To be clear, I wouldn’t want to reduce the number of star systems; I think it’s too important for exploration. I would just reduce the number of “urban” systems, for lack of a better word.
I would keep Federation, Empire, and Alliance space but they would be reduced in size. Maybe the Empire has two massive manufacturing systems, several smaller scale operations, and a handful of extraction systems that specialize in different resources. System D is very important to them because it’s their primary source of a particular ore which are used to build Imperial ships, that sort of thing. That way if piracy or raids by the Federation hit that system, you can have meaningful emergent gameplay where the Governor of that sector (someone you are familiar with, since he/she’s one of a handful of important NPCs for that faction) sends out the call for mercenaries and security forces to secure the sector. Otherwise, prices at the Imperial shipyards start to increase and even the supply becomes limited. This also opens up an opportunity for players flying Type 9’s make some serious cash hauling ore long distance to the Empire. Of course, they might have to run a Federation blockade in order to do it… if caught, that could have serious repercussions on their ability to continue to do business in Federation space.
Right now, that type of scenario can’t exist because even if one system is under siege by enemies/pirates, there’s dozens (hundreds? thousands?) of others to pick up the slack. Star systems lack importance and just become lost in a sea of beige samey-ness.