How defence companies improve processes and attract talent when buying or cooperating with start-ups

The defence sector is facing the same challenges as civilian industries: the digital transformation is leading to many new players pushing technologies that can also be used militarily. Of course, manufacturers are investing a lot of money to digitise their defence systems and security technologies. But in many areas, including AI and automation, they cannot keep pace. Because corporations like Amazon, Alphabet, Microsoft or Apple alone each invest either more or almost as much in research and development as the entire global aerospace and defence industry. According to PwC, their annual R&D expenditure recently amounted to around 20 billion US dollars. This money is also used to finance the war for the brightest minds.

Defence ministries are also pushing for shorter procurement cycles in order to be able to integrate new technologies more quickly into their army, air force and naval arsenals. For the established German manufacturers in the defence technology sector, who are used to long-term projects, this can only be solved by expanding their own R&D efforts or by buying or cooperating with start-ups. The second approach is cheaper, faster and safer. But competition from foreign companies is increasing. This is illustrated by the increasing number of cross-sectoral and sector-specific review procedures that take place under the German Foreign Trade Regulation: While 66 procedures were initiated in 2017, by 2020 there were already 159. They are intended to prevent foreign states and companies from gaining access to safety-critical technologies through the participation or acquisition of German manufacturers and developers. In addition, even large-scale projects have recently been put out to tender across Europe: in 2020, for example, the Dutch company Damen Naval was awarded the contract to build the new F126 frigates against competition from Germany, albeit with the Hamburg shipyard Blohm+Voss as a consortium partner.

Based on our experience, German companies should realign their strategy. Buying or cooperating with start-ups from the high-tech sector can help to mentally “get ahead of the situation” when it comes to new technologies and to be able to react better to new developments. However, this only leads to success if structures and processes are adapted accordingly. The biggest challenge is to reconcile the sometimes very different ways of thinking and working of established companies and those that are new to the market. Imposing the old ways of working on a start-up in post-merger integration or in the context of joint projects would torpedo success and drive important specialists and managers into fluctuation.

Steering cooperation in the right direction

Against the background of a conventional employee structure, cooperation with start-ups offers established companies the chance to prove themselves as attractive employers. We make the following recommendations for action:

• The own strategy determines the choice of partners
  First, it is important to analyse which technological developments are relevant and how they affect one's own strategic orientation. After that, start-ups can be sought that can help as takeover candidates or cooperation partners in the implementation of the strategy. Special attention should be paid to the founders as well as the know-how of the experts and managers.
• Binding important know-how carriers to the company
  Especially in the case of takeovers, the most important know-how carriers in the start-up should be identified and tied to the company in the course of HR due diligence (if possible) or at the latest in the post-merger integration. But even in the case of cooperation, success depends decisively on the motivation and expertise of the employees involved on both sides.
• Adapt processes and structures
  Established companies often have entrenched processes and structures. The integration of hardware and software plays a key role in defence systems. Project management is therefore very complex, and not only in large-scale projects such as the new frigates of the German Navy. It must be able to solve complicated detailed issues as well as take into account rapid technological developments in on-going projects. This requires a flexible project structure and methodology as well as good interface management.
• Developing technical and managerial staff
  New strategies, structures and processes require the further development of technical and managerial staff. In many cases this can only be achieved with a change in management, for example to establish new management tools. In the most important positions, job profiles and assessments of the previous incumbents should be used to check whether the necessary and actual skills match. Otherwise, new working and communication methods cannot be implemented.

Conclusion

The acquisition of or increased cooperation with start-ups represents an opportunity for further development for traditional German companies from the defence sector. However, this can only be seized if the technical and managerial staff are convinced of the need for change and support it. If necessary, an entrenched management team must be replaced by a new leadership. Top managers can also come from related technology sectors such as civil aviation. It is important to be able to work well with start-ups and international partners. In view of the dynamics in the market and the complexity of the tasks, the ability for good project management and cooperation will be crucial in the future.

If you would like to know more about this topic or would like to be contacted personally, please feel free to contact us:

Dennis Tanke
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