FARNBOROUGH, England — Cutting employees is easy. Keeping the right ones is difficult.
While U.S. defense companies will likely continue to reduce staffing as part of the defense downturn already in progress, the process of sorting the critical from the expendable is a concern for many senior executives.
Much of their fear stems from a glance at history: The aerospace and defense industry didn’t handle the last downturn well. Not only did a loss of critical knowledge affect efficiency, but in many cases companies were ill-prepared to support government needs when greater spending returned.
“What I found in the ‘90s is you never had the work where you wanted it, and you always had it where you didn’t want it,” Raytheon Chief Executive William Swanson said. “The first thing that we learned is you better be pretty good at your work force plan, that you should have tools or models available to you that allow you to understand what your work force needs are across your company.”
One of the largest challenges companies face is understanding what knowledge is lost as employees depart. During the last downturn, one of the worst areas was on assembly lines, where long-tenured employees who knew how to install tricky parts disappeared, and at times production was forced to a crawl or even halted.
To prevent a knowledge loss that could cripple production, Lockheed Martin has installed cameras at the work station of assembly line workers to document their skilled moves, said Chris Kubasik, who will take over as chief executive in January.
“When you go to [the Lockheed plant in] Fort Worth or you go to one of our facilities, the technology has allowed us to capture the way that people are doing things,” Kubasik said. “We have embedded video where we’ll say, ‘This is our main guy.’ We will videotape him.”
The recognition of the value of knowledge has changed, said Steve Grundman, the Lund Fellow at the Atlantic Council.
“In general, I think reductions in the last downturn were focused on ‘capacity’ and capital investments, not people, and what they learned was that the focus should have been on ‘capabilities’ and skills instead,” Grundman said. “Compared to finding a good systems engineer, it’s comparatively easy to build a factory, an insight I’m not sure was so widely shared 20 years ago as it is today.”
While cutting jobs could result in critical knowledge loss, executives also fear that some of the political dynamics of the automatic budget cuts known as sequestration could scare off top talent.
In particular, industry threats about large-scale layoff notices filed in compliance with the Worker Adjustment and Retraining Notification (WARN) Act immediately prior to the election could persuade some skilled employees to exit the industry, L-3 Communications Chief Executive Michael Strianese said.
“Employees will stop and think if we do the conditional WARN Act notice that companies are talking about,” he said. “It may take your most highly valued assets, employees and make them start thinking about how to pay the mortgage in six months. It may force things to happen that you really don’t want to happen, and that’s not reversible. I hope people understand that. It’s not fixable in the short term.”
Strianese said he questions whether the notices must be sent for potential January layoffs since the government can’t immediately stop defense payments.
“We know that engineering talent is king, and in that regard I’m very concerned about the prospect of sending out WARN Act notices and putting employees in play before I actually have to,” he said. “I don’t think the spigot turns off as of Jan. 2; there’s always money in the pipeline already.”
The last downturn demonstrated that early buyouts and other moves to reduce employee rolls can leave a glaring hole at the top of the talent ladder, said Richard Aboulafia, an analyst with the Teal Group.
“People who can get jobs elsewhere leave,” he said. “The less talented and less aggressive stay behind.”
Double-dip talent recession
Demographics also are working against the industry. As a group, defense employees are aging rapidly, and the pipeline to bring in new talent is providing only a trickle of capable candidates.
“We’re looking at the same demographics that all of aerospace is looking at,” Boeing Defense, Space & Security Chief Executive Dennis Muilenburg said. “Perhaps half of our top technical and manufacturing work force will be eligible to retire in the next five to 10 years. We’ve got to get out ahead of that curve.”
Boeing, however, has an advantage shared by few of the other top defense contractors: The company’s commercial side is growing just as defense slows.
“Boeing will have a strong competitive advantage because of their ability to keep people within the company and move them to commercial operations,” said Byron Callan, an analyst with Capital Alpha Partners. “Other defense primes won’t have that option”
Muilenburg said that many of the early cuts he has had to make in defense have been picked up by the company’s commercial expansion in South Carolina.
“I’ve come down from 69,000 to 61,000 people on the defense side of the company,” he said. “Most of those people are now working in commercial as they’ve been ramping up. That ebbing and flowing of the two sides of the company provides us with a real talent management advantage.”
But Boeing, like every defense contractor, is facing the same weak flow of incoming talent that makes replacement of retiring employees so difficult.
Swanson, who has been active in a variety of STEM (science, technology, engineering and math) initiatives to increase interest among students and boost the talent pool, said he is very concerned about the problem.
“Let me put it in perspective, and I’ll deal with it in math,” he said. “17.4 percent of students that go into the program both have the aptitude and the desire. That’s the population that we work with. Of that population, they now go into STEM, and 60 percent, at least on the engineering side, drop out. That yields us 60,000 to 70,000 graduates on a yearly basis.”
Swanson said that defense companies could be doing more to fight the problem.
“Business has got to get … off the sideline and get on the field,” he said. “We cannot sit and complain about this issue unless we’re engaged.”
Managing cuts in Europe
While U.S. companies may risk accidentally cutting critical talent, the very laws that make the business environment difficult for some European companies may provide protection against knowledge loss. The imperfect if apt generalization that it is harder to cut employees quickly in Europe because of stricter labor laws means companies will have more time to evaluate talent.
European companies expressed less concern about the talent problem than their U.S. counterparts, and emphasized efforts to maintain a flexible work force.
“We are in a cyclic business; there will be a downturn one of these days,” said Michel Mathieu, senior vice president for avionics at French systems company Thales. For now, civil aviation revenue is growing for the company while military revenue is flat.
“It’s very important to keep all their talents,” Mathieu said. The Thales Avionics Division employs about 2,000 engineers. The managers seek to organize the workload so the engineers deal with a broad range of projects and avoid over-specialization.
There are competence centers in the company where engineers work on products such as computers, software, navigation and cockpit displays. All the work is for dual civil and military application, and the engineers work on commercial and defense programs.
Challenge of a changing market
The unsettled nature of defense technology makes the present downturn much more difficult for companies to manage. During the last downturn, the types of systems that companies were looking for remained the same, if on a lesser scale. This time, national security needs have shifted to include cyberwarfare capabilities and intelligence, surveillance and reconnaissance (ISR) needs.
“The main difference is that in the 1988-1996 downturn, the thrust of the inflection was simply about dollars and quantities, whereas the present inflection point is as much about changes to the composition of demand — what the customer will be buying — as the magnitudes of demand,” Grundman said.
In addition to the market changes, there have been leadership changes. An industry once led by former engineers is currently helmed by many with financial backgrounds, a shift that may change the ability of leaders to evaluate talent, Callan said.
“I suppose you could make the argument that the engineering CEO would really know who the most valuable people are, but it takes more than engineers to run a defense contractor,” he said. “Today’s professional management teams might be able to look at a work force more dispassionately and recognize the value of people in production, purchasing, HR, supply chain, contracts and finance.”
Despite the difficulties of a shifting market place, defense companies have a boon in the growth of the commercial market that didn’t exist last time, Aboulafia said.
“The last big defense downturn saw a very painful commercial downturn too,” he said. “This time, commercial aerospace is booming. That helps one or two primes and much of the contractor base. But most of all, the last downturn happened when there was still a large number of companies. The consolidation of the 1990s transformed the industry and made it much leaner. The growth of the 2000s was basically gravy.”
Today’s different conditions should prevent catastrophe, Aboulafia said.
“Unless we have a downturn that’s much worse than expected, we’re not going to see an industrial base implosion,” he said.