Defence & Defence Industry – Interactions & Understanding Date : 6 Feb 2008 Vern Gallagher General Manager Business Development Joint Systems

2 Feb 2008 Defence Industry – Interactions & Understanding The scope of the Defence Business What it is? Why are we (Defence Contractors) here? Business Basics – what is needed to run a business Teaming, Pricing & Contracting Defence Acquisition Strategies Conclusion

3 Feb 2008 Defence is a unique Monopsonistic Customer This sole customer environment involves a mix of divergent cultures: War fighters: Profession of Arms embodies a culture of honour, loyalty, integrity, service and sacrifice. Public Servants: strong cultural values of service, integrity, and non- partisan advice Industry: culture based on commerce which today espouses growth and profitability.

4 Feb 2008 ADM Magazine List 2007 Top 10 Defence ContractorsTurnover (in millions) 1. Thales Australia Tenix Defence Pty Ltd Raytheon Australia Pty Ltd BAE Systems Australia Australian Aerospace Limited Boeing Australia Holdings Pty Ltd Spotless Group Limited ASC Pty Ltd Defence Maritime Services Pty Ltd Austal241.35

5 Feb 2008 DCP Overview Over ten years Accessible by Aust Ind 33% Cap Acq = $16 Bn 67% Sustainment = $32 Bn Accessible by Aust Ind on an Annual basis Cap Acq = $1.4 BnSustainment = $3.3 Bn SUMMARY OF THE DCP FORECAST

6 Feb 2008 Business Analysis YES Investment & return considerations Barriers to entry Strategies to entry Is there a business? Customer Needs Company Products & Capabilities Competitor presence NO Go Home!! Walk Away!! The only consideration is: ‘Return to shareholders’!

7 Feb 2008 What is a Company?? Shareholders Lend Money Company Investment Vehicle Public Listed Public Unlisted Privately owned Joint Venture Multi-National Domestic In return for Shares

8 Feb 2008 What is a Company?? Shareholders Lend Money Company Investment Vehicle Public Listed Public Unlisted Privately owned Joint Venture Multi-National Domestic Gain Benefits Return on Investment Growth in Value In return for Shares Employee knowledge & expertise ROI

9 Feb 2008 What is a Company?? Shareholders Lend Money Company Investment Vehicle Public Listed Public Unlisted Privately owned Joint Venture Multi-National Domestic Gain Benefits Return on Investment Growth in Value In return for Shares Employee knowledge & expertise Borrowings Banks/Finance

10 Feb 2008 What is a Company?? Shareholders Lend Money Company Investment Vehicle Public Listed Public Unlisted Privately owned Joint Venture Multi-National Domestic Gain Benefits Return on Investment Growth in Value In return for Shares Employee knowledge & expertise Borrowings Banks/Finance Companies operate within a world market and must compete for funds & expertise

11 Feb 2008 Model of a Project Organisation Time $ Project Wins

12 Feb 2008 Model of a Project Organisation Time $ Project Wins Sustainment of Core Capability Residual Income Stream

13 Feb 2008 Elements of Tendered Price Tendered Price generally consists of: Project Costs Delivered costs (engineering effort, delivered equipment, documents) Level of Effort Costs (project management, QA, travel) Risk Overheads Marketing (bids, tender responses, shows) Finance HR (training, salaries, recruiting, etc) Engineering (QA, certifications, standards, training) R&D Travel Profit (ROI) Price = Project Cost + Overheads + Profit

14 Feb 2008 PROJECT RISK Penalty for Delay = $5M Delay Occurs 20% Delay Does Not Occur - 80% Retire Risk Retain $1M Provision Pay Penalty of $5M $1M is added to the Price as a Risk Provision Companies do not promise what they cannot deliver

15 Feb 2008 Formation of Teams DMO ‘Total Project View

16 Feb 2008 Formation of Teams Poor Industrial Composition Good Industrial Composition Overlap of core capabilities, skills & products within the team Key areas of requirements not met No overlap of core capabilities, skills & products within the team Clear demarcation of responsibilities All requirement areas covered

17 Feb 2008 Potential Competitive Contract Outcomes

18 Feb 2008 Potential Competitive Contract Outcomes Optimum Outcome

19 Feb 2008 Competition, Project Pricing & Evaluation Defence does itself a disservice by not revealing its budget for major projects. Tendered prices from all bidders against a good SOW should be very close, unless: One bidder decides to ‘buy the job’ One bidder has ‘done it before’ One or more bidders misunderstand scope & difficulty One or more bidders really understanding the scope & difficulty Any competition is not against the Defence budget, it is against other bidders.

20 Feb 2008 Defence – Industry Partnerships There is scope for more understanding in Defence/Industry relationships: In order to be viable in the long term, a company must make a reasonable profit. Large penalties (i.e. a loss on a project) affect subsequent projects as pressure mounts for a ‘whole of company’ ROI. Acquisition strategies should be cognisant of team formation in the pursuit of projects (and thus the potential to develop a choice of sub- optimal solutions). The end customer is the warfighter.

21 Feb 2008 Defence – Industry Partnerships There is scope for more understanding in Defence/Industry relationships: In order to be viable in the long term, a company must make a reasonable profit. Large penalties (i.e. a loss on a project) affect subsequent projects as pressure mounts for a ‘whole of company’ ROI. Acquisition strategies should be cognisant of team formation in the pursuit of projects (and thus the potential to develop a choice of sub- optimal solutions). The end customer is the warfighter. Concentrate on ‘the end customer’, DMO & industry acting as a team.