Hudson Reorganizes BAE Systems U.S. Unit Into A More Manageable Structure

Linda Hudson, the recently appointed President and Chief Executive Officer of BAE Systems Inc., informed workers this week that the company was being reorganized into five business units focused on either hardware or services. BAE Systems Inc. is the United States component of U.K.-based BAE Systems plc, once known as British Aerospace. BAE Systems plc claims seven nations as “home markets,” but since the United States generates the largest amount of sales for the parent company, any changes in how the American unit operates can have a material impact on the entire global enterprise.

Right now, the U.S. unit is facing a difficult business environment due to the impending drawdown of U.S. forces in Iraq and then Afghanistan. The Land & Armaments business of the U.S. unit has benefited handsomely from its role as a supplier of vehicles and materiel to U.S. ground forces fighting in those countries, but demand is expected to fall off as the drawdown proceeds. In light of the challenging business outlook, Hudson apparently concluded that the organization of BAE Systems Inc. needed to be revamped into a series of more focused business units. The five new units are Electronic Solutions, Platform Solutions, Land & Armaments, Intelligence & Security, and Support Solutions.

BAE Systems Inc. was cobbled together after the Cold War ended through a series of acquisitions that included United Defense, Armor Holdings, Sanders Associates and Tracor. Although the basic business mix of the company was easy to describe — it was primarily defense electronics and military vehicles — finding a suitable management framework has not been easy. Linda Hudson inherited an unwieldy structure in which everything except military vehicles and armaments was subsumed under a sprawling unit called Electronics, Intelligence & Support (EI&S). EI&S was engaged both in developing hardware and providing services to a diverse array of customers, based mainly on the legacy electronics franchises acquired through Sanders and Tracor (among others). Much of its work was classified, which made the unit hard to describe to investors. The situation was further complicated by the fact that the entire U.S. operation functions under a Special Security Agreement that limits the ability of the parent company to oversee sensitive operations.

After several months of review, Hudson decided this unwieldy structure needed to be unbundled into more focused units. The new framework she is putting in place abolishes the EI&S umbrella organization and substitutes product-oriented units that are aligned with the company’s core competencies and business lines. Some observers think the new arrangement looks like General Dynamics, which wouldn’t be surprising since Hudson came to BAE Systems from GD in 2007. However, it also looks a lot like the relevant parts of Raytheon and Lockheed Martin, underscoring the fact that all major U.S. defense companies are now engaged in electronics, aerospace, information systems and services.

With half of the parent company’s 107,000 global employees working somewhere in her business, Hudson needed a better way of managing BAE Systems Inc. into the coming defense downturn, and at the very least she has come up with a structure that outsiders can readily grasp. Now comes the hard part: generating stable returns from a business facing major shifts in demand. Of all the first-tier players in the U.S. defense sector, BAE is the most likely to make major acquisitions. It will probably opt to grow in services, since hardware accounts have already begun to shrink significantly in response to Obama Administration priorities.