Strategy & Operations » Leadership & Management » BAE Systems CFO on managing complexity

“Of course I have a moral conscience”, says Peter Lynas, CFO of BAE Systems, the UK’s big defence contractor that makes the Typhoon jet fighter as well  as nuclear submarines and armoured vehicles.

He is speaking in relation to the concerns of many that jets supplied by BAE to Saudi Arabia have been used in the war in Yemen, which has featured horrific images of civilian deaths from aerial bombing.

Lynas has a consistent view on the issue, saying BAE always takes its direction from the UK government. “We will provide equipment based on their call. If they view we shouldn’t be supplying, then we won’t supply,” he says.

The issue reflects the complex ecosystem that BAE operates in as one of the world’s biggest defence and aerospace companies. “We have such a diverse portfolio, from nuclear submarines to ship repair through to regional aircraft supply and spares to supply of intelligence analysts,” he says.

The move to create the defence industries champion nearly two decades ago has delivered great commercial success, winning huge global orders and supporting thousands of well-paid jobs in the UK’s industrial heartlands. In 2017, operating profit of £1.5bn came from revenues of £18.3bn- slightly up on the previous year.

BAE is important to the UK economy. But the fact that the hardware it makes has been used to brutal effect by some of the world’s more unsavoury and corrupt regimes makes its presence an uncomfortable reality for many.

In every sense the business model of BAE and its relationship with shareholders and other stakeholders is complicated, but that’s clearly an aspect of the role Lynas enjoys-running a finance function with a whole portfolio of extra responsibilities.

On a mission

Having left school at 16, Lynas joined banknote maker De La Rue as a trainee accountant in his home city of Portsmouth, shunning the possibility of university, and progressed through the firm- spending two years in the group’s Madrid office.

A move to a lifejacket maker in nearby Gosport, where as an accountant he did “everything from the book-keeping to the wages, to the bought ledger”, was the small company experience he desired before joining defence giant GEC Marconi, part of the conglomerate GEC run by Lord Weinstock.

Lynas started there as financial accountant of the manufacturing side based outside Portsmouth, before moving to a development site in Stanmore to be the financial lead on the electronic warfare division. He suggests “a strong work ethic, and being prepared to move around and take opportunities where they come,” helped his early career.

There was also a passionate enthusiasm for the defence sector- perhaps stemming from his father who served in the Navy. “I’ve always had that belief that the defence industry is an important industry. We protect those who protect us,” he says.

Lynas took a big leap forward when he was made assistant finance director of GEC Marconi by FD Ian King, who would become BAE’s chief executive (he stepped down last year), and within a week was taking on the project that he says was the making of his career.

As a key finance person on the in-flight entertainments system being developed for Boeing’s 777,  Lynas was for two years part of a team seeking ways to exit GEC’s largest loss-making programme. “We were being sued in various courts for breach of contract in America, not the most pleasant thing to have ever done. But by putting myself in harm’s way, it got me a lot of visibility,” he says.

The seriousness of the issue meant that it drew the attention of GEC board directors that Lynas met regularly. “It is much better to take a bad business and turn it around than it is to take a well performing business where everybody expects the business to carry on as is. You can show what you can do,” he adds.

The new order

Things were turned upside down at GEC when the group pivoted to the telecoms sector, exiting in 1999 it profitable white goods and defence businesses, the latter sold to British Aerospace to forge a national defence champion re-named BAE Systems.

“What GEC Marconi brought to British Aerospace was a big footprint in the US. We had what I would call the component level knowledge, sub-system level knowledge, whereas British Aerospace was the prime level, so you almost created an integrated top to bottom UK supplier with a big international footprint,” says Lynas.

When the merger happened, Lynas had been recently made finance director of GEC Marconi. He says he found the initial two years of integration difficult, as he was part of the acquired arm- but he settled into the role of BAE’s director of financial control.

But the biggest breakthrough came when BAE’s finance director George Rose “made a decision that his internal candidate for successor was not going to be the guy who came from British Aerospace, it was going to be me. So that sort of locked me into the business,” says Lynas.

