekingorentertainingcareersinaerospace and defense. Add to this the highly visible media coverage on sequestration that may have resulted in higher levels of potential and current employeedisengagement.Outsideofthisparticularsurvey,limitedresearchbyCSChasfoundothersurveydatareportingthatpost-recession employeeturnovermayexceed50%basedonself-reportedinterestinsearchingfornewpositionsoutsideA&D.Takingthesedatapointsas potential indicators should encourage A&D companies to give increased attention to human capital management strategies for both commercial and government/military companies.

Although the percentages vary, both commercial and government/military companies share the concern of attracting and retaining science, technology,engineeringandmath(STEM)resources.Thereisintensecompetitionfornewtalentwithtechnologyskills.ForU.S.-basedA&D companies,thetalentdiminishesevenfurtherbecauseofthesecurityrequirementsasdefinedbyITARguidelines.Anadditionalheadwindis compensation expectations of new and recent graduates. When one compares the compensation for top talent from the private sector with that of A&D companies, the gap can be meaningful, especially to the millennials.


22

Q. HowwilltheinabilitytoattractandretainnewknowledgeandITworkersaffectyourcompetitivenessinthenext5years?Chooseone:

Our business will be significantly affected unless we are able to attract and retain new talent

Our inability to attract new talent will have a moderate effect on our business

Attracting new talent is a low priority as our business is downsizing

40.4%SIGNIFICANT

39.8%SIGNIFICANT

51.9%MODERATE

48.2%MODERATE

7.7%LOW12.0%

LOW


AtrendthatcontinuesisthathighernumbersofinternationalU.S.engineeringschoolgraduatesarereturningtotheirnativecountries.Newfields of interest are emerging that are of interest to the new graduate in engineering such as network sciences, biomedical engineering and security. These new disciplines, and their ability to attract high-potential science, technology, engineering and math students, add to the pressure to compete for and retain high-value employees.

SUMMARYFinding and retaining highly skilled scientific, technology, engineering and math resources is a very important but challenging priority for A&D companies.Bothcommercialandgovernment/militarycompaniesrecognizethechallenge,andmanyhaveactionplansinflight—butthe competition is fierce.


23

FINAL THOUGHTSCSC and AIA are pleased to have the opportunity to present these findings to you and your management team. We have canvassed both business operations and information management executives to understand their functional insights through the use of the survey questions, and to present these findings in a useful format. The responses capture business, economic and technology challenges the industry has experienced over the past 12 – 15 months, as well as near-term expectations. Program cancellations, sequestration and the modest global growth rateareputtingapremiumontakingcostoutofthebusiness.Whilethiswillcontinuetobeapriority,analyzingthesurveyindicatesthedesire to achieve new and higher levels of growth.

The 2013 survey results indicate the industry’s highest priority is creating competitive advantage through new, innovative products and services and by securing new sources of revenue in both current and adjacent markets while preserving existing revenue streams. The reality is complex, since both the commercial and government/military A&D industries are demanding greater program accountability across the global supply chain network. In defense, budget challenges are expected to remain for the foreseeable future:

• Thisistranslatingtochallengingtheinternalorganizations(IT,SupplyChain,etc.)totakesignificantcostout.

• Defensecompaniesareseekingnewrelationshipswithcommercialsupplierstosellunusedcapacityandassets.

• WhilethelargeOEMscanweatheradownturn,somesmallersuppliersarestruggling—M&Aactivityislikelytoincrease.

Onthecommercialside,companiesindicated:

• Heightenedemphasisondesigningandproducinginnovativeproductsasapathtosuccess

• Continuedfocusonmeetingdemandsfromcustomersoninitialproductpriceandongoingsupportcosts

ForITexecutives,themessageis,“Businessgrowthinitiativesneedareal-timeresponsefromIT.”Therecanbenodelaysinprovidingthe infrastructures, tools, data, applications and information required for business decisions in this changing market.

We hope you find the data and insights contained in the 2013 CSC and AIA sponsored Aerospace and Defense Industry Market Survey to be useful as you align your enterprise to compete in the complex and changing marketplace.

2013 A&D MARKET SURVEY - Aerospace Industries … · government and commercial sector A&D companies...

Documents

Transcript of 2013 A&D MARKET SURVEY - Aerospace Industries … · government and commercial sector A&D companies...