Thales uses @RISK to Measure Feasibility of New Business Tenders
Thales is a leading provider of mission-critical electronic information systems for aerospace, defence, and security markets around the world. With operations in 60 countries and 70,000 employees, it develops products for dual markets in recognition that civil and military systems benefit from many of the same technologies and innovations.
Risks and Challenges Addressed with @RISK
Thales operates in a highly competitive environment, with technologically advanced countries continuously providing tough opposition when it tenders for contracts. It is imperative therefore that Thales keeps up with the relentless pace of technology development—something made additionally challenging by the sophistication of the products in question. In addition, the critical and sensitive nature of its customers’ businesses demand that the equipment Thales develops and produces is rugged, robust, and failsafe.
Bringing products of this calibre to market is costly both in terms of time and resource. Consequently, for every opportunity to compete for new business (which in itself can be a long, and therefore expensive, process), Thales must be confident that it has a reasonable chance of success. It must also take into consideration that, while winning a contract is favourable, the long-term cost of then maintaining its market share can actually be prohibitive to pitching for the prospect in the first place. For example, once developed, sophisticated electronic systems for aircraft require continual upgrading—the cost of which may outweigh the original benefit (and profit projections) of the initial deal.
Thales uses @RISK software from Palisade to assist it in making these business-critical decisions. @RISK is an Excel add-in using Monte Carlo analysis to show all potential scenarios, as well as the likelihood that each will occur. @RISK enables Thales to calculate the competitiveness of complex markets, measure probabilities for project costs, quantify rate of return, and even account for the effects of cumulative business, thereby providing decision-makers with the most complete picture possible.
@RISK Quantifies Complex Markets
The risk analysis undertaken by Thales enables it to quantify and understand how the market for a particular product area may work, and from there whether it is worth investing in trying to win the business offered.
For example, Thales might need to decide whether to bid for developing a radar system for a particular type of combat aircraft. By developing a distribution model with @RISK, Thales can input unknown quantities such as production forecasts for that aircraft and account for them with distribution functions. Thales also inputs ‘known’ quantities, such as which countries and organisations are currently flying the same machine, and is then able to forecast the potential market for the product once it is completed. On the civil aviation front, the 25-year lifespan of aeroplanes offers the potential for several equipment upgrades during that time. For example, in-flight entertainment systems have changed dramatically over the past quarter of a century, with personalised systems that allow passengers to watch their individual choice of film now providing airlines with competitive advantage when selling tickets. Again, combining @RISK’s sophisticated prediction capability with human expertise and research enables Thales to ascertain whether the potential market is sufficient to warrant competing for a contract.
@RISK Weighs Up Project Cost vs. Probability
With the market potential ‘measured’, Thales needs to balance the overall cost for bringing the completed project to market against the probability of winning the business. Figures fed into the @RISK model include costs for staffing, new office openings, licensing, etc, as well as the adjustments needed for different countries and regions, such as providing instructions in different languages. Thales must also include a sum for ‘unknown’ or ‘unexpected’ costs.
To then calculate the probability of breaking even on a project, Thales must factor in the cost of preparing a tender with the probability of winning the business. Although bidding against three other operations could be perceived as offering a 25 percent chance of success, Thales believes it makes better business sense to err on the side of caution when making this estimation.
Thales uses @RISK to quantify complex markets in of mission-critical electronic information systems for aerospace, defence, and security around the world.
Senior Consultant, Thales Management Consultancy
@RISK combines its powerful risk analysis capability with the added benefit of being easy and intuitive to use, and applicable for almost any task. As a result it is a key strategic tool for Thales, assisting us in our process of reaching informed business-critical decisions.
@RISK Measures Rate of Return
Adam Ogilvie-Smith, Senior Consultant at Thales Management Consultancy, explains: “In theory it would be tempting to try and win every piece of business that we are offered. But in the sophisticated and complex markets in which we operate, closer inspection of each case reveals this often is not possible, practical, or desirable. @RISK’s complex risk analysis capabilities provide us initially with a figure that is essentially an internal rate of return on the funds used to tender for and win a project—that is, will financing a business pitch and the subsequent product development bring an equivalent rate of return as investing the same amount of capital in a bank over the same period of time? In addition, the @RISK model helps us to determine the probability of securing the contract, and therefore whether it is strategically viable overall to pitch for the business.”
@RISK Accounts for Cumulative Business
Commercial agreements rarely occur in isolation. Thales’ @RISK decision models therefore ascend to another level by taking into account the cumulative effect of winning new business, for example including conditions such as winning project A being a prerequisite for pitching for project B. It also enables Thales to work with scenarios such as the initial probability of securing contracts in countries X and Y being factored as 40 percent and 30 percent respectively, but winning the contract in country X then making it easier to succeed in the next territory—country Y.
Taking this one step further, Thales can also calculate when it makes commercial sense to use this tactic strategically—for example, will winning a piece of business in one region be beneficial when tendering for another contract? @RISK helps Thales understand whether securing a contract with one region will be a route in to doing business in another.
@RISK Enables Business-Critical Decisions
Ogilvie-Smith concludes: “Our commercial success is determined by our ability to quantify both our internal operations, as well our position in the wider environment in which we operate—which is both dynamic and sensitive. It is essential therefore that we use a versatile and robust modelling tool that can handle the complexity of our queries. @RISK combines its powerful risk analysis capability with the added benefit of being easy and intuitive to use, and applicable for almost any task. As a result it is a key strategic tool for Thales, assisting us in our process of reaching informed business-critical decisions.”