Strengthening the Australian Industry Capability Program- a six point plan.

We’ve all been aware of the need/intent to “strengthen” Defence’s AIC program for some time now (having worked in this arena on both the Industry and Commonwealth sides for more than a decade now, this goes far beyond the statement released in the 2016 DIPS), however we have clearly failed as yet, to make the necessary structural changes to the AIC and broader ASDEFCON contracting framework or to Defence’s standard operating procedures, to successfully realise this objective. 

The more positive news is that we now appear to be finally focused on getting this done and the task at hand, if approached in a focused and pragmatic fashion i.e one that seeks to build on existing strengths and fix current weaknesses, is one that shouldn’t be all that difficult to achieve. It is my view that the key to success here lies in the securing of senior defence leadership support to the addressing of a small but key number of actions that carry with them the potential to significantly improve AIC Program effectiveness through better definition and standardisation of the way AIC plans and commitments are viewed, formalised, reported upon and enforced on defence projects moving forward. 

To get there, I'd offer the following six key actions must be addressed:

1.     Elevating the tender evaluation criteria weighting placed on the AIC component of Defence tenders to position AIC on a par with Capability, Cost & Schedule commitments. Ensuring this is the case on all defence projects along with providing a granule enough breakdown of what the AIC evaluation criterion are (at the next level down), would help provide a clear signal to the market that this aspect of defence contracting is enduring and critically important to the securing of new business in defence.

2.     Standardising the AIC Plan response format, content and approach. To achieve this, Defence leadership should look to remove the current discretionary ability of projects to subjectively determine how industry is engaged during the RFI/RFQ/RFT process and what their final AIC plans will (and won't) contain. A more homogenous approach which aims to drive best-practice commonality and collaboration between Defence & Industry through the industry engagement, tendering and subsequent offer definition phases, would surely be of great benefit here. This should be directed by a single approach to industry engagement (arguably coordinated in partnership with ICN, which appears to have become the preferred option for most Primes) and a single AIC Data Item Description (DID), which is prescriptive enough to be able to guide respondents on exactly what is needed to satisfy each section of their plan (i.e. Workforce, Supply-Chain, Infrastructure, Innovation/R&D, etc) incorporating “Specific, Measurable, Achievable, Realistic, and Time bound” (SMART) commitments for each and jointly agreed BEFORE any final contract is signed. This would allow defence to benefit from consistently high quality AIC Plans that have better buy-in from both Defence & Industry, are more uniformed, comparable and clear on their commitments and ultimately completed prior to the contract effective date.

3.     Fully integrating AIC commitments into a project’s performance-based contracting framework and associated payment milestones. Again, this would put AIC on an equal footing with the Capability, Cost & Schedule commitments made and more easily allow for the broadening of existing incentivisation frameworks to incorporate a contractor’s under or over performance when it comes to meeting its agreed AIC commitments. Employing established performance-based contracting practices, the two common and logically applicable penalty mechanisms/options available to Defence for contractors who fail to meet their commitments are (1) placing a percentage of the contractors agreed profit margin at risk and/or (2) introducing liquidated damages. My view is the former of these would perhaps be more appropriate but either option would serve to give the program some much needed teeth and evolve it beyond the currently ineffective "best endeavours" level of commitment category that has for far too long now provided a convenient loophole for those seeking to shirk their AIC commitments. In so doing, this perhaps coupled with the introduction of a mandatory AIC remediation plan requirement, would introduce the much needed consequences that have to date been missing when it comes to better incentivising industry to stick to and deliver against their AIC commitments and strengthening defence’s response options, when they fail to do so.

4.     Resolving the confusion around “Capability” vs “Content”. In practical terms, all AIC Plans should clearly identify which Local Industry Activities (LIAs) link to Sovereign Industrial “Capability” Priorities (SICPs) and which link to lower order “Content” related work packages. In turn, Defence must then ensure it adopts a sophisticated enough evaluation and scoring system to recognise the superior value of capability related offerings over content offerings made by tenderers and challenging them (through the offer definition and contract negotiation phases of the process) when these are either unclear, inadequate or seemingly overstated. Maximising the total AIC commitment (capability & content) as a percentage of overall contract expenditure remains a noble objective here but we must evolve our approach to ensure Defence becomes a savvier customer when it comes to formerly preferencing capability over content and consistently ensuring its priority capability requirements are being met (at both the project and broader industry levels). Furthermore, it is now essential that Defence also seek to safeguard the long-term, sustainable supply of priority capabilities in Australia through direct and targeted procurement decision-making, introducing more robust supply-chain resilience and assurance requirements (in a post-COVID world), in support of this. Only then can it ensure it is intelligently maximising AIC and truly achieving value-for-money on its projects.

5.     Putting in place a credible third-party independent AIC Plan audit program i.e. someone removed from the day-to-day operations of the project but sufficiently equipped and knowledgeable on Defence Industry and Defence project delivery to fully and objectively evaluate performance against plan and (if needed) determine whether penalties are warranted for failures to deliver against contracted AIC commitments. At present, the closest entity we have to this in my opinion is the Australian National Audit Office (ANAO), which has in the past, proven a useful mechanism for conducting independent audits and shining a light on key areas for improvement. Whether an extension of powers here coupled with a more formal approach to specifically reviewing AIC project performance is preferred to the creation of an entirely new entity is up for debate, but it is clear that we must do something to ensure that both defence and industry are more tightly held to account for the delivery of AIC commitments and outcomes.

6.     Formally publishing an annual “AIC & SICP Performance Report” on Defence-wide AIC project performance and SICP status. This would assist in better promoting the symbiotic relationship between these two key industry programs and be based on the consolidated output (or "Scorecard") of the independent AIC Plan auditor’s findings. This should be publicly released each year and be used to both maintain a current and transparent view of AIC program performance and outcomes and how these are directly supporting the development and sustainment of SICPs as well as to make more intelligent preferred tenderer selection decisions by using actual (parametric) and current industry AIC performance data to verify and substantiate claims and offers made during the tender evaluation process.

Whilst certainly not an exhaustive list, I believe these six key actions have the potential to provide a simple yet effective set of practical measures that Defence can quickly adopt to significantly improve and strengthen its AIC program approach. In doing this, I feel we could make Defence a smarter buyer and better position them to unlock the enormous value this program can have on both Defence project performance and the broader Australian economy.