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5.9 The Development of a Specialist Consulting
accident prevention. Even if unmanned aircraft in the civilian aircraft market may be far off, development in this area is certain to steadily improve the safety of the manned civilian air traffic.
Saab is developing Neuron, a military UAV demonstrator together with French Dassault and some other European aircraft manufacturers. Such European collabora-tion projects are important for both Saab and Swedish defense and security authorities that learn to work together in the slowly merging European industrial environment.
A significant part of the problem to be solved for UAV traffic to become a reality has to do with developing and agreeing upon international standards for UAV traffic in controlled airspace. And even though completely unmanned civilian air traffic is beyond the current horizons many of the security devices already developed or in advanced stages of development can be implemented on manned aircraft, for instance to reduce the number of pilots required on long-distance flights.
5.9 The Development of a Specialist Consulting
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seemingly inefficient and costly practice was that tailor design of subsystems and components was necessary to achieve the extreme performance characteristics demanded of the military aircraft as a whole. Another and more acute reason was the absence of specialized producers of such products and markets for specialized subcontractors. Such markets have developed in pace with the evolution of distrib-uted and integrated production. Saab was also the pioneer both when it came to developing a safety technology for its aircraft and in out-contracting the manufac-turing of particular equipment for its rescue systems such as the ejection seats.
Advanced and expensive products such as military aircraft also use very expensive components and subsystems so the economic base for outsourcing arrived earlier in aircraft industry than in other manufacturing industries, and this was especially so if there existed a complementary civilian aircraft industry.
The evolution of global markets for specialized and very advanced subcontractors that are a must for modern manufacturing industry, therefore, could be first studied in and around aircraft industry. To some extent the capturing of the opportunities to develop an advanced subcontracting industry depended on the generosity of the customer in allowing for a margin of experimental technology development. This was a nice feature of earlier Swedish military procurement. Generosity, however, has its limits in business life. Tough competition also sharpens the innovation pro-cess and forces economical selection of new technologies.
The development of global markets for specialist subcontractors has improved the technology transfer links both ways between military and civilian aircraft indus-try to the benefit of both. Access to specialist subcontractor markets also makes it possible for a firm to complement its internal competence with technologies it does not possess rather than trying to develop them on its own. There is also the possibility of overcoming the organizational forgetting syndrome for which aircraft industry tested positively in Benkard (1999), namely that recent production is more impor-tant for learning and current production efficiency than more disimpor-tant production.
Expressed differently, learning on the job is important for firm efficiency,19 but old learning embodied in the staff of people may raise the costs of using the most recent technologies. Forgetting matters. Benkard (1999) studied this at the transition of accumulated experience between different civilian aircraft models, but the same problems will probably be more difficult to overcome when it comes to commer-cializing military technology in civilian markets.
Kelley and Cook (1998) have studied the special relations that Pentagon imposes on prime defense contractors that “obligates them to “volunteer” information on their business practices as a “condition of their special relationship with the govern-ment.” They find that defense contractors have learnt more quickly about IT appli-cations than firms outside the defense contractor network, and that this learning about advanced industrial practices in military production has spilled to the civilian operations of the networked companies as well. Kelley and Cook (1998) observe that “this unusual regulatory regime” has promoted a kind of cooperation among the networked companies that has been difficult to organize in other industries in the USA. They refer to the similar effects of collaboration among automobile and machinery manufacturers in the German Baden-Württemberg region which has occurred spontaneously in the market.
5.9.2 Engineering Consulting Bridges the Gap Between Technology Creation and Technology Adoption
To identify, select, finance, and take commercially interesting and odd technologies (winning spillovers) to industrial-scale production and distribution, a sophisticated local commercialization industry is needed (see competence bloc theory in Sect. 2.4).
A similar bridge made up of a diversified and sophisticated engineering consulting industry is needed to bridge the gap between odd technologies (once identified as commercially interesting) and industrial implementation in a receiving firm. This engineering consulting industry has mushroomed with the rapid increase in recent years in technological sophistication across industries and above all with the distribu-tion and globalizadistribu-tion of producdistribu-tion. Distribudistribu-tion of producdistribu-tion means that techno-logical links have to be created between autonomous producers in the market and that often large deficiencies in competence requirements have to be patched up. This is all a natural extension of Adam Smith’s principle of decentralization, of the associated requirements of learning and finally of the creation and diffusion of knowledge. Large high-tech firms such as Saab, Volvo, and Ericsson draw heavily in their daily business on external consulting services in this market for distributed (tacit) knowledge.
