Post on 19-Dec-2015
Defence & Defence Industry – Interactions & Understanding
Date : 6 Feb 2008
Vern Gallagher
General Manager Business Development
Joint Systems
2
Feb
200
8
Defence Industry – Interactions & Understanding
The scope of the Defence Business What it is? Why are we (Defence Contractors) here?
Business Basics – what is needed to run a business
Teaming, Pricing & Contracting
Defence Acquisition Strategies
Conclusion
3
Feb
200
8
Defence is a unique Monopsonistic Customer
This sole customer environment involves a mix of divergent cultures:
War fighters: Profession of Arms embodies a culture of honour,
loyalty, integrity, service and sacrifice.
Public Servants: strong cultural values of service, integrity, and non-
partisan advice
Industry: culture based on commerce which today espouses
growth and profitability.
4
Feb
200
8
ADM Magazine List 2007
Top 10 Defence Contractors Turnover
(in millions)
1. Thales Australia 757.50
2. Tenix Defence Pty Ltd. 650.00
3. Raytheon Australia Pty Ltd. 593.00
4. BAE Systems Australia 560.00
5. Australian Aerospace Limited 527.80
6. Boeing Australia Holdings Pty Ltd. 400.00
7. Spotless Group Limited 400.00
8. ASC Pty Ltd. 312.40
9. Defence Maritime Services Pty Ltd. 253.00
10. Austal 241.35
5
Feb
200
8
DCP Overview Over ten years
Accessible byAust Ind
33% CapAcq
= $16 Bn
67%Sustainment
= $32 Bn
Accessible byAust Ind on anAnnual basis Cap Acq = $1.4 Bn Sustainment = $3.3 Bn
SUMMARY OF THE DCP FORECAST
6
Feb
200
8
Business Analysis
YES Investment & return considerations Barriers to entry Strategies to entry
Is there a business?•Customer Needs•Company Products & Capabilities•Competitor presence
NO
Go Home!!
Walk Away!!
The only consideration is: ‘Return to shareholders’!
7
Feb
200
8
What is a Company??
Shareholders
Lend
MoneyCompany
Investment Vehicle
Public Listed
Public Unlisted
Privately owned
Joint Venture
Multi-National
Domestic
In return
for Shares
8
Feb
200
8
What is a Company??
Shareholders
Lend
MoneyCompany
Investment Vehicle
Public Listed
Public Unlisted
Privately owned
Joint Venture
Multi-National
Domestic
Gain
Benefits
Return on
Investment
Growth in
Value
In return
for Shares
Employee
knowledge &
expertise
ROI
9
Feb
200
8
What is a Company??
Shareholders
Lend
MoneyCompany
Investment Vehicle
Public Listed
Public Unlisted
Privately owned
Joint Venture
Multi-National
Domestic
Gain
Benefits
Return on
Investment
Growth in
Value
In return
for Shares
Employee
knowledge &
expertise
Borrowings
Banks/Finance
10
Feb
200
8
What is a Company??
Shareholders
Lend
MoneyCompany
Investment Vehicle
Public Listed
Public Unlisted
Privately owned
Joint Venture
Multi-National
Domestic
Gain
Benefits
Return on
Investment
Growth in
Value
In return
for Shares
Employee
knowledge &
expertise
Borrowings
Banks/Finance
Companies operate within a world market
and must compete for funds & expertise
11
Feb
200
8
Model of a Project Organisation
Time
$Project Wins
12
Feb
200
8
Model of a Project Organisation
Time
$Project Wins
Sustainment of Core Capability
Residual Income Stream
13
Feb
200
8
Elements of Tendered Price
Tendered Price generally consists of: Project Costs
Delivered costs (engineering effort, delivered equipment, documents)
Level of Effort Costs (project management, QA, travel) Risk
Overheads Marketing (bids, tender responses, shows) Finance HR (training, salaries, recruiting, etc) Engineering (QA, certifications, standards, training) R&D Travel
Profit (ROI)
Price = Project Cost + Overheads + Profit
14
Feb
200
8
PROJECT RISK
Penalty for Delay = $5M
Delay Occurs
20%Delay Does Not
Occur - 80%
Retire Risk
Retain $1M ProvisionPay Penalty of
$5M
$1M is added to
the Price as a
Risk Provision
Companies do not promise what they cannot deliver
15
Feb
200
8
Formation of Teams
Radios
Software
Hardware
Sys Int
DMO ‘Total Project View
Prime
Sub A
Sub B
Sub C
16
Feb
200
8
Formation of Teams
Poor Industrial Composition
Prime
Sub A
Sub B
Sub C
Good Industrial Composition
Overlap of core capabilities, skills
& products within the team
Key areas of requirements not met
No overlap of core capabilities, skills
& products within the team
Clear demarcation of responsibilities
All requirement areas covered
17
Feb
200
8
Potential Competitive Contract Outcomes
0
5
10
15
20
25
30
35
40
45
50
% Contribution
Prime A Prime B Prime C
RadiosSoftwareHardwareAII
18
Feb
200
8
Potential Competitive Contract Outcomes
0
5
10
15
20
25
30
35
40
45
50
% Contribution
Prime A Prime B Prime C
RadiosSoftwareHardwareAII
Optimum Outcome
19
Feb
200
8
Competition, Project Pricing & Evaluation
Defence does itself a disservice by not revealing its budget for major projects.
Tendered prices from all bidders against a good SOW should be very close, unless: One bidder decides to ‘buy the job’ One bidder has ‘done it before’ One or more bidders misunderstand scope & difficulty One or more bidders really understanding the scope &
difficulty
Any competition is not against the Defence budget,
it is against other bidders.
20
Feb
200
8
Defence – Industry Partnerships
There is scope for more understanding in Defence/Industry relationships:
In order to be viable in the long term, a company must make a reasonable profit. Large penalties (i.e. a loss on a project) affect
subsequent projects as pressure mounts for a ‘whole of company’ ROI.
Acquisition strategies should be cognisant of team formation in the pursuit of projects (and thus the potential to develop a choice of sub-optimal solutions).
The end customer is the warfighter.
21
Feb
200
8
Defence – Industry Partnerships
There is scope for more understanding in Defence/Industry relationships:
In order to be viable in the long term, a company must make a reasonable profit. Large penalties (i.e. a loss on a project) affect
subsequent projects as pressure mounts for a ‘whole of company’ ROI.
Acquisition strategies should be cognisant of team formation in the pursuit of projects (and thus the potential to develop a choice of sub-optimal solutions).
The end customer is the warfighter.
Concentrate on ‘the end customer’,
DMO & industry acting as a team.