Top 100: Market clarity aids BAE Systems strategic focus

The fog of a congressional war over defense spending has cleared somewhat and BAE Systems Inc. has better sense of where its opportunities lie.

Sequestration forced defense officials into a time of uncertainty, and the budget battle resulted in an 8-percent decrease in overall spending—$702 billion to $646 billion—from 2012 to 2013, the Center for Strategic and International Studies reported. The cuts reduced mid- to late-stage research the most, with advanced technology development falling by 27 percent. In addition, defense contract spending fell by 16 percent.

But since 2013, defense officials have become more assured of funding, said Doug Belair, senior vice president of strategy and planning at BAE Systems, the No. 19 company on the 2015 Top 100. Of course, DOD’s budget won’t return to spending levels rivaling the early 2000s. Nevertheless DOD and the defense industry are dealing more predictability in DOD’s budget.

“We’re seeing better clarity now, and we’re dealing with customers who have a better sense of what the future is going to bring,” Belair said.

In light of that, BAE Systems, a subsidiary of the U.K.-based BAE Systems plc, a global defense, security and aerospace company, has focused its business on areas that will remain steady into the future, such as special operations, and is shifting away from services.

“No matter what goes on in the world, (special operations) going to be required. The need to protect soldiers is not going away. Whether that’s in an airplane, on the ground, or individual soldiers, it’s just going to get more sophisticated,” Belair said.

In a snapshot of 2014, the overall market declined, as did BAE Systems’ revenues. Yet, the company had a strong bottom-line performance against a declining top-line by finding efficiencies and aggressively reallocating capital, as did many other defense companies. Belair said the performance was similar to other defense contractors and in line with the decreasing defense budget.

The company also won contracts in areas that will do well moving forward. In the past year, BAE won contracts to build the Army’s Armored Multi-Purpose Vehicle, which is potentially worth $1.2 billion, and integrated night-vision goggles with a thermal targeted solution, which is a five-year contract worth up to $434 million, among other areas of advanced weaponry.

“From a strength position, I think BAE Systems is very well positioned in a place where demand will endure,” Belair said.

Meanwhile, BAE is selling off more of its services. The company is reportedly shopping its manpower and services businesses within its intelligence and security sector. Not on the block is its cybersecurity and intelligence work.

“As we looked over the past few years and look out into the future, the services space has really become pressured,” he said.

The number of companies that are entering the services sector is growing, and services have taken a disproportionate number of the budget cuts.

“We’re also seeing a trend in that customer space where they’re going for the lowest price technically acceptable selection criteria,” Belair said. Federal officials are prioritizing LPTA and savings over their close relationships with contractors.

Because of tight budgets, “differentiating technologies and customer intimacy are overruled by the desire to get the lowest possible price,” he said.

BAE began to question whether they wanted to continue investing in the services. It also has had some outside interest in its services sectors.

“So we’re going through the process now of strategic evaluations,” he said.

However, decisions about its services sector turn out, BAE has already focused in areas where DOD will have ongoing needs.

“Our organic investments for the year are very well aligned with places we think are going to grow,” he said.