With this mandate, Lynas helped reboot BAE’s finance function. “The control environment was weak, so we put a huge amount of effort into turning that around. We also put succession planning in place, raised job competencies and re-energised the graduate scheme,” he says.

Raising the bar in finance came at a time when BAE was beefing up its presence in the land sector- particularly in armoured vehicles for the US military, complementing the group’s sea and air divisions. It was all about building out the US presence, which today accounts for 40% of the group.

For Lynas it was a huge learning curve, working on M&A and other corporate finance areas, as well as the group’s integration. “It’s about how you eliminate the worst of both worlds because we talk about best practice but sometimes it’s about eliminating worst practice,” he reveals.

Leadership responsibilities

In 2010 it was announced that Lynas would take up the top finance role at BAE and he was made group finance director the following year, adding to core finance areas such as treasury, tax, and most recently shared services and procurement. Analytic tools and robotics are increasingly coming to the fore to drive greater efficiencies, says Lynas- a big champion of innovative technology.

He also plays a key role driving the group’s strategy, along with CEO Charles Woodburn who has been in the role for just over a year, improving operational performance, competitiveness and technology. “The focus has been very much on leveraging what we have collectively,” says Lynas.

The complexity of the group, with its very different divisions and joint venture MBDA, the world’s second largest missile maker, demands the group operates multiple approaches. “Every business will have what it sees as its own strategy,” he says.

“If you’re in an environment where there’s huge political swings, budget changes, international competition and low barriers to entry, then that creates a different set of strategic thought than if you’re running a nuclear submarines business, so we do strategy reviews with the individual businesses.

“We then have to bring that together in strategy reviews with the board, where issues are around portfolio management and the balance sheet capacity,” says Lynas. Given the breadth of stakeholders across the different areas, be it government or unions that have a strong presence in the UK business, he says boardroom discussion can be about the pension structure as much as capital allocation.

Lynas say shareholders are interested in understanding the group has good global spread and strong governance, but are less concerned by potential reputational damage of BAE-built equipment being used in the Yemen conflict. “When we talk to the shareholders we get very little. If you come along to our AGM its dominated by that subject,” he reveals.

The issue continues to be high profile as the UK signed a letter of intent earlier this year to supply 48 BAE-built Typhoon aircraft to Saudi to replace Tornados going out of service in the next decade. More recently a $5bn jet aircraft deal was struck earlier this week with Qatar, which last year pulled out of the Saudi-led coalition fighting the Houthi rebellion in Yemen.

Although BAE is guided by the UK government on the licensing agreement to supply Saudi Arabia, Lynas is aware of the impact of the turmoil.

Referring to some especially horrific scenes of bombings shown recently around the world he says: “It’s horrible to see that sort of stuff, absolutely terrible,” but he insists: “It’s who deploys, not the equipment.”

 Doing well over there

What shareholders are interested in is ensuring BAE takes a big chunk of the American defence market, by far the world’s largest. “It’s about chasing the biggest defence budget,” says Lynas, insisting the US administration’s America First policy won’t hurt BAE.

“We are the fifth or sixth largest defence provider in the US. If we were not seen as a US player there is no way we would be given some of the programmes that we get, such as providing electronic warfare equipment on the F-35 aircraft, the biggest defence programme in the world,” he says.

In first half of 2018 US sales were down 8%, but Lynas says prospects are rising with expectations of growing defence budgets after a recent slump as the Afghanistan and Iraq conflicts declined in significance saw US business shrink from $20bn to $10bn.

“You need a very different mind-set, not just in general management but in finance, for how you manage that type of business. It’s about how you manage growth in areas such as combat vehicles, a very different mind-set to cost reduction which is relatively straightforward,” he says.

“You have to plan for growth, project management, supply chain, labour resource, so it’s about how do we get the right people in the right mind set, the right business acumen to meet the right business demand? Lynas says.

“In the US there is also the complexity of the business we operate in, where what you need is political support that comes state by state. Sometimes you have to be inefficient to gain support in the US. That may be the point when senators will support you,” he adds.