Is returning to Denel an option for skilled ex-staff?

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Parliament’s Joint Standing Committee on Defence (JSCD) has called for the full implementation of Denel’s turnaround strategy so that it can continue to support the South African National Defence Force (SANDF). This raised a few items for consideration.

There is the acknowledgement by the JSCD that Denel needs to be stabilised and reputational damage needs to be addressed. The JSCD seem to have progressed through the five stages of grief (denial, anger, bargaining, depression, acceptance) to the acceptance that Denel is in serious trouble. The JSCD seems to have accepted the current Denel turnaround strategy, which proposes to achieve turnaround through right-sizing the organization. If this is achieved, then long-term strategic partnerships (local and international) can be used to unlock the value of the intellectual property (IP) and capabilities within Denel.

The biggest problem, that is most clearly highlighted by the fall of the capabilities within Denel Dynamics, is that skilled staff have left the organization. The lack of guaranteed salaries resulted in local and foreign companies poaching skilled staff.

The second problem is that production capabilities for the Denel range of products seems to have also deteriorated. There are statements of old equipment and obsolescence re-engineering that would hamper the short-term restart of production capabilities. This is highlighted by the potential loss of ground that is being seen in the artillery space. The Aerospace & Defence Master Plan that is but two-year-old mentions massive potential in the G5 and G6 artillery space. Middle Eastern countries were eagerly waiting for solutions at Denel. Alas, it seems as though this massive potential is sidestepping Denel. UAE, as an example, is entertaining South Korean artillery solutions. The UAE also seem to be approaching Türkiye suppliers to re-engineer parts for existing main equipment maintenance.

The third problem is that of reputational damage. The export market is definitely where the opportunities lie. Denel needs to secure business in a challenging environment. Private South African defence industry entities seem to be benefitting from the reduced clout of Denel. It was reported (https://www.africaintelligence.com/southern-africa-and-islands/2023/02/17/riyadh-and-abu-dhabi-eye-south-african-army-s-artillery-stocks,109914543-art) prior to IDEX that the SA company TFM Defence and Aerospace were offering second hand Denel howitzers to Saudi Arabia and the UAE. The second hand equipment is being offered by several ex-Denel executives with knowledge of the sector and who understand that foreign entities are hesitant to use Denel at present.

It appears a partnering model has been developed by Denel, with support from Armscor, to restore Denel capability in South Africa. I am all for partnership to unlock the Denel capability value. This article (https://www.defenceweb.co.za/industry/industry-industry/opninion-alternative-denel-restructure-strategy-analysis/) put forward a model for private SA Defence Industry role players to be custodians of the most of the Denel capabilities. This is most probably a bridge too far, but it has the opportunity of addressing the fear that if Denel’s capabilities are eroded, it will not have a fundamental adverse effect on the SANDF’s ability to ensure operational readiness and execute its national security mandate. This partnering model would be required if government wanted to benefit from a potential Public Private Partnership (PPP) model for financing certain capabilities. Denel cannot do PPP solutions. Treasury rules do not allow for public (Armscor and Denel) partnership solutions.

Similar to the Denel turnaround strategy, I believe that the system level capability that has been established in Denel should be maintained and if possible expanded. This ringfenced entity within Denel has maintained a skilled staff compliment while delivering programme solutions. There is a case to be made for maintaining certain programmes within a State-Owned Entity environment.

It seems that the partnering approach is critical for Denel’s future. There is a chicken and egg situation playing out. Stability is needed to unlock partnership, but partnership can create stability. It is unclear how the reputational damage element is being addressed. Price is king, but Denel cannot offer at sub-cost or fully financed solutions unless there is significant government support. This financial element is not going to be forthcoming.

The key is then how to attract skilled resources. A very small sample of what I see as skilled staff was approached with the question: Would you work for Denel again? For some it is a clear “No”.

Surprisingly, the “Yes, But” answer is prevalent. The clarification of the “But” element was interesting. It seems simplistic. If the businesses within Denel were operated according to commercial principles, then skilled staff would consider returning to unlock capability potential. What are commercial principles? At a business level, risk and reward backed up by recognition of potential in unlocking market opportunities with the goal of making money. At a personal level, aligning with the merit-based employment principle that can offer longer term possibilities.

It seems like the old model where entities like Kentron were more self-standing is what is preferred by the set of skilled resources I approached. This seems to align with the small ringfenced system level entity within Denel while being in conflict with the turnaround strategy merging capabilities.

The bottom line is that Denel still seems to be an option for some killed ex-staff.

Written by James Kerr, Orion Consulting CC, which provides Market Entry Strategy and Bid & Proposal services to the Aerospace & Defence related industry and assists international SME mission system product suppliers to gain traction in South Africa.