Swords into plowshares? by Clarke Havener
Implications for Human Capital in the Aerospace & Defense Industry under a new Administration
T
he garden at the United Nations in New York City contains several beautiful sculptures and statues donated over the years by different countries. One of these, a large bronze statue from the
Soviet Union, represents the figure of a man holding a hammer in one hand and a sword in the other hand, a sword which he is making into a plowshare. The statue, “Let Us Beat Swords into Plowshares,” symbolizes man’s desire to put an end to war and convert the means of destruction into creative tools for the benefit of all mankind. The gift was given to the United Nations by the Soviet Union in 1959. Ironically, after the gift was given, there ensued the largest and most dangerous arms buildup in man’s history. Fought between the Soviet Union and the United States, this was a “cold” war which lasted almost thirty years. The defining moment of victory in the Cold War, captured in countless photographs of the Berlin Wall being razed, came at an overall weapons cost to the United States and the Soviet Union estimated to be upwards of $8 Trillion.
The election of a new president of the United States also constitutes a defining moment in the history of America. In the coming weeks and months, we will be hearing more about what the new president’s victory symbolizes and what changes it will usher into the country. One sector of the economy that is certain to experience a shift in direction and priorities is the Aerospace and Defense industry, where shares in companies have declined ahead of the election in spite of stronger-than-expected earnings as investors anticipate a less robust environment for the Aerospace and Defense industry. The fear is that after years of strong growth in revenues and profits, the new administration will begin beating swords into plowshares; reining in Defense spending as part of a broader cut in federal spending and redirecting some of that funding toward more popular domestic programs. Changing priorities under a new administration will have a direct impact on the leadership and talent management within the Aerospace and Defense contracting community, although not necessarily what might be expected. Countervailing forces, competing strategies for allocating resources, and workforce issues will likely play a significant role in any directional shift.
Background
The new president enters the White House inheriting two wars, a credit crisis, a housing slump, the domestic economy in recession, plunging consumer confidence, a global economy that is rapidly grinding to a halt, and the deleveraging of financial assets worldwide. The new administration also inherits the unresolved nuclear crisis with Iran, a resurgent Russia determined to reassert its power and influence in Asia and Europe, China on the ascendency in the Asia Pacific region, radical terrorists and a host of dysfunctional nation-states. While some observers believe that the new president will follow the lead of the last Democratic president, Bill Clinton, and drastically shrink defense spending, the chances of that happening are unlikely. Bill Clinton presided over the final presidency of the 20th century. His presidency was defined by the collapse of the Soviet Union and the expansion of market-based economies across the globe. The new president takes office in the new century. And in the 21st Century, every president must measure himself against the backdrop of 9/11.
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The new president has promised to end the Iraq War and to pull American soldiers out of that country. He has also promised to take a hard look at many of President Bush’s Defense initiatives. It is unlikely, however, that he will reverse the broader Defense policies and buildup set in motion by his predecessor. While changes to the policies currently in place may occur after debate, the new president is likely to discover—as so many newly elected presidents have before him—that there is a vast gulf separating the promises of a candidate from the responsibilities of a president. This is not to say that the new president does not bring his own set of Defense priorities to the Oval Office, or that he will not leave his own stamp on Defense policy. He will. These new priorities will have significant downstream implications and will present challenges to the leadership of the Aerospace and Defense industry. In addition to the changes and challenges that management and boards will face over the next four years, there will also be significant opportunities in the development, acquisition, and management of executive talent.
Notes: Base budget figures are from OMB and include Department of Energy nuclear weapons activities and DOD-related spending by other agencies. Iraq/Afghanistan war budget figures are from CBO, “Analysis of the Growth in Funding for Operations in Iraq and Afghanistan,” Februrary 11, 2008.
