Managing rapid growth in Defence or how the elephant learns to dance

By Dr. Mike Körner and Dr. Martin Krause //

After decades of contraction, the defense industry now needs to grow substantially. In the past, defense projects have not exactly been associated with quick time-to-market or reliable delivery timeline. So how can this rapid growth be managed in a brief time, or how do you get the elephant to dance?

Simply multiplying the company’s own capacities is often neither sensible due to the extensive investments, the build-up of future fixed costs, nor possible within the required timeframe. In addition, the defense industry also suffers from staff shortages in combination with an aging workforce and often unattractive company locations. Supply bottlenecks or long lead times for intermediate products and components ranging from electronics to steel have also been a problem, and not just since the Corona era.

Realizing rapid growth by means of strategic partnerships

One approach to managing rapid growth is to build strategic partnerships. Collaboration offers the opportunity of faster response time to strong demand, a more flexible overall organization with significant expertise, and a lower fixed cost base. In this context, it is important to understand that a strategic partnership is not just another word for an interchangeable supplier relationship, but a commitment to working together over the long term and pursuing common goals in the long term. In doing so, both partners make themselves dependent on each other to a certain extent, integrate the other side into their own processes and make long-term, project-specific investments. Rapid growth requires defense management to turn away from the previous business model in shrinking markets. At that time, the focus was on maximizing the company’s own value creation for the utilization of its own plants as well as margin optimization within the corporate group. In the case of rapid growth, on the other hand, a significant part of the value-added and margin is deliberately outsourced to increase speed, reduce complexity, and increase flexibility.

Approach for building strategic partnerships

What can a result-oriented approach look like? From our experience, a sensible approach can be as follows:

Step 1: Determining opportunity costs

The main motivator of strategic cooperation is the combination of lack of resources, rapid growth, and immense time pressure. In this respect, the partnership aims at gaining a long-term competitive advantage, which will enable rapid growth in the current situation and beyond. Consequently, one should first determine the volume of this potential growth and then estimate the opportunity costs that will be incurred should the company not be able to realize this growth, or only after a delay. These costs, including the necessary investments, are then the benchmark for all further steps in the adaptation process.

Step 2: Creation of a project plan

The second step is to check how much time is available for the development of the strategic partnership. This enables a clear estimate of the timeframe in which steps of the reorganization must be completed. This clearly limits the number of practical solutions and defines the time requirements for potential partners. It is important to create an integrated overall plan. Frequently, some crucial topics are systematically underestimated or neglected in terms of duration and scope during planning. These include, for example, necessary development activities or obsolescence removal, which are required for the restart of series production, or the need to expand supporting functional areas such as incoming goods inspections or internal logistical activities, with subsequent negative consequences for the production ramp-up.

Step 3: Selecting the Buy components

The third stage involves selecting the systems or subsystems or processes to be handed over to the strategic partner. In this make-or-buy decision, care must be taken to ensure that the selected subsystems / components do not require core competence expertise, otherwise there is a risk of building up a competitor in the long term. When selecting and allocating systems and subsystems to different strategic partners and suppliers, knowledge protection plays a key role. In our experience, internal resistance and fears among managers and employees can be expected at this stage. Some are worried about losing power or core competencies, while others fear for their future jobs. An objective assessment as well as clear objectives and communication help to overcome fears and to overcome legacy, outdated structures. What was considered internal core capabilities ten years ago may now be widely available technology in the market.

Step 4: Selection and development of partnerships

Now one can identify partners that meet the requirements in terms of capabilities, resources, finances, soundness, quality, reliability, etc. When selecting partners, one should look beyond the usual suspect defense contractors and suppliers. The physical proximity of the partner has taken on a new importance in the context of security of supply and new geopolitical realities. Short distances as well as cultural proximity allow for a much higher speed in the implementation of a cooperation and contribute to the security of supply.

When selecting components and strategic partners, the specific aspects of the defense industry must be considered. These include, for example, legal requirements such as the War Weapons Control Act (KWKG) or export controls. Particularly in security-relevant, innovative technologies, an expansion of banned lists, trade restrictions, sanctions and tighter export controls is to be expected.

Partner selection also requires a structured risk analysis that considers both short-term operational and long-term strategic aspects. Once the right partner has been selected, the modalities are defined and contractually fixed. This includes, among other things, the details of the cooperation, the associated investments, the communication channels, or even a division of risks. The partner becomes part of the company’s own value chain.

Success factors for strategic partnerships

What are the success factors for building strategic partnerships?

(1) Combining forces

Rapid growth regularly pushes employees to the limits. Integrating new partners is not a walk in the park either and requires significant efforts for the organization. To successfully establish strategic partnerships, a powerful team from different functional areas must work together. In addition to the traditional areas such as program, development, production and purchasing, other functions such as quality, finance, IT and legal must also be involved. Only a broad and intensive involvement of all relevant areas ensures that no substantial mistakes are made in the design of the partnership, even in the important initial phase.

(2) Build up new competencies

Integrating external partners into internal structures and processes requires a higher degree of formalization and documentation at the most important technical and commercial interfaces to the partner. Internal work plans and handwritten documentation must be replaced by formal specifications, comprehensive technical documentation and manuals. The effort required for this conversion should not be underestimated. This formalization requires new competencies, for example in development, manufacturing or purchasing.

(3) Adapt processes and structures

Strategic partnerships require innovative approaches and processes in various functional areas. An example of necessary changes is displayed in the figure 1 below for the procurement function. If, for example, procurement is selecting the most economic supplier instead of the most suitable partner, conflicts and undesirable developments are inevitable.

Classic defence procurement of componentsRole of procurement in strategic partnerships
Scope:
– Simple components (e.g., DIN/ standard parts)
Approach:
– Selection of the most cost-efficient supplier based on three comparable offers
– Autonomous selection decision of the purchasing department
Incentive/Variable Pay:
– Realized savings as the most important KPI
Scope:
– Complex subsystems / processes
Approach:
– Selection of the most suitable, not necessarily the cheapest partner
– Decision based on a complex set of criteria involving many internal & external stakeholders

Incentive/Variable Pay:
– New MbO system based on various performance KPIs
Fig.:1 Exemplary comparison „classic purchasing“ vs. „strategic partnership“

(4) Create transparency

Even more than in other industries, the defense industry must have a detailed status at all times of where its supplied components come from and which companies are involved in the entire value-added process, including in the third tier.  Furthermore, a fast ramp-up of production only succeeds if there is transparency about lead times and parts availability. This helps to identify risks, look for alternatives and create a robust supply chain.

How can ACTRANS support?

At ACTRANS, as a management consulting firm focused on defense, we help general managers, business unit leaders and program managers to handle their rapid growth. In doing so, we help management to readjust many small and large levers at once for the ramp-up. The ACTRANS team has extensive experience in ramping up major military programs, optimizing cycle times, and building strategic partnerships. Our rapid growth services include:

– External risk analysis of existing growth plans

– Development of alternative approaches and scenarios to manage growth

– Support in planning, orchestrating and implementing all measures to manage growth