Logging its best financial year ever in 2001, Space and Communications aims to become a main driver of Boeing growth and profits

BY MALLEY HISLOP

Six years along in its transformation into a broader, better balanced aerospace enterprise, Boeing is looking for growth and improved performance out of a business unit that until last year had not generated significant financial returns. Now, Space and Communications is taking aim at growing revenues and margins in an addressable market that is forecast to increase five-fold in 10 years.

"In today's market, it's ideas and execution that count," said Jim Albaugh, Space and Communications president and CEO. "And Boeing is counting on us to deliver on our share of the bottom line."

With peak Delta IV launch vehicle research and development investment largely in the past, Albaugh said, Space and Communications now is looking to improve profitability. The business unit is working to realize synergies and savings from recent acquisitions. It also is leveraging current technologies into growth markets and going after new business with new technology. Key to the plan is encouraging its people to get involved in designing and measuring processes to further improve efficiency.

The business unit also is aggressively addressing performance issues at its commercial satellite unit and instituting lean production processes. "We've had to make some fundamental changes to ensure we can be competitive in the future and grow our satellite business," said Albaugh. "I'm confident that we will remain the premier satellite manufacturer."

Who are these people?

To appreciate how far Space and Communications has come in its relatively short history, it helps to understand how this diverse compilation of organizations came together to form what many are now saying will be a key driver of Boeing's future growth and profits. It's a tale of former business competitors formulating cross-functional teams to find the best ways of increasing profits from core businesses while capturing new commerce through lean manufacturing and processes.

"We have brought together six companies over the last four years and I think this is the greatest strength that we have as an organization," said Albaugh. "We have people with different technological backgrounds - that come out of different ways of thinking and doing business - all coming together as one entity. As we bring the best and brightest together, and develop the best processes and ideas from these six companies, I don't think anybody can stop us."

Former elements of Boeing, McDonnell Douglas, Boeing North American, Hughes, Autometric and SVS are gelling into a cohesive unit. The melding has not always been easy. But despite inherent obstacles, this newly formed team of engineers, technicians, administrators and leaders has, for the first time, turned company investment into positive cash flow, with plans to produce more.

Success in 2001

"The thing that jumps out at me from last year is the way we were able to execute on a number of programs, like Missile Defense for example," said Albaugh. "In 2000, we had two failed intercepts. The program's critics had some ammunition. But since then, we have had three successful intercepts. As a reward for our efforts on this program, we are earning award fees that are in the 90-percent range."

Also in 2001, Space and Communications was able to certify the first new launch vehicle in 30 years in the United States - the Delta IV with its Boeing-built RS-68 engine. The Delta II team enjoyed its 100th launch last year and Space and Communications' satellite building business - Boeing Satellite Systems - had its 200th commercial communications satellite put into orbit.

"In 2001 we completed Phase II of the International Space Station program and its on-orbit performance is absolutely astounding. We have received two 100-percent award fees for the on-orbit performance," Albaugh said. "And on the classified Future Imagery Architecture Program, we are on track."

In all, Boeing-built hardware performed successfully in 39 out of 40 missions.

Other factors contributed to Space and Communications' improved numbers in 2001 as well. A long-standing campaign to reduce unneeded assets is showing solid results, helping the group reduce costs while increasing profit margins. Year-to-year financial performance improved significantly: revenues increased by nearly a third over numbers in 2000, and operating earnings and operating margins almost tripled.

Customer confidence on the rise

Space and Communications' successes are further increasing customer confidence in Boeing. For example, the Defense Department recently designated Boeing as the overall systems engineering and integration lead for the multi-layered missile defense system.

Jim Evatt, executive vice president and general manager of Missile Defense Systems, who early last year restructured his organization to fully align with the customer, said leading the program is a strong indication of the trust and respect our customer has for Boeing's strengths as Missile Defense goes forward. Space and Communications is in a great position to apply the best technologies as it helps the customers to define what they want, he said.

"By knowing the customer and structuring our organization and capabilities to reflect emerging customer needs, we are positioning Boeing to be a top competitor in future missile defense markets," Evatt said.

Aligning with the customers

Better alignment with customers is a major on-going effort throughout Space and Communications, and it's not always painless.

"We place a premium on the company's legacy in human space flight and its partnership with NASA and United Space Alliance," said Mike Mott, vice president and general manager for Boeing Human Space Flight & Exploration (HSF&E). "Safety, of course, is our highest priority, and the only way to maintain our competitive advantage on the business side of the equation is to integrate with our customer, understand them and have them see us as the contractor of choice."

Boeing's move of certain HSF&E employees and assets from California to Texas and Florida "is about taking actions today to ensure our customers can achieve their objectives in the future with Boeing as their contractor. This is not about maintaining what we have today, but winning the business we need to secure our future," Mott continued.

Traditional markets

In Space and Communications' traditional markets of Launch Services and HSF&E, Boeing leaders have been tasked with finding opportunities to improve efficiency, thereby increasing profit margins.