Growth in Defense Budget 2000-2008 (in current dollars)
800 Iraq/Afghanistan War Budget
700
$696
Base Budget
$628
600
$521
500 400 300
$292
200
170
165
101
116
76
$475 74
$459
189
$558
$706
$333 17
$359 14
316
345
383
401
420
442
463
2001
2002
2003
2004
2005
2006
2007
507
536
100 0 2000
2008
request
2009
estimate
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Defense spending under President George Bush more than doubled over the past eight years, rising to $692.4 billion in 2008, from $292 billion in 2000, a compound annual growth rate of 10%. Included in this figure is nearly $200 billion in supplemental funding, which has been used to finance the wars in Iraq and Afghanistan as well as the global war on terror. In 2009 and 2010, defense spending is expected to exceed $700 billion annually, after which it is likely to level off. It is expected that this supplemental funding will be phased out and folded into the Pentagon’s baseline budget as the new administration begins the troop drawdown in Iraq and begins the buildup in Afghanistan. But these changes do not necessarily signal a downturn in the Aerospace and Defense industry; rather, they represent a shift in priorities of how defense dollars are spent and in slowing the rate of growth in defense spending. According to Friedman, Billings & Ramsey’s recent study, “2008 Presidential Election: Investing in an Environment of Change,” there is little likelihood of an across-theboard cut in the defense budget. Rather, the approach of the new administration will be to emphasize cost savings, as some weapons modernization efforts are downsized, delayed or eliminated. Acquisition reform, slowing the growth of the forces, utilizing commercial off-theshelf technology in place of unique technology, reducing duplicative and competing programs among the branches of the armed services and encouraging joint programs and international alliances will also characterize the approach of the new administration. The recognition of the necessity for a strong and robust military capability is implicit in the key defense issues that the new president highlighted in the election campaign. And while some observers have pointed to an emphasis on the areas of command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), it would be a mistake to reduce the new architecture to C4ISR alone. It will be incumbent on the incoming administration to identify and define the future threats facing the U.S. and to prepare U.S. forces for these evolving threats. The military will need to strike a balance between conventional capabilities and irregular-asymmetrical challenges. In the course of the past eight years, we have seen the need for regular capabilities in Iraq, while Afghanistan has revealed the need to maintain irregular capabilities in a non-nation state setting. Counterinsurgency operations will be central to U.S. strategy. The new president has also indicated that providing humanitarian relief efforts abroad is a role that the military will play in his administration.
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The incoming administration will be especially receptive to emerging technologies, combating cyber-threats in cyberspace, strategic aircraft, ground mobility and soldier systems. The new president has said he is committed to preserving U.S. airpower to deter and defeat conventional opponents, to respond quickly to crises across the globe, and to support U.S. ground forces. The redeployment and retraction of armed forces, first from Iraq and eventually from Afghanistan, means that air and sea power are essential to the foreign and defense policy going forward. The new president has indicated his support for such unglamorous yet essential systems like the C-17 cargo plane and KC-X air refueling craft, to be able to move men and materiel rapidly to distant parts of the globe. He has also voiced his support for replacing aging vessels with smaller, more nimble ships. While the new president is somewhat more cautious in the area of Missile Defense, he is likely to continue to support Missile Defense systems, while at the same time investing in technologies designed to prevent a nuclear attack on America by terrorists. The upcoming debate over funding more troops versus funding advanced technology systems may have a profound impact on the direction of the industry, but not necessarily on the overall funding levels.
The Impact on Human Capital in the Aerospace and Defense Industry
While the advent of the new administration presents the Aerospace and Defense sector with uncertainty, a crucial and pressing issue for the industry is that of human capital. The industry faces a critical shortage as many professionals prepare for retirement. According to the American Institute of Aeronautics and Astronautics (AIAA), there are currently more than 40,000 professional job openings in the Aerospace and Defense industry. More than a quarter (26%) of professionals within the industry are eligible to retire this year (AIAA refers to this as the “silver tsunami�). Estimates are that the industry will need from 120,000 to 190,000 new professionals to enter the workforce over the next decade. To be sure, many mature industries in the U.S. face similar issues of a graying workforce and the loss of knowledge/experience as a result of retirement. The dilemma of how to address the chronic shortage of engineers, scientists and computer scientists is not unique to the Aerospace and Defense sector. Unlike other sectors, where companies can subcontract critical aspects of a project and can send some of the work overseas to India or China, subcontracting is limited in the areas of defense because of security concerns and technology transfer issues.
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To a certain degree, some of the talent shortage may be bridged through the increase use of commercial off the shelf components, but there may be a limit to the extent to which commercial products and components can meet stringent military standards. The larger issue of knowledge/experience loss is one for which there are no easy fixes. In an industry where programs have an extended and protracted product lifecycle—more than 15 years on average—and where the products often last decades, there is no substitute for a knowledgeable and experienced workforce.
