Friday, December 3, 2010
Hold the Front Page
If the industrial base in the United States can learn anything from the fall-out from the post-Strategic Defense and Security Review (SDSR) recently carried out in the United Kingdom (UK), it would be that the recent cuts in the defence budget of around eight percent is going to hit small and medium enterprises (SMEs) the hardest. At a recent industry gathering in London, (‘Chatham house’ rules prevent me from naming the event or speakers), the keynote speakers (members of a company central at the center of the UK’s defense industry), foresaw ‘a long period of turbulence [in defense acquisition] before a balanced and stable program is developed.’
There was a plea for the Ministry of Defence to closely examine and reappraise its relationship with industry. This opportunity is already in progress. Following a Green Paper (see note below) published on Feb. 3, 2010 entitled “Adaptability and Partnership: Issues for a Strategic Defence Review,” which acted as a warned that post-election cuts to the defence budget were on the way, a further Green Paper is expected from the UK Government before the end of the year. This consultation with industry is leading towards the publication of the next Defence Industrial Strategy around the second quarter (Q2) of 2011. Once issued, this document will be the foundation upon which the Government’s relationship with the defence industry will be based for the coming years over the implementation of its strategic ambitions across each industrial sector.
The SDSR has already been criticized for taking a short-term view on major issues while not really addressing the more numerous lower tier projects [it has mainly addressed ‘A & B’ large scale projects]. It has been seen as largely fiscally driven and that some of its published strategic assumptions have not been readily accepted.
Industry representatives have complained that the UK MoD’s procurement process is not fit for purpose, in that it frequently fails to retain a long-term basic vision, a continuity of procurement and experienced personnel to follow through its programs. To some extent, reasons behind this include the frequency of churn among its political, civilian and military representatives. When this is matched against industry, with personnel who often stay with a program through its lifetime, then it is clear that the relationship can only improve if the need for long-term continuity is addressed.
Currently there is a reluctance of SMEs to invest their own finances into research and development of science and technology projects. In the collective experience if, or rather when, procurement priorities change they can be left stranded. Research and development budgets are some of the easiest to cut when government needs to make short-term savings.
Industry’s call from the meeting expressed an urgent need for there to be ‘a revolution in the defense industry’ which should lead to clarity and consistency over the coming years. Plans made as a result of the SDSR should be sustained with ‘no deferring of difficult issues.’
The collective view from industry leans towards a belief that the SDSR 2010 was only the beginning of a very difficult few years. Project cancellation were far from completed and it was expected that the 2011 budget would be particularly harsh with one estimate postulating that somewhere between 600-900 contracts could be up for renegotiation. Private Finance Initiatives (PFIs) are almost certainly going to be ‘tied down very tightly’. Manpower cuts forecast at the MoD’s Defense Equipment & Support agency will be in the region of 30 percent and cuts to C and D category projects [those of lower value] could be in the region of 20 percent.
Many in industry believe that in order to expand the economy and the industrial base, and to increase exports to new and developing markets outside of Europe, the need for successful SMEs should not be undervalued or marginalized.
SMEs are categorized by their generally lower overheads and their size allows flexibility, while they often generate a high level of expertise. However, they are vulnerable to rapid change, especially when it impacts on their financial stability, and their pace of innovation can differ significantly from that of project execution. Added to this is a general belief that there is little incentive and reward for their labors.
But whether impactful process changes can be made in the current climate of defense cutbacks remains to be seen. Industry wants to help, if only driven by self-interest and survival. But if SMEs can be energized in a new way then the result must be increased dynamism and further innovation all the way up the chain.
Note: A green paper is a ‘first-draft’ document on a specific policy area circulated among interested parties who are invited to join in a process of consultation and debate. The objective of a green paper is to arrive at a general consensus before drafting the official policy document, the white paper. (Definition from BusinessDirectory.com)