SpaceNews Features RAS Insights: “The Imperative of Affordability”

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Thomas D. Taverney’s recent article points out a number of intelligent steps the U.S. Department of Defense space community is taking to survive sequestration, such as moving toward disaggregated, resilient/affordable systems [“The ‘S’ Word: The Beginning, Not the End,” Commentary, May 6, page 19]. There is general agreement that the cost of space systems has to be reduced, but few aerospace and defense organizations have been able to make the leap to the inventive business models required for survival in our present economic reality.

Enough big picture talk; I think it’s time to drill down to the details of what we need to do next. Taverney mentions “painful decisions involving buying smaller quantities of expensive legacy systems,” but I see more innovative alternatives to this course of action.

It has various names now — affordability, strategic preparedness, market positioning — but the principle remains the same. Aerospace and defense organizations have to figure out how to streamline and innovate to meet new price sensitivities; otherwise, the dynamic of this new paradigm could drastically dwindle your market share, or worse, render your business obsolete. Yes, the competition within the industry is that fierce right now.

The current fallacy is that the bureaucratic and entrenched incumbents are safe, pending demonstration of basic cost savings. They’re still operating with an entitlement mentality. The herd think among the C-suite of the major aerospace and defense firms goes something like this: “We’re a protected industry given the services we provide to the government and national security. Competitors can’t quickly restructure and this isn’t high-tech where entrepreneurs can launch disruptive businesses.”

I beg to differ. Anyone heard of SpaceX?

Granted, Space Exploration Technologies Corp. still has to prove mission reliability before it becomes a truly viable alternative, but it appears Elon Musk and company are poised to close that gap. How did they get this far, and sooner than almost anyone predicted? They examined the entire business infrastructure — not just the parts — and extracted more for less. Failure to learn from this case study by redefining and restructuring into a leaner business model will likely have real and lasting implications for aerospace and defense organizations.

I submit that the spoils will soon go to those companies that figure out how to reinvent themselves as cost-conscious innovators. With $526.6 billion in President Obama’s 2014 budget request for defense spending and an additional $88.5 billion in planned war funding, there is too much at stake to ignore demands for an improved value proposition. We live in a different global economic reality now, and customers, especially of this type and scale, have leverage again. This is not a bluff I would call.

In its simplest form, creating a leaner business model translates not only to reducing enterprise-wide costs but also to cultivating business development strategies and program work designs that yield maximum value.

Successful affordability programs will achieve two key objectives — balancing cost efficiency with reliability and maintaining the current customer base. In fact, companies that proactively subscribe to affordability can enter a growth period where delivering systems early and below cost can lead to increased volume. This is a real world approach that has proved successful in today’s market.

In order to build this internal capability, define the strategy. Put it into words, clearly and concisely, and communicate it with all the stakeholders in the value chain — employees, suppliers and customers. Efforts to create more affordable solutions should be paraded publicly and proudly. Also consider developing an affordability office or small team that serves as the hub of activity and drives the initiative internally by working collaboratively with affordability functional leads.

All this said, the most important element in this initial definition phase is to recruit executive sponsorship. Organizations will encounter significant difficulties in their attempts to align priorities and achieve results without a mandate from the C-suite. Cultural adoption of affordability requires top-down management and messaging.

Once defined, assess total costs throughout the organization. This is done most effectively by determining and categorizing a standardized set of demand drivers. Extract the relevant cost data and map them to the demand drivers to produce a comprehensive allocation of costs that serves as the basis of fact. (Target 90-95 percent accuracy with the data inputs; this is sufficient for making key business decisions.) The current state allocation acts as the baseline from which to evaluate opportunities for improvement — with labor “right-sizing,” with engineering designs, with supplier relationships and with enterprise infrastructure. Apply a prioritization model to the identified opportunities such that high-impact and low-effort projects filter to the top of the list.

Armed with a total cost framework and a targeted savings list, implement the prioritized affordability ideas by engaging both internal stakeholders to realize change and customers to support change. Recognize that ownership and accountability will play key roles in the success of implementation efforts. Establish targets, measure progress, integrate conversations on affordability into normal business rhythms and routinely report outcomes to senior leadership.

Affordability won’t happen on its own — it will require commitment from functional/team leads to achieve their targets and strong influence from the corner office to realize the strategic objectives. This is precisely why the hub and spoke model proves so effective in aligning and coordinating the affordability activity throughout the organization. As a best practice, it is also important to pinpoint quick wins early in the process to put “points on the board” and create momentum with the initiative.

As the mindset gradually shifts to “we can do more with less,” leverage the successes in order to sustain the gains. Throughout the exercise, the organization will have redefined what was possible:

Celebrate and communicate the incremental progress.

Have executives highlight process improvements that lead to more efficient work flows and thereby cut overhead expenses. n Inform customers of key efforts to streamline costs and the associated savings to programs and pricing.

Offer employee incentives for unique and impactful ideas.
Affordable solutions are the outcome of a well-defined strategy that assess all forms of cost and rely on a collaborative approach to produce measurable results. But outcomes ultimately become behavior when there is widespread participation, institutional accountability and recognition for performance.

Affordability is here to stay in aerospace and defense and it is a competitive differentiator. It is also a responsibility that exists at all levels regardless of job title or tenure because individual opinions and ideas do matter. Without questioning conventional designs, without challenging current processes or cost structures, without asking “why,” organizations will struggle to stay relevant in the new market. Adopting affordability using the roadmap above will help ensure that does not happen.

This opinion piece is featured in SpaceNews