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4. Aerospace and Defense: Assault on Risk

(originally published by Booz & Company)

The aerospace and defense industry is under great pressure. Order rates for new commercial aircraft have declined, and major defense programs around the world have been canceled or cut back. The last time this happened, in the early 1990s, the one strategy that did not succeed was hunkering down — attempting to outlast the fall in aerospace and defense demand by cutting costs and curtailing investment. In general, that approach exacerbates risk and performance problems. Executives try to “fill the factory” to keep people busy. They pursue work of marginal profitability and high risk, and they bring outsourced work back in-house even if the in-house facility is more costly. Ultimately, they find that they are managing a portfolio with the risk profile of a derivatives trader and the expected returns of government T-bills.

The alternative is for leaders, beginning with CEOs and CFOs, to become more adept at understanding and managing risk and reward across the business portfolio. This means addressing the full range of indirect cost categories: corporate allocations, people-related costs, site-related costs, information technology spend, and discretionary expenditure. And it means seeing markets as Marshal Ferdinand Foch saw the battlefield of the Marne in his legendary dispatch of 1914. Just before he turned the tide of the initial German offensive, Foch cabled: “My center is giving way and my right is in retreat. Situation excellent. I shall attack.”

One good place to start is in improving risk management practices. In recent years, virtually every segment of the aerospace and defense industry has suffered calamitous difficulties in executing major projects. Large commercial aircraft, military spacecraft, naval surface combatants — none have been immune from expensive (and embarrassing) program failure. Many analysts attribute these failures to management errors, lack of customer self-discipline, systems integration issues, or shortages of skilled labor. But these factors, although they play a role, cannot explain why the problem is so widespread and so deep.

The underlying cause is the increasing obsolescence of this industry’s traditional approaches to program management, especially in tracking and reducing risk. The industry’s conventional project management tools and practices were developed decades ago, at a time when technically astute customers worked closely with just one vertically integrated contractor for any given project. The methods depended on a clear, un­biased, and easy exchange of data. Today, a typical contractor is a complex network of industry consortia, often spanning continents and sharing responsibility for managing costs, schedules, and risks. A teammate from another company, working on a shared project, could easily be a competitor tomorrow. The exchange of simple data on risks can become the basis for prolonged contract disputes or competitive disadvantage. There are too few positive incentives to volunteer relevant risk data in a timely manner.

Fortunately, new techniques are emerging that can pierce the veil. These include objective risk-scoring criteria that apply to all types of risk, whether technical or purely cost- or schedule-related; the use of computer-based simulations to assess how risks might correlate; and new forms of mitigation analysis. These have provided senior management with the information they need to direct remediation efforts, and to set financial goals that can cover the costs of an appropriate balance between risk and return.

Author profile:
Martin J. Bollinger is a senior partner with Booz & Company based in McLean, Va. For his clients, which have included most of the world’s leading aerospace and defense companies and major industrial and service companies, he works on such issues as business strategy, organizational effectiveness, and operating improvements.
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