Older Workers in Aerospace How the percentage of U.S. aerospace workers age 45 and over has grown since 1992: 2007 59%
60
40
20
0
‘92
‘07
Given the impending wave of retirements, the lack of workforce diversity and the dearth of up-and-coming leaders within the industry caused by a falloff in funding and sentiment post-Vietnam, competing for talent will continue to be a major concern for our industry irrespective of shifting priorities under the new administration. Companies will continue to need to recruit, retain and develop their employees even more assiduously than they have during the past eight years. But the battle will not be limited to scientific, engineering or technological talents alone. The shifting priorities of the new administration, given its greater focus on reducing waste and on encouraging partnerships building new weapons platforms, will also create greater demands on the top level executives at Aerospace and Defense companies. Where the industry has been characterized by cost-plus development programs 6
for advanced weapon systems, executives at all levels will be called upon to develop new business skills. These will include negotiating skills, managing cost more effectively, and working with a multiplicity of partners around the world. Perhaps most importantly, executives should be trained to think of their businesses not as a collection of programs but rather as a commercial enterprise. Program management skills, while important, are not a replacement for business skills. These new executives will need to bring international experience and a global perspective, not simply for the purpose of selling weapons or other sophisticated, costly systems abroad, but in forging partnerships to undertake development of complex projects. At the same time, these executives must be equally experienced in handling complex issues associated with international alliances, as well as government funding, accounting and integrity requirements. Companies will need to become more innovative in their approach to meeting the sometimes opaque requirements of their government customers. Boards will need to pay greater attention to the issue of succession and the grooming and nurturing of executive talent and be able to contribute to the internationalization of relationships with our allies abroad.
Summing Up
The challenges our new president will face are complicated, and some are quite dangerous. How he shifts resources from one set of priorities to another will in large part define his presidency. The near term impact on the Aerospace and Defense industry, given the volatile state of the world, a critical shortage of professional talent, and the choices which are yet to be made by a host of political and military actors about how resources are allocated, points to a continued need to hire, retain, and develop the best executives the industry has to offer. Companies that attract, develop, retain and motivate the right executives can achieve superior performance in the Aerospace and Defense industry. Despite the noble desire to beat swords into plowshares, the war for talent within the Aerospace and Defense industry will continue to be as pronounced as ever, and will likely intensify.
About Korn/Ferry
Korn/Ferry is the global leader in Talent Management and provides executive search, talent management, succession planning, retention strategies and recruitment process outsourcing. Along with the challenges and changing priorities in the Aerospace and Defense Industry over the next decade comes the opportunity for positioning your organization for growth through successful talent management strategies. 7
About the Author
Clarke Havener is the Global Aerospace & Defense Sector Leader with Korn/Ferry International.
Offices/Aerospace & Defense Sector Contacts: Washington, DC Clarke Havener, 202-955-0909, clarke.havener@kornferry.com Thomas Colella, 202-955-0939, thomas.colella@kornferry.com Frank Cahouet, 202-955-0923, frank.cahouet@kornferry.com Patrick Gray, 202-955-0918, patrick.gray@kornferry.com Robert McHale, 703-873-3201, robert.mchale@kornferry.com James Prencipe, 202-955-0945. james.prencipe@kornferry.com Stamford Michael Rothblatt, 203-406-8726, michael.rothblatt@kornferry.com Nancy Pearson, 203-406-8747, nancy.pearson@kornferry.com Jason Ward, 203-406-8769, jason.ward@kornferry.com Mary Ellen Rusell, 203-406-8717, maryellen.russell@kornferry.com Joseph Huddle, 203-406-8798, joseph.huddle@kornferry.com Chicago Dr. Boyd Falconer, 312-526-0594, boyd.falconer@kornferry.com Los Angeles Peter Santora, 949-260-9501, peter.santora@kornferry.com London Giles Goschen, 44-2073123229, giles.goschen@kornferry.com Montreal Jean Guilbaut, 514-788-3082, jean.guilbaut@kornferry.com Singapore William Fello, 86-21-5260-4502, bill.fello@kornferry.com
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