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

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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’!

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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

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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

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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.