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Top Gun

Sunday, August 1, 2010 - 08:52

The global recession is presenting opportunities for Australian managers, says defence industry insider Christine Zeitz. By Georgina Jerums

Multinationals are looking to their Australian bases to profit post global financial crisis.

The reason? Australia comparatively sidestepped the GFC bullet, making us an attractive proposition to help steer global companies out of the GFC doldrums.

BAE Systems Australia - the Adelaide-based Australian operations of British Aerospace Engineering Systems - is one of the examples of this trend in action. Australia's largest defence company, with around 6500 employees, BAE Systems Australia contributed handily to the global company's 2009 sales of AUD$38 billion per year.

While there have been reductions in defence spending worldwide, Australia's unique position in avoiding the worst of the effects of the GFC has seen defence spending remain in a growth phase. Of course, while BAE may be looking to Australia as a profit saviour, its biggest Australian client, the Federal Government, still remains jittery about spending during wartime and in light of ongoing economic woes in Europe and the US.

In the corporate bunker

From hammering out policy with Defence Materiel and Science Minister Greg Combet's team, signing off on eight-figure contracts, coordinating lean management for Chinook and F/A-18 aircraft upgrades, and driving gender equality in the workplace, Christine Zeitz certainly gets around.

As Director of Corporate Affairs at BAE Systems Australia, she is a grandmaster of negotiation. And that's critical, given Zeitz oversees a hefty $1.48 billion (yes, billion) in air, land and sea orders annually.

While Zeitz finds work a real buzz - which is why she has remained at the organisation since 1990, rising through finance, commercial and procurement ranks - it's tough going for her industry at the moment. The 41-year-old accounting and business graduate doesn't sugar-coat the challenges her organisation faces.

Driving costs down

Since their primary customer is the Federal Government, BAE are at the mercy of the Department of Defence's spend. While growing, it is curbed at 3 per cent real growth annually until 2015-16, in an environment where equipment needs upgrading and Australia's presence in Iraq and Afghanistan continues to drain the defence purse.

"Afghanistan will continue for some time, and there's not enough money to re-equip the army, navy and air force over the next 20 years, so the Government have started a 10-year savings reform," says Zeitz.

"That's affecting us. We have to show that we have programs to drive costs down. Although not directly from the GFC, we are experiencing enormous scrutiny on cost and we're also experiencing a slight downturn in some revenues because half of our business is 'sustainment': upgrading and supporting.

"For example, the servicing of an F/A-18 might cost X-thousand dollars this month, where we endeavour to get that down the next month, and the next and the next. We're rewarded a profit for doing that, and the customer shares a return of that as well."

Likewise, in Nowra, BAE Systems have won two new contracts for Chinook helicopters by working leaner across the board. They must deliver savings because they've signed up for reducing pricing.

"If we don't do that, we won't be able to compete," declares Zeitz. "Cost pressure has forced us to commit to savings year on year."

Management innovations to save money include the use by pilot trainees of flight simulators and smaller aircraft modified to resemble an F/A-18 cockpit, while maintenance staff must sign off on daily key performance indicators for improved efficiencies.

Contract management skills

Shorter contract stages are another management weapon used by BAE to win contracts and boost the likelihood of projects being delivered on time and budget. As such, hard skills such as engineering, accounting and surveillance are the focus at BAE, but employees in senior management level are drilled in soft skills too, such as leadership and communication.

The higher up the chain you go, the more critical the soft skills become, Zeitz believes.

Defence industry cost pressures are also being felt in other Western countries, although contract styles differ. It's not just a matter of delivering a particular item for X dollars. In the US they have phases called 'cost plus incentive fee', as Zeitz explains.

"They say, 'You estimate a stage will cost $300 million. Do it for that, we'll give you 5 per cent. Do it for $600 million and we won't give you any profit'. They sign that off and move to the next stage."

To the layperson, the failure of some of these critical programs may bemuse, particularly given their importance and the quality of people who work on them. The Collins-class submarines (plagued by design problems since their 1996 launch) is the prime example. Zeitz offers this defence.

"The CEO of a defence procurement agency will argue that only a very small number go wrong," begins Zeitz. "Which is true. It's just that the most complex, high cost ones go wrong. They're very difficult and go over a long period of time with in-depth technologies; some that are a first in the world." BAE Systems airborne early-warning aircraft, for instance, cost $3.45 billion and took seven years to build.

Spotlight on Australia

BAE is headquartered in the UK with a presence in the US, Sweden, Saudi Arabia and South Africa. All up, there are 107,000 employees. They are the largest European defence company and top five in the US.

Yet global slowdowns have meant BAE Systems Australia is taking up the slack from other markets, since Australia is the only market where defence spending is growing. This means BAE partner companies, under huge pressure around the world, are looking to their Australian arm to perform.

Zeitz, for instance, meets every three weeks with Federal Defence Department staff to help carve out industry policy due to be put to Cabinet later this year. With over 20 per cent of Australia's 30,000 defence industry workers, they have a leadership role representing Australian industry to governments such as Brazil and India.

While any new Government policy won't affect the way BAE Systems operates, Zeitz says it will reinforce industry's role in helping to provide sovereign capability to defence.

"Defence industries play a significant role in contributing to Australia's national security," Zeitz says. "I'm very proud to play my part in that."