"We will continue our leadership position in human space flight by working to keep the shuttle the safest, most reliable and economic option for NASA," said Mott. "As a result, we will be able to generate cash and economic profit for Space and Communications while maximizing the return on strategic investments in our business."

While keeping NASA pleased with its support of the shuttle through 2020, Mott's team also will be positioning Boeing to be the contractor of choice for the next major manned space program.

At Launch Services, the strategy is to provide the lowest cost, most reliable launch vehicles in the world (Delta IV and Sea Launch), and thereby add profitable new market share to a strong niche position built by the Delta II.

"HSF&E and Launch Services are important parts of the business," Albaugh said. "Indeed, they give us a very strong base from which to work. We see them remaining fairly steady revenue generators, but that's not where much of the growth opportunity for the company will be over the next several years."

Transformation or evolution?

The strategy the leaders of Space and Communications have charted is to secure the future and achieve double-digit growth over the next five to 10 years.

Four years ago, human space flight was Space and Communications' most prominent market, bringing in about 35 percent of revenues. However, the heavy revenue-generating portion of International Space Station work is winding down and Space and Communications is turning to other growth areas.

The business unit is focusing much of its energy on two markets where opportunities abound: Integrated Battlespace and Information and Communications. In fact, if Space and Communications captures business within those markets at planned levels, it will have a profound effect on the entire organization.

"We are transforming the business from one that's very focused on space infrastructure and products and supporting those products, to one that's much more focused on information and systems, and systems engineering," said Bob Dean, vice president of Business Development. Dean estimates as much as 79 percent of business in 2002 will be associated with missile defense and information and communications.

Where the growth is

"In 1998, the year S&C came together as its own group, sales revenues were just a shade under $7 billion," said Bill Collopy, chief financial officer for Space and Communications. "In 2001 we were up to about $10.4 billion. And this year we should be up in the range of $11 billion. By 2003, we expect to nearly double our 1998 revenues." However, plans for profitability over the next five to 10 years are considerably more aggressive.

"Although we did almost double the margins over 2000," says Collopy, "we were still at about 6 percent. The company needs us to be a lot closer to double-digit margins. We've got some work to do."

Easier said than done? Going from $660 million to over $1 billion in profit within the next several years? … Yes, it will be difficult.

"But not impossible by any means," said Albaugh. "We have achieved market leadership and excellent program execution in a number of areas. We're the market leader in human space flight, in missile defense, in airborne early warning systems, in commercial and government communications satellites. We've got a very strong position in the intelligence area. We have a strong niche position in launch services, and with Delta IV and Sea Launch, we've got a solid shot at leadership in that market as well."

Addressable markets in which Space and Communications now competes have a total value of about $20 billion a year and are expected to balloon to $100 billion in 10 years.

"We are in markets that are growing by a factor of three over the next 10 years," said Albaugh. "If we can bring the right ideas to potential customers, if we can execute on those ideas, it's easy to think of ourselves as a much bigger business than we are today."

Growth markets

In its pursuit of the growth markets of missile defense, integrated battlespace and global connectivity, Space and Communications is transforming its focus from being an asset-heavy producer of products to becoming a systems-of-systems integrator and service provider.

The plan is to:

• Become the global missile defense integrator by pleasing the customer with performance on the Missile Defense National Team, the GMD Program [the program formerly known as National Missile Defense], the Airborne Laser Program and by developing innovative concepts to meet future missile defense needs.
  
  
• Be the enablers of Integrated Battlespace by ensuring that Boeing-designed networks are the core for the government's communications infrastructure.
  
  
• Facilitate global connectivity by building the best satellites in the world while becoming an operator and provider of space-based networks and services in focused markets.

The unknowns

While excited by the growth opportunities, Space and Communications clearly faces a number of strategic issues and related questions in 2002. Chief among them are the U.S. military's transformation and Defense Department budget priorities. Will the Pentagon transform as planned or will legacy programs, infrastructure, and personnel costs prevent it? What are the characteristics of the future communications infrastructure and marketplace? Is there a U.S. civil space vision and mandate?

Although the answers to such questions are unknown, by aligning with customers, engaging employees, reducing costs and leveraging technology, Space and Communications plans to do what is necessary to profitably grow the business and move forward.

Employees are key

Whatever the challenges, if empowered employees are put into the mix of designing processes, and the metrics that measure their success, the outcome will be extraordinary, Albaugh said.

"We're turning up the heat on our Employee Empowerment program," says Albaugh. "We have to. Employees who understand the plan and take the initiative to get engaged in improving processes are the individuals who will take us where we must go.

"It's a pretty straightforward plan," Albaugh continued. "We - the employees of Space and Communications - have got to bring the best ideas to our customers and then we've got to execute on those ideas. If we can do that, we can achieve astounding success for The Boeing Company."