Consultants are brought in for long and brief periods when their knowledge is lacking internally and when only temporarily needed.20 This consulting market therefore enhances the efficiency of the entire industry. The firm that hires these external spe-cialists, furthermore, needs to master the complementary art of managing and coor-dinating its complex network of specialists.
Diversity in this market is enormous and complete secrecy impossible to main-tain. To be able to participate and take, the participant also has to give. Even though Saab itself uses such specialist consultants extensively there is an even greater market demand for the specialist knowledge that resides within the Saab organization, and that can be commercialized.
5.9.2.1 Case 23: Engineering Consultancy (Combitech AB)
Saab Scania Combitech was founded in 1983 and assigned the task of developing separate businesses based on the military aircraft technology spillovers. A flora of companies was founded under the umbrella organization that Combitech represented (See Eliasson 1995:81). Technologies were spun off from the Saab “technology cloud” at a rapid rate and incorporated. Strategic complementary acquisitions were made and new business combinations formed. Many of these firms were sold off in the market. In general, however, it was found difficult to charge reasonable prices for these high-technology firms. It was difficult for the Saab technology organization to market and identify matching high-paying customers for technologies, the commer-cial side of which was often entirely outside Saab’s own experience. Even more important was the fact that developed markets for trade in such strategic high-technology assets were and still are lacking. This is in practice also the case in the USA. As a consequence, it was also a less than profitable business for Saab to
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outsource the task to match technology supply with interested customers. The rare customer found almost always appropriated the profit, except when it made a mistake or when the market was overheated, as it was during the IT bubble in 1999/2001.
In 1997, Saab therefore decided to shutdown its Combitech umbrella organization and most of its ingredient companies were sold off at a rapid rate and not at extraor-dinarily high prices. Among the remaining firms was the consulting firm Combitech Systems21 that was merged with Aerotech Telub (that had come to Saab with the Celsius acquisition in 2000) in 2006 into the consulting firm Combitech AB.
Combitech AB currently (spring 2009) employs some 800 people, practically all of them professional engineering consultants. The businesses of Combitech are divided between two divisions, one working almost exclusively with security solutions for public customers, notably defense, the other with private industry. Thirty percent of turnover is from internal Saab consulting and about as much is directed at private industry. The main competence assets of Combitech draw on Saab’s (and Celsius’s) internal competence accumulation and engineering experience. The military origin is dominant and from the Gripen system in particular. A group of Combitech people worked on the Gripen control and guidance system before Combitech was formed.
Embodied real-time systems is one Combitech specialty and this competence is currently being integrated with mechanical systems competence which is one of the heavy competence areas of the Gripen project (See above). Since Gripen is an extremely sophisticated high-technology product, having worked on a Gripen project or in relation to Gripen is a valuable reference for Combitech consultants when addressing the civilian market.
Systems integration and safety-ciritcal software are related competence areas that originate in Gripen and carry many potential civilian applications. The Combitech engineering consultants have great use for this experience in medical technology, automotive, and telecom industry consulting in particular. Model-based work practices, for instance, have been developed for simulated automated engi-neering production at Atlas Copco Tools, for instance, to establish traceability when it comes to the quality of the tightening of bolts. Safety-critical software has been used on a consulting job on Volvo S80 where a large number of internal computer-controlled systems from different suppliers (climate control, the telematic system, ABS brakes, engine control, safety systems, etc.) were to be made compatible and integrated. All these technology areas were developed within Saab long ago for the Gripen project.
5.9.3 Industrial Competence Bloc Formation in Linköping (Case 24)
When a vertically complete and horizontally varied competence bloc has reached critical mass it becomes a combined attractor for advanced industrial location in, and a spillover source, in short a sustainable endogenous growth generator (see Sect. 2.4).
