Customer support and sustainment – including performance based logistics
Driving value to Aerospace & Defence companies through performance based support
What was once a peripheral part of most A&D companies’ business strategy, Customer Support & Sustainment (CS&S), has moved to the forefront through a confluence of events around the globe. These events include an expansion of international commercial sales, a dearth of new, large government programmes, acceleration of asset usage because of the fight against terror, and the U.S. government's explicit decision to change its product support contracting strategy and pay for performance through Performance Based Logistics (PBL) contracts.
These events have created a $105 billion global CS&S industry, with profit margins up to 10 times that for the original equipment. OEMs are rushing to reconfigure their businesses to support this new growth engine. Defence contractors in particular are going through significant changes with the shift away from traditional cost-plus contracting arrangements to a contracting strategy focused on pay-for-performance. Under a cost-plus contract, the OEMs have had little incentive to improve efficiencies in production and service delivery, as any benefits were required to be split with the government. In a PBL contracting arrangement, the operational mindset and incentives change, where in:
- Support providers are contracted to provide a given level of service based upon Performance Based Agreements (PBAs), which are akin to commercial Service Level Agreements (SLAs)
- PBAs are expressed in terms of distribution efficiency, material availability or operational availability depending on the complexity of the support
- Service providers are paid a fixed price payment
- The performance risk is leveraged upon the service provider
- Service providers are incentivised to enhance reliability as a means of reducing the cost of service and increasing profitability
Companies that are entering into these types of contracts have been slow to change and have underestimated the level of transformation required to profitably execute them, and consequently are scrambling to reconfigure their businesses.
Download the full report, Performance based logistics in Aerospace & Defense (PDF).