Defence contracting in 2018 - A year for squeeze or growth?

Defence contracting in 2018 - A year for squeeze or growth? Author: James Blackwood Published: 23 February 2018

As headhunters we are guaranteed to be asked one question in any meeting “How’s the market?”. The standard industry answer being: “The market’s buoyant though patchy” and then we pose the exact same question back.

Personally, I think a more detailed answer provides greater credibility and confidence that we are specialists with deep market knowledge.

You may ask “what’s this got to do with where the UK’s defence industry is going this year?”. In a nut-shell, everyone is extremely busy and the market is buoyant, though in places. In particular: VR Simulation and high-end security solutions are in demand. The industry however is politically challenged, consolidating in areas, and becoming more competitive. In the last quarter we have identified a number of consistent themes across a myriad of defence firms, with the most imperative challenges and opportunities outlined below.

Challenges

Investment: Despite the UK’s defence budget being £36BN, much of this is tied into the major programmes including the Carrier/Joint Strike Fighter (circa £6BN, not including F35s) and the Dreadnought Class/Submarine (circa £41BN). For those outside the contracted consortia, there is much trepidation about the future of the UK market. Whilst UK Government has made their intent to utilise products and services from the UK SME community clear, the time and cost of the tender process can be disadvantageous for these firms as they do not have the financial or resource cushions a Tier1 Contractor has. Such companies have to think out-side the box, consider new (international) markets and develop new technology-led solutions such as machine learning and artificial intelligence.

Talent succession: The industry boasts some of the most talented scientists, engineers and politically astute personnel, many of whom have extensive career tenure. Succession planning, however, is proving more of a challenge. The new generation of talent is being lured to the broader, fast moving and enticing Technology industry, which has a reputation for rapid development and disruption, coupled with higher salaries than defence.

Longevity: The procurement/tender processes are often extreme, regularly breaking the 10 year mark. For a Bid or Business Development specialist to continuously work on such a programme is often demotivating and unrewarding. That is even before considering the constant shift of solution, cost, margin, economics and politics. Talent within this sector is unique and culturally it is tough to hire similar skilled personnel from industries such as Technology and IT services, as they are typically used to much shorter procurement cycles, often weekly or monthly.

Opportunities

Talent attraction: The appeal to join an industry that is rapidly innovating and making front-line military operations more efficient, through the deployment of advanced technology solutions, is real, credible and ground breaking. Capabilities such as surveillance, autonomous vehicles and simulation (VR war gaming) are undergoing significant technology disruption, enabling the utilisation and analysis of huge data-sets in seconds, improving tactical decision making. Such initiatives are highly appealing, though must be aggressively marketed; expos such at DSEI play an active part in this.

In order to attract such talent, defence firms need to adapt fast and be more proactive. QinetiQ for example, have been successful in attracting graduates and apprentices, having developed a programme that offers access to ground breaking technologies, with an emphasis on inclusion, collaboration and teamwork.

Corporate Venturing: Partnership and collaboration with tech start-ups is an increasing trend, though differences in culture and pace between organisations requires serious consideration. It can be a cost effective way to acquire and deploy highly advanced technology solutions into the market. In 2017, DSTL and Digital Catapult ran the Pit Stop programme encouraging Machine Learning Technology firms to engage with the defence industry. Deemed a success, this is now being rolled out to other verticals such as automotive and healthcare.

R&D and Technology innovation: There is a real buzz around the industry, with much talk and action in the areas of Artificial Intelligence and Machine Learning. AI solutions for mine clearing, casualty evacuation, simulation, surveillance and logistical resupply are all real, and evolving at pace. Those who succeed will need to be highly commercial and astute, keeping profitability at the forefront and costs in check.

UK: As mentioned previously, much of the defence budget has been tied up in the major programmes. However, there is huge opportunity for contractors to provide services maintaining and augmenting the legacy of the existing platforms across all three services. The need for constant upgrade of simulators, live firing ranges and vehicles, for example, provides ongoing opportunities.

Export: In 2017 the ADS reported 62% of UK defence companies would expect to grow their export sales. We have supported QinetiQ in their export strategy, hiring talent in the US, Middle East and Singapore to sell imported test and evaluation services, which are highly sought after in these regions. In order to succeed there must be a watertight business model. Joint venturing is prolific, creating leads, and hiring in-country, expat talent with understanding of UK PLC, supported by local support staff, is tried and trusted, and remains one of the most effective methods.

Despite constant pressure from the UK Government on defence costs, providing UK firms can align their business models and deploy exceptional commercial and technical talent, the opportunities certainly out-weigh the challenges. Here’s to industry growth for 2018.

James Blackwood specialises in senior leadership appointments in the defence and cyber security sectors.

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