As a consequence not only an aircraft industry competence bloc has developed
around Linköping but also a highly sophisticated competence bloc in signal analysis, image recognition, microwave communication and the design of compact and robust mechanical systems, notably around the weapons and guided missiles development of Saab Bofors Dynamics (now within the new Dynamics business area. See Sect. 4.2.1). A special technology area development that has benefitted from the integration of sensors and electronics technologies with mechanical products in aircraft development has been the diversified formation of medical technology firms in the Linköping area and an associated development of chemically based medical firms in the not so distant Karlskoga region where energetic materials such as gunpow-der and dynamite have been produced for cannons and (now) guided missiles since the times of Alfred Nobel.
A cluster of high-tech innovative start ups has been developed around Saab over the years. Some of them, for some time, were organized under the Saab Combitech umbrella company. Some of them developed military technology (like Saab Missiles), but many of them civilian technology. Some of them are currently part of the previous Saab–Celsius cooperation (since 2000, a 100% Saab operation).
The difficult management problem, however, has been to identify and carry radi-cally different and odd technological spillovers to full-scale industrial production and distribution under the parent’s management umbrella. Saab Ventures was, therefore, founded in 2000 to manage the selling of noncore technologies spilled by Saab.
The list of noncore technology spilled from Saab is impressive (See further Transfer, No. 2, 2003). Saab Missiles (now Saab Bofors Dynamics) converted some of its military radar technology to an instrument to measure the level of oil in tank-ers and to compute remaining volume. Saab Marine Electronics was established on that technology. It became a winner that earned Saab good profit. In 2003, it was sold to US Emerson for 800 million SEK, and Emerson has never regretted the price it paid. Saab Traffic Systems, another Saab Missiles spillover located in Jönköping was sold to Austrian Kapsch Traffic in 2000 for some 100 million SEK.
Kapsch recently captured an order from South Africa to install one of the largest traffic toll systems in the world around Johannesburg and Pretoria to finance the improvements of the motorways needed to prepare for the global soccer competi-tion there in 2010 (DN, Sept. 29, 2009).
Track AB was spun off as a separate “entertainment” company in 2005. Trackab uses image recognition technology and tracking algorithms for missiles developed by Saab Missiles to “target” individual soccer players in the field through an array of cameras such that TV viewers can follow individual players during a game.
C3 Technologies is a – according to Saab – promising company that has devel-oped three-dimensional air surveillance (photographic) pictures. It was spun off as a separate company in 2008.
For its 2000 regional aircraft, Saab developed a system for electronic noise reduction. The method was to reduce noise from the propellers and the turbo prop engines in the cabin by computer generated antinoise. This technology is the base for the Saab company A2 Accoustics.
There are also several medical technology spin offs to report. Already in the 1970s, the Bofors metallurgical laboratory (now within Saab) began cooperating with
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Dr. Per-Ingvar Brånemark to develop bone-compatible dental implants in titanium.
The critical military contribution that made that feasible was extremely precise metal machining technology used in the production of guns and its ammunition.
After a long series of delays that were associated with a slow customer acceptance of the new dental technology (the dentists) and difficulties of financing the project (even though Bofors had founded it originally) a new company (Nobel Biocare) based on the Brånemark method was founded and later introduced on the Swedish stock market in 1994 (Fridh 2002). The company has later been acquired cheaply by Swiss BB Medtechs (see Eliasson and Eliasson 2005a: note 181).
There are other more recent military medical spin offs; for instance, Sangiustech based on a technology to centrifugate blood that was sold to Gambro in 2000.
A patented method by Saab to pressurize the skin, originally meant for the development of a G-suit for military pilots was later used to develop an elastic sock for helping people with circulatory problems, e.g. oedema. The company SMM Medical was founded on that technology and has later been spun off.
The mathematical methods used by Saab to simulate airflows around combat aircraft have been used to simulate the flow of blood around the heart. Together with the Linköping University Hospital, magnetic camera techniques and computer simulation have been combined to achieve a better understanding of blood circula-tion flows under different condicircula-tions and to improve the precision in measuring those flows.
Sectra is another IT and medical technology company that was established in Linköping because of the very early computer and digitally inclined academic environment of the Institute of Technology, an academic inclination that owed its existence to early support, demand and encouragement from the users of computing technology within Saab (See Case 12 above).
