For the aerospace & defense and high-tech equipment suppliers and the original equipment manufacturers (OEMs), airlines, and operators, around 9 to 10% is the average negative impact on their bottom-line performance resulting from weaknesses in commercial and contract management.
Especially, now times are so tough for industries in aerospace and aviation and related industries that traditionally always have had very tight profit (EBITDA) margins (half those of similar, blue-chip industrial manufacturing industries), we need to see how we can help the aerospace and aviation and related industries to weather the storm.
How can improving commercial and contract management help? In this article, I will describe how improving ten of the most important issues in contract management can optimize the bottom lines of companies working in aerospace and aviation or even allow them to survive.
Tough Times of Aerospace, Defense and High-Tech
Instead of using the traditional instrument of workforce reductions and firing the ‘indirects’, companies should be looking at investing in commercial and contract management, training the people, streamlining the processes, and in deploying contract lifecycle management tools.
Especially now aerospace, defense, and high-tech equipment industries face their greatest production fall-off in history due to the COVID pandemic with unprecedented impact across the world, there is a need to more than ever to effectively manage the top and bottom lines.
Operators, OEMs (Original Equipment Manufacturers like Boeing and Airbus), 1st to 3rd tier suppliers in the supply chain, and the whole aftermarket in aerospace are all in disarray.
In defense, things today look better, but operations of many aerospace and defense and related high-tech manufacturing firms are also affected by COVID, causing delays in production and deliveries.
Since the governments have to spend a lot of (tax-) money on fighting the pandemic and healthcare, the focus will shift away from purchasing defense material and equipment (if the global political situation allows this).
Moreover, since many aerospace companies also working in the defense market are severely hit in their non-defense and commercial operations, there will be a lot of restructuring and reduction of the workforce going on in the next few years. The effects thereof will spill over and impact also the defense side of their businesses.
But restructuring and firing people is not the only remedy to get through this period.
Companies Should Focus More on Effective Contract Management
Companies should focus more on a significant source of value: effective contract management.
Long development lead-times are only one of the hurdles that the aerospace and defense
and high-tech equipment companies must overcome when managing a contract.
The programs in aerospace and related high-tech equipment industries include some of the most complex and detailed projects around. Moreover, the industries work in a global environment with sites spread over different countries.
Sine the companies often have been around for many decades, their business processes are outdated and inefficient. This affects the time to market, cost goals, and contract performance, and in the end margins.
Top 10 Contract Management Issues in Aerospace & Defense
If I make a list of returning issues related to contract management in aerospace, defense, high-tech, and other similar industries, always the same subjects pop up.
In my experience, the top 10 contract value leakage issues in aerospace and high-tech look something like this:
- Disagreements over contract scope, technical specifications, or statements of work and over what was exactly committed in the contract leading to disputes, claims, or contract termination.
- Contract management left as an operational side job to non-legal or non-commercial people (e.g. program or service managers) who are not trained to do effectively draft contracts or have the skills to manage competitive terms which leads to poor contracts.
- Issues related to poor contract change management, leading to contract breaches, conflicts, and claims.
- Performance (and delivery) failures due to over-commitment in the contract (setting unrealistic schedules in the pre-signature phases and poor drafting and negotiating skills) leading to penalties or liquidated damages or even termination of contracts.
- Disputes about (over-) pricing and price changes, leading again to conflicts and other negative consequences.
- Inappropriate contract structure (not structured or administered to effectively manage costs and achieve desired business value outcomes), contract data residing in fragmented systems and databases dispersed over the company, combined with unclear responsibilities of the parties, leading to poor visibility into the contract specifics and conflicts in contract execution.
- Invoicing and late payment issues causing cash flow issues and again more conflicts with customers.
- Issues with subcontractors and vendors dues to poor subcontracts or risks not properly having been flown down.
- Intellectual property, cybersecurity, and export control issues leading to lengthy court cases.
- Customers imposing unreasonable or suboptimal contract terms and conditions on OEMS and/or the OEMs doing the same with their own subcontractors and vendors.
Improving Contract Management Performance
The top 10 conditions that need to be in place to reduce contract value leakage to make sure you can weather the pandemic storm can be the following:
- The number one focus must be on having the right commercial and technical (writing) skills on board to create value propositions and negotiate technical specifications or statements of work that are based on clearly understood customer requirements.
- You must make sure you put skilled people, robust processes, and effective tools in place to get a complete 360-degree overview of the complete contract lifecycle and to effectively manage contract value and reduce value leakage over time.
- You must be able to adopt change rapidly into your contract and flow down those changes quickly and effectively throughout the organization and supply chain.
- Make sure you have a skilled team of people helping you in drafting contracts and negotiating commitments based on realistic value forecast numbers.
- Inclusion of contract value leakage in the pricing strategy and engaging the organization, supply chain, and customers in understanding contract and business value will reduce (over-)pricing issues.
- Make sure that offers and contracts are structured in a coherent way and easy to understand and make use of customer lifecycle management software or legal tech (CLM) to create an integrated solution that delivers a “single version of the truth”.
- Automate ordering by e-commerce portals as much as possible, including invoicing.
- Make sure you involve your subcontractors and vendors and – if possible also your customers- also in contract management issues and in identifying contract value leakage.
- Set up teams with skilled people, implement and build processes and introduce tools for export control, cybersecurity and ensure the protection of your intellectual property.
- Make sure you have skilled contract reviewers checking the terms and conditions for proposals and agreements.
So What’s Your Top 10?
Companies in aerospace and defense need to invest in people, processes, and technology to weather the storm. Traditionally, they have not invested and therefore they have relatively limited resources in contract management (less than 1 percent of total spending).
This is a huge lost opportunity, especially for companies in aerospace and defense that now are in dire straits due to what is happening in the world due to Covid and the way governments are dealing with it.
First and foremost, you need to put a lifecycle contracting strategy and skilled contract management organization in place that focuses laser-sharp on creating business value.
By improving your organization, training your people, introducing efficient processes and contract lifecycle automation you can overcome many of the issues related to contract management and contract value leakage.
What is your take on this? I would like to know what would be your top 10? Is it the same as mine or do you miss issues you think that should belong there? Leave your comments below.