For aerospace and defence equipment (A&D) manufacturers, the days of only providing new manufactured products to the government are over. Full service solutions are now expected. This means manufacturers need to shift their businesses from pure manufacturing to a blend of manufacturing and services, converting to a new business model in which services are competitive differentiators.
To date, most companies have not achieved the transformation they have been seeking. Selling service models with a product mindset has often been ineffective and confused customers. To overcome these obstacles and succeed in offering products and services, Accenture believes there are seven issues manufacturers need to address: strategy; service offering development; business case development and financial modelling; leadership; contract management; capability; and management of external relationships including suppliers, collaborators and post-merger integration.
Strategy
In shifting to a more service-focused business model, manufacturers must start by identifying clear strategic objectives. These determine the approach to the other six success factors. Corporate executives should define the company's strategic purpose then create a vision and mission centred on how to achieve it. The next step is to create a robust business case focused on the contracting model for services that will secure the company's revenues and enable strategic execution. Executives can then determine the shape of the organisation, preparing it for efficient execution.
When new critical capabilities are needed, management needs to decide whether to buy, create or partner with a suitable third party with access to required capabilities.
Offering development
When using a new service-based model, manufacturers should establish a clear definition and articulation of service offerings manufacturers need to develop new sales strategies and revamp sales forces based on focused and disciplined methods aimed at promoting services. Sales executives should learn how to differentiate their company from competitors, while clearly explaining service value and avoiding selling services as an inexpensive add-on to the sales of the product. Processes should also be established for tracking services marketplace changes and amending sales strategies accordingly.
Business case development and financial modelling
To verify that the move into services will be beneficial in value creation and profitability, manufacturers need a new approach for developing business cases, as well as modelling financial scenarios and outcomes. For example, some service contracts call for heavy initial expenditure to be earned back at a profit over ten years or more. The need to finance such deals requires a different approach than selling equipment. Lower margins in some service provision contracts mean profitability is sensitive to changes in variables such as contract length, delivery delays, currency exchange rates or changes in raw material costs. This sensitivity is a risk that has to be understood and managed.
Leadership
Robust and visible commitment from senior management is important in any industry, but few change initiatives in major corporations are as far-reaching as the task of piloting a long-established, world-class manufacturer into the services space. This means energetic and inspirational leadership is essential.
Contract management
Moving to a services model requires a different approach to creating value propositions for A&D customers. Rather than selling hardware, the focus is on providing services that increase availability, heighten operational readiness and regenerate combat power to create new profits. These service provisions have a major impact on the way contracts are constructed, managed and fulfilled. Contracts need to allow for active monitoring and measurement of systems, platforms and programme performance, verifying that customer-mandated levels of system or platform uptime are met. There should also be provisions to develop, measure and report on programme metrics while the programme is ‘in flight', along with flexibility to innovate and add new elements.
Capability
The journey towards becoming a service organisation requires execution at all corporate levels. This places new demands on how manufacturers acquire, align, evaluate and develop their workforces. To transition successfully, the entire company needs to be engaged in a new mindset, and the strategy must be clearly articulated.
As a service portfolio develops, it will require new processes supported by new responsibilities and risk approaches. Managing a blend of internal capabilities and collaborations will require refined supply and repair operations, and different ways of working with the supply chain. Standardisation will also help the company reduce inventory.
Timely, accurate and complete data is critical to cost-effective delivery of service offerings. The quality of the manufacturer's data management and analytical capabilities will determine its ability to meet customer service requirements and cut costs. Robust data quality and management are essential for tracking material costs, accurately forecasting demand and inventory needs, and monitoring suppliers. Reliable data also allows manufacturers to monitor performance of field assets and the overall service programme's financial performance.
To ensure this data is properly maintained, updated and distributed, companies require an infrastructure for gathering, recording, managing, and communicating data in near real-time. Furthermore, the shift to services necessitates closer and continuous customer engagements and therefore requires integration with defence agency systems.
Management of external relationships
The shift to services elevates the need for manufacturers to look externally for capabilities and collaboration. In many areas, teaming with third parties will be the only option. Manufacturers will need to apply skilled management and integration of the various components in the services value chain, both in-house and third party. This will demand clear and smart decision-making regarding choosing the right collaborators and sharing risk and reward. Targeted acquisitions may also play a role in building the right value chain to meet customers' needs.
Tackling such challenges effectively is essential. For example, a major commercial aerospace manufacturer may currently employ up to 95% of its workforce in its engineering and manufacturing plants. The move to a service focus and availability contracting will require manufacturers to support customers at their own locations and implement a large and complex logistics flow for inventory. As a result, the new model may result in up to 70% of the resources used by the company being located outside its business.
A final thought
A&D companies are moving into an age that brings new challenges and opportunities. Defence agencies have made it clear that they expect these companies to help them achieve their programme and mission goals at lower costs as new airlines are also focusing on differentiating the customer experience rather than building maintenance facilities. Those manufacturers that transform themselves into agile, services-oriented partners will be positioned to drive sustainable results and achieve high performance.
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