All business units within Saab in fact have a history of spillover intensity, spill-overs that Saab has attempted to capture and earn a profit on using different management methods. Saab Missiles (now Saab Bofors Dynamics) has been par-ticularly prolific in that respect and I will detail some cases below. The overall picture of Saab, however, is that of a technology-intensive business organization with a tremendous creative capacity that has to both focus and to find better ways to capitalize economically on its rich flow of spillovers.
5.9.4 The Subcontracting Contract
The standard military procurement contract in the past was cost plus pricing, and separately negotiated charges for modifications. From the 1970s, electronics had entered manufacturing industry in a serious way and profoundly changed the air-craft industry. Technological change became overwhelming and cost overruns for modifications large. This had become a concern with the JAS 39 Gripen procure-ment negotiators, and the concerns even included the possibility of the purchase going abroad. So even though the expected future technological change was
expected to become even larger than before, the concerned industrial partners approached the Government customer in the late 1970s and offered to take on a fixed price contract (See the Gripen Chronicle 2005). This made it important for the supplier firms to come up with a flexible platform design that allowed easy future modifications of the aircraft.
IG JAS consortium formed to manage the industrial side of the procurement (see Technical Supplement S1), therefore, was different from earlier procurement of combat aircraft. IG JAS was committed to delivering a complete aircraft with cer-tain well-defined functionalities/properties and at a fixed price, or a design to cost contract that was far tougher than earlier and more loosely negotiated cost plus contracts. The IG JAS consortium thus had to take on a significant technical risk and therefore also attempted to pass the risks on to their subcontractors.
5.9.5 Risk Sharing Among Contractors
Saab was the coordinating contractor and therefore took on a considerably greater risk than the other participants/ partners. As a consequence, it became necessary to shift some of the risks on to the subcontractors, very much as the big civilian aircraft and aircraft engine producers also do today when they engage Saab and Volvo Aero in the development and manufacturing of subsystems. IG JAS alone carried the risk of delivering the complete aircraft on time with the agreed-upon properties.
The consequence of this tougher procurement process was that Saab could find very few Swedish firms that were willing to engage in the large risk sharing required of them to be allowed to be involved in the development of advanced aircraft sub-systems. In the end, therefore, almost all Swedish subdeliveries consisted of compo-nents, and most subsystems contracts went abroad. Only one Swedish subcontractor (Nobel Plast, now ACAB, see case presentation in Sect. 5.5) outside the IG JAS partner group took on a complete and very advanced subsystems contract, the radom nose cone of the Gripen aircraft that housed the radar antenna within a plastic nose, a material that could be designed “to receive signals, but not leak signals.”
Saab’s argument when negotiating subsystems contracts was: This is your oppor-tunity to become a global competitor/ subcontractor in your field. That opporoppor-tunity is valuable to you, so you should cover a significant part of the financing and the risks yourself. IG JAS is only paying the global market price charged by already estab-lished volume producers. Swedish potential subcontractors were not used to this, and did not come forward (for more details on this see Technical Supplement S1).
For several reasons it was considered impractical for the IG JAS partners to organize a central purchasing operation. The main reason was that components and subsystems for Saab, VAC engines, and Ericsson electronics were so different and required such specialized knowledge on the part of the purchasing agents that potential synergies would be small, the power to negotiate price concessions of limited importance and a joint organization more a bureaucratic nuisance than an
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improvement. The systems subcontractor then negotiated correspondingly tough risk-sharing contracts with their subcontractors.
Each aircraft, for instance, has to be equipped with a black box that registers what happens to the aircraft in flight and can be recovered in case of accident to figure out the reason. For the Gripen aircraft the specifications were that the black box should stand a water depth of at least 100 m. SLI Avionic Systems (a Lear company) got the contract, but did not deliver up to the specifications. The Saab purchase director did not accept the product and demanded that the product be redesigned. The Saab delivery therefore probably became a loss contract for SLI Avionic, but when it had fixed the black box up to Saab specifications they managed to have the US Air Force install the new black box on all its F 16 combat aircraft. So in the end this became a profitable deal for SLI Avionic Systems.