Aerospace & Defence – Sector Summary

• There are 34 aerospace and defence companies in the UK1000, all of which feature in the G1000. R&D investment in this sector grew more quickly in the UK than globally.
• The aerospace and defence sector was the second largest contributor to R&D in the UK1000 and the seventh largest in the G1000 in 2008.
• Globally, the largest R&D investor in the aerospace and defence sector was EADS, which ranked 35th in the G1000.
• Airbus and Rolls-Royce were the two largest investors in R&D in the UK1000, ranking eighth and ninth respectively, spending 58% of the sector total and roughly 4% of the overall UK1000 spend.
• The two largest UK- and foreign-owned aerospace and defence companies in the UK1000 both increased their investment in R&D.

CASE STUDY Cohort: Agility in the defence industry

In 2008, the three giants of the UK aerospace sector – Airbus, BAE Systems and Rolls-Royce – collectively spent almost £1.2 billion on R&D. But despite their deep pockets and impressive technical capabilities, they are by no means the only successful innovators in the industry. With the defence and security landscape changing rapidly, a handful of smaller defence companies are also winning plaudits and contracts, using their agility and responsiveness to make up for a relative lack of resources.

The idea that innovation thrives in small, tightly focused businesses has been a driving force behind the development of Cohort, an AIM-listed company that was established to acquire and develop businesses within the defence sector. Since it was founded in 2006, Cohort has acquired three companies: SCS, a defence advisory business; MASS, a systems house that specialises in electronic warfare; and SEA, an engineering and software company with a wide range of capabilities in defence, space and transport.

In 2009, Cohort reported a 38% revenue growth over 2008 to £78.6 million with an operating profi t of £8.1 million. It has continued to diversify both its product range and client base, expanding into sectors such as transport and space, and signing deals with overseas customers including the French Ministry of Defence and Japanese government. In October 2009, Cohort announced that its SEA subsidiary had signed a two-year, €5 million contract to supply Remote Interface Units (RIUs) for the BepiColombo spacecraft mission to explore the planet Mercury.

Structural innovation

For Andy Thomis, chief executive of Cohort, the company structure has been critical to its strong performance in innovation. Rather than merge the three subsidiaries with their parent company and create a central R&D function, Cohort has encouraged its component businesses to retain their autonomy and culture. This inevitably means losing out on the economies of scale that can be derived from integration, but Mr Thomis is confident that the model makes sense from an innovation perspective. “We believe that businesses work best when tightly focused on individual goals,” he explains. “We have a strongly decentralised model, although it hinges on a very strong relationship between me and the senior management teams of each of the businesses.”

In 2008, Cohort spent just over £7 million on R&D, a 28% growth on the previous year. Rather than setting a fixed budget allocation across its three subsidiaries, Cohort takes a reactive approach by funding investment as opportunities arise. “If you want to succeed in this sector, you’ve really got to be agile enough to spot opportunities and be prepared to invest in them,” comments Mr Thomis. “We don’t have a macro lever that either accelerates or decelerates our R&D spend. I measure the businesses on their profitability and it is their job to be agile, responsive and innovative to meet the market needs.”

“If you want to succeed in this sector you’ve really got to be agile enough to spot opportunities and be prepared to invest in them”

According to Mr Thomis, the success of this model relies on tight financial processes between the subsidiaries and the parent company. “If R&D investments exceed a certain level, then there is an approval process, but we try to make that as straightforward as possible. If you have a long-winded bureaucratic process to approve funding, you can easily miss out on important opportunities.”

The focus in defence is shifting as armed forces and security services wrestle with unfamiliar challenges, such as the Afghanistan insurgency and the ongoing threat of terrorist attacks at home. “Technology and innovation will play an important role in addressing these challenges,” says Mr Thomis, “so even if we see a decline in overall defence spending, there will continue to be new opportunities to meet market needs.”