Simon Pryce of Ultra Electronics on growth

Here is an excerpt from an interview of Simon Pryce by Tanuja Randery for the McKinsey Quarterly, published by McKinsey & Company. Learn how Pryce turned an aggregation of acquisitions into a cohesive innovation engine. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.

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This interview was recorded on April 6, 2021 and originally published on on May 17, 2021.
As the former CEO of BBA Aviation and a senior executive at GKN, Simon Pryce has led organizations that grew rapidly through acquisitions. Now, as the CEO of Ultra Electronics, a British company that develops technology for the defense and security industries, he is overseeing a corporate transfor­mation that aims to position Ultra for future growth. In this episode of the Inside the Strategy Room podcast, he talks with Tanuja Randery, a partner in McKinsey’s Transformation Practice, about the company’s approach to innovation and how Ultra is building an adaptable workforce.This is an edited transcript of the discussion.
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Tanuja Randery: Simon, you have had a global career in aviation and engineering. What drew you to Ultra?
Simon Pryce: I have a rather unusual background. I have spent most of my life in engineering businesses and I’m not an engineer. I have a degree in food sciences and agriculture and I’m a trained accountant. I was an investment banker for 12 years before getting into the industry. But not being an expert, I have never believed that I could engineer anything better than the engineers I work with. Instead, I facilitate and create an environment in which engineers, who usually think about the problems they are solving first, focus on customer needs.
Randery: Our research on growth out­performers shows that they tend to focus on growth in several spaces, whether that be improving the core business, entering new geographies or adjacencies, or changing their business models. Looking at Ultra’s three-year growth trend, it is clearly an outperformer. How have you driven that growth?
Pryce: Growth, for me, is about taking managed risks in areas where you are truly expert and competitive. It’s no more complicated than the much-used Warren Buffett analogy of castles and moats. You need to understand how high your castle walls are and how wide your moat is because that tells you your strengths as a business. It is important not to believe your own BS but to look for external verification and data to support the internal assumptions, because sometimes those assumptions are flawed.
In a world changing as quickly as it is today, something that was correct two years ago may no longer be true. Encouraging the organization to understand its customers and how their needs are evolving is key. It’s amazing how infrequently some companies ask their customers what they want. We are a very engineering-focused organization and engineers may be the worst at that.
You also need to be prepared to experiment and take risks. Make them small—don’t bet the farm on a punt—but take risks around what you are good at. Fail quickly, learn from it, and reinvest; go again.How you grow is very much dependent on the business, where you are in the cycle, the business model itself, the physical geographies. At BBA, a lot of our growth was inorganic. It was all about adding scale to a strong core. In the past, Ultra was very acquisitive and that growth was not particularly value-creating.
Do I think we will be deploying capital? Absolutely, but we will deploy it in areas that accelerate our ability to innovate. I have been doing M&A for a long time and anybody who justifies M&A on the basis that an asset is cheap is doomed to failure. Markets are pretty good at valuing the future discounted cash flows that a business or an asset can generate, and they get the math right 99 times out of 100. So, unless you do something different with that asset once you own it, you will almost certainly have paid away all the value in acquiring it in the first place.Anybody who justifies M&A on the basis that an asset is cheap is doomed to failure…. Unless you do something different with that asset once you own it, you will almost certainly have paid away all the value in acquiring it.Unlike BBA, which was driven by scale and consistency of product and service, where there were massive benefits from aggregated procure­ment, here M&A is much more about buying the right technologies to knit together to create clever solutions for our customers. It’s about accelerating the pace at which we can develop capabilities that might take us five years to build organically.

Tanuja Randery: Innovation and intellectual property play a major role in Ultra. You established Ultra Labs, a growth accelerator. How do you make use of it?

Pryce: Between 17 and 20 percent of our revenue every year comes from development work. Sometimes it is funded development for customers, sometimes it’s money we invest in ourselves to develop capabilities to apply to future solutions. Ultra’s background is as an aggregation of acquisitions that were never fully integrated, and the trans­formation we are going through now is effectively integrating 30 years of acquisitions. We need to focus our investment in intellectual property and capabilities in the areas that we are good at.

Some capabilities and technologies span our businesses. For example, everybody is talking about big data, machine learning, and artificial intelligence. At its core, Ultra takes data that sensors pick up, usually in harsh environments, and turns it into infor­mation. We then send it somewhere so somebody can do something with it. We will continue to improve the sensors we manufacture, but where we will spend most of our time is improving the data those sensors produce and more effectively and efficiently turning it into information. That is an issue all of our businesses face, and therefore one of the reasons we created Ultra Labs was to create a cross-business capability in certain core areas. It stops us from inventing multiple solutions for the same problem. Where we can create modular solutions, such as modular machine-learning algorithms, we try to do that centrally and then adapt it to local customer needs or a particular situation.

The second area that Ultra Labs focuses on is innovation. It owns our innovation process. It pulls together skills and capabilities from across Ultra to work on unique problems that either many of our customers face or Ultra’s broader capabilities can help us provide better solutions. Thirdly, Ultra Labs is responsible for engagement with forward-thinking institutions within our principal customers, mainly the defense arena, such as DARPA strategists, to help us better understand what problems our customers will be trying to solve in ten or 15 years’ time. The accelerator is a conscious effort to isolate a group of people away from our strategic business units, to act as a service for those SBUs but also to identify and solve problems that cross those business units.

Randery: In our experience, two-thirds of business-building initiatives are not successful, and one of the reasons is the lack of specifically carved-out funding and talent. Often, the ventures end up being stifled by the mother ship or they have to be funded by business units, which creates a tension between the core versus the new business. How does Ultra Labs overcome that?

Pryce: It reports to our chief technology officer, who reports to me. It does not report to the business units. It has its own budget. It is treated like a business unit with specific objectives each year. It has five- and ten-year plans and it goes through the same quarterly operating reviews that business units do. Ultra Labs also can do some things the business units on their own would not do. Having done a two-week sprint on a particular problem, it may hand it off to one of the SBUs if we see a com­mer­cial possibility. It creates more business for those SBUs—it’s not an execution unit. But I absolutely understand the challenges others have faced in setting up these groups. We are not creating some sort of ventures hothouse. Ultra Labs is there to support the Ultra strategy and enable a more rapid execution of it. It’s making the core businesses more effective and allowing the core to evolve rapidly.

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Here is a direct link to the complete article.

Simon Pryce is the CEO of Ultra Electronics. Tanuja Randery is a partner based in McKinsey’s London office.


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