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
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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.
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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, [email protected]
Thomas Colella, 202-955-0939, [email protected]
Frank Cahouet, 202-955-0923, [email protected]
Patrick Gray, 202-955-0918, [email protected]
Robert McHale, 703-873-3201, [email protected]
James Prencipe, 202-955-0945. [email protected]
Stamford
Michael Rothblatt, 203-406-8726, [email protected]
Nancy Pearson, 203-406-8747, [email protected]
Jason Ward, 203-406-8769, [email protected]
Mary Ellen Rusell, 203-406-8717, [email protected]
Joseph Huddle, 203-406-8798, [email protected]
Chicago
Dr. Boyd Falconer, 312-526-0594, [email protected]
Los Angeles
Peter Santora, 949-260-9501, [email protected]
London
Giles Goschen, 44-2073123229, [email protected]
Montreal
Jean Guilbaut, 514-788-3082, [email protected]
Singapore
William Fello, 86-21-5260-4502, [email protected]
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