Although vital to MRO processes, MRO IT is characterized by underinvestment and unleveraged efficiency increase potential. Facing pandemic-strapped IT budgets, buyers need to balance cost saving measures and overdue technology investments to help their IT departments contribute to company value.

Aerospace Maintenance, Repair and Overhaul (MRO) follows complex processes which have strict and precise requirements defined by airworthiness authorities to guarantee the safety of passengers and aircrew. For aircraft operators, MRO accounts for 11% to 15% of their annual cost and is thus a relevant portion of their total operational expenses. However, although the worldwide commercial MRO market is large, and forecasts are optimistic, MRO providers struggle to make strong margins, generating an average of 12% EBITDA with a broad variance across subsectors. Fragmented supply markets, large fixed base cost and revenue variabilities are just some of the factors which make it hard for MROs to sustainably achieve higher margins.

The coronavirus crisis has disrupted the aerospace MRO industry, and conservative scenarios predict the market still to be 20% below its 2019 peak in 2023.¹ The aerospace supplier industry has already seen significant consolidation moves in the past, and further consolidation in the MRO segment is likely in the coming years.

Corporate IT: The Pivotal Point of Company Transactions

Information Technology (IT) is a core concern of most company transactions. In transformations, technology determines the critical path, timeline, resource requirements and costs. Most value creation plans will struggle to deliver returns unless technology is at the heart of the change. In all industries, transactions are an opportunity to assess how the IT function itself is run, as the momentum they bring allows for a redesign of their operating model and cost.² While in many aspects MRO IT does not fundamentally differ from other manufacturing industries, we believe that it is particularly demanding to fit IT into a value creation plan in an industry which is strained by a complexity of budget shortage, strict regulations, and unleveraged technology innovation potentials.

MRO IT is shaped by low budgets and challenges to prove its return on investment

We see MROs spend on average between 1% and 3% of their annual revenue on Information Technology. Budgets in MRO vary within this range, depending on size, subsector, regional focus, aircraft type orientation and split between military and civil customers. MRO IT is typically perceived as a cost center, and consequently there is hesitation to issue investments required to increase operational efficiency.

While many representatives of MRO IT departments believe in some type of return of investment in the IT function, most of them concede that IT investment does not necessarily have a measurable financial benefit. Due to the complexity of systems, organizations, and processes it is difficult for many IT organizations to create and pursue meaningful business cases, and many of them struggle to argue how concretely an IT investment will impact the company’s financial performance.

MRO Buyers need to balance overdue IT modernization needs with the imperative to save IT cost

Facing a complexity of strategic shifts, technical challenges, budget strain and buzzword technology trends in MRO IT, buyers in MRO organizations need to identify the right IT measures to support their value creation plans. Also, they must be aware of investments needed to continue IT operations, as shortcomings of recent years may become a risk to business continuity.

Typical Cost Reduction Shortcomings in MRO IT

Typically, 20-30% of IT cost in MRO is directly related to infrastructure operation. Unless already addressed by cost-savings initiatives during the pandemic, transactions may ideally be used to right-size infrastructure and license costs by tailoring agreements and hardware to the number of users and customers to be serviced in the future. As IT operating costs typically increase with MRO events and users to be serviced, infrastructure and license surplus can often be quickly reduced without negative operations impact.

In manufacturing industries an average of 18% of IT budget is annually invested in transformational projects.³ But, in an ambition to address technology trends in MRO, many organizations have set up IT innovation projects which either struggle to deliver to their promises or are not in line with the future company direction during MRO consolidation. Often IT initiatives are called “strategic”, but not reviewed as context changes, and so unlikely to bring financially noticeable benefits short- or mid-term. Unless already suspended during the pandemic, buyers should reassess the rationale and progress of running IT innovation projects to see if they really bring the expected benefit or should be terminated to save cost.

Third, especially incumbent MRO organizations suffer from inefficient IT operations, as their legacy infrastructure, dated applications and existing workforce are not in sync with actual financial, performance and skill needs. Buyers can use the transaction momentum to design an entirely new IT operating model, e.g., by cost-reduction through partial or full outsourcing of hosting and operation, reduction of span of control and review of IT roles.

Typical Investment Needs in MRO IT

In light of increasing cybersecurity threats, aviation authorities are about to upgrade information security requirements to be fulfilled by aviation organizations.​ US and EU aviation authorities have prepared directives to require aviation organizations to prove the effectiveness of their Information Security Management Systems (ISMS). As failure to fulfil standards of aviation authorities may result in a material risk for MRO approvals, buyers should be aware of shortcomings and investment needed to maintain or increase the quality of the information security management systems to comply with authority requirements.

Due to underinvestment in infrastructure in MRO facilities workforce often suffer from bad network connectivity at the shopfloor, in warehouses and during transportation. In result, workers often need to follow paper-based processes and frequently manually enter handwritten notes, shipping documents or maintenance records into IT systems. The lack of shopfloor connectivity limits usage of mobile devices and lowers workforce efficiency. Investment into very basic infrastructure often allows MROs to start and use available technology efficiently, such as data intense modern information systems or mobile devices.

In MRO, ERP software supports a vast range of different processes. Although centered on financial data, their scope often extends to supply chain, production planning and inventory. As legacy ERPs are often costly to operate and in poor technical condition, and as their upgrades can be expensive and typically result in temporary productivity loss, buyers should be diligent about the condition of the ERP and assess if it adequately supports the target operating model after the transaction or if ERP upgrade or migration is required.

Finally, incumbent MROs often suffer from lack of integration between customer order processing, production, financial and reporting systems. In result, data quality is poor, reporting efforts are high and it is difficult to use data to actively control MRO operations rather than retrospectively report on them. Investing in modern and secure integration between systems will allow for better data consistency, improve analytics capabilities and is a prerequisite for operations automation.

Coping with the MRO IT Investment Dilemma

Aerospace MRO is high-tech and commodity service at once. This inherent trait echoes into IT operations of MRO companies and ultimately demands difficult design tradeoffs. Should this ongoing IT innovation project be continued after the crisis? Is this multi-year investment into network really required? How many cybersecurity engineers do we need in future? These are just some of the considerations which typically arise in any MRO IT organization today.

Understanding IT challenges in MRO will prepare buyers for future decisions to be taken in IT budgeting and operating model design. When assessing IT operations in an MRO organization, they should rapidly develop a view on, e.g.:

• IT budget, resource utilization and application of any workforce flexibility schemes in the Information Technology department
• Relation of unit cost and business benefit of IT systems
• Impact of airworthiness directives and cybersecurity regulations on systems
• Cost of system portfolio and return on investment of projects
• Infrastructure investment needs
• Lifecycle stage, upgrade needs and cost of the ERP as well as its interaction with Maintenance & Engineering systems
• Impact of any future value creation program on IT strategy and IT budgets

Although IT modernization in MRO is overdue, IT departments will unlikely be exempt from budget cuts in the next years. To proceed in resolving this MRO IT investment dilemma, it will be important for buyers to understand their IT department’s challenges and help it purposefully target investments, so they reliably and sustainably contribute to company value.