BAE seeks balance in uncertain market

BAE Systems winning strategy combines cost cutting with renewed efforts to capture key contracts.

Just because BAE Systems Inc. is a subsidiary of London-based BAE Systems plc, doesn’t mean the defense industry giant isn’t feeling the effects of the uncertain U.S. federal market.

“The biggest challenge we have, like every other person in our industry, is just the stability of the defense budget,” said Michael Bennett, senior vice president of information management and CIO at BAE Systems Inc. “But we think we’ve positioned ourselves as best we can in this uncertain time.”

In fact, the U.S. subsidiary, which is led by President and CEO Linda Hudson, recorded $14.4 billion in sales in 2011, almost half of the corporation’s worldwide sales of $30.7 billion. The company ranks No. 20 on this year’s Top 100 list with $1.7 billion in prime IT contracts.

To cut internal costs the company combined its electronics and platform solutions sectors into one unit, Electronic Systems.

“That allowed us to provide the products and services of both those sectors in a much more cost-effective way for our customers,” Bennett said, acknowledging also a cost savings for BAE “of several million dollars” partially through the elimination of duplicate management layers and the creation of a shared services HR and accounting system.

The company made two significant acquisitions last year, buying Fairchild Imaging for $86 million and L-1 Identity Solutions’ intelligence services group for $295.8 million.

Many of BAE Systems’ IT contracts won in 2011 came from the intelligence community and their details, including the values, are classified, Bennett said.

Other 2011 contract wins included:

  • $850 million Army contract to manage and maintain the Radford, Va., Army ammunition plant.
  • $650 million Army IDIQ contract to extend security services for Army Corps of Engineers.
  • $367 million Army Digital Electronic Warfare Systems contract for 70 electronic missile warning systems
  • $37 million Navy contract for onboard radio communications and network capability for new destroyers.
  • $36.7 million contract for Navy’s ALE-55 Integrated Defensive Electronic Countermeasures subsystem.
  • $23 million contract to design and test Air Force mission computers
  • $21.9 million Marine Corps contract for maintenance, updates and repairs to Mine Resistant Ambush Protected vehicles.

BAE Systems operates under four divisions, each led by a president:

Electronic Systems offerings include flight and engine controls, and surveillance and reconnaissance sensors. The Nashua, N.H., sector has 12,000 employees and is led by Tom Arseneault.

Intelligence and Security serves diverse customers including the Defense Department, the intelligence community and federal civilian agencies. The Arlington, Va., sector has 7,200 employees and is led by John Gannon.

Land and Armaments, also of Arlington, Va., produces armored combat vehicles, naval guns, missile launchers, artillery systems, munitions and law enforcement products. This sector led by Frank Pope has 11,200 employees.

Support Solutions provides engineering, systems integration, ship repair and readiness and sustainment for military and commercial customers worldwide. This sector, located in Rockville, Md., has 12,000 employees and is led by David Herr.

Loren Thompson, chief operating officer at the Lexington Institute, a public-policy non-profit think tank, said BAE did quite well in 2011.

He noted that BAE scrubbed its plans last year to spin off the commercial aircraft components business because it was doing too well to sell; instead it wrapped the unit into the electronics division. As a result, Thompson said, “Every part of the company is doing well at the moment.”

Thompson cited as an example BAE’s services business led by Executive Vice President Larry Prior, formerly the No. 2 executive at Science Applications International Corp. and ManTech International.

“He has a fairly deep understanding of the federal IT space, particularly the intelligence part of it. But it’s a little hard for outsiders to analyze because they have so many other services wrapped in with their IT under Prior.”

Looking ahead, Thompson said, “Because half of BAE’s military business is outside the United States, it will probably weather any fiscal trauma like sequestration better than its industry peers.”

“However,” he added, “I think the parent company needs to make a decision on how big it wants to be in America because it has the potential to become the No. 1 or No. 2 [defense] contractor here if it decides to make those bets.”

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