Time to Experiment with How we Buy and Maintain in Defence?

Article first published in The Australian Tuesday 8 October 2019.

The structure of large, complex defence projects makes sense. Appoint an experienced prime, have them select capable suppliers, mandate requirements to engage with local Australian industry, carefully manage access to IP, ensure the nation achieves the sovereign and economic outcomes sought, then deliver. Focused, familiar, generally reliable.

But Australia has an unusual defence industry structure – we don’t look like other countries. Our ‘hollow middle’ has been well documented. It’s not something we planned for. It emerged as a result of historical local acquisition models that were more flexible on the importance of sovereignty and the value of local content. In the past Australia hasn’t been as interested as other countries in the local industrial outcomes when buying overseas manufactured military equipment, but of course that’s changed now. And so, while our interest in local industry outcomes has changed, it might also be time to think again about our acquisition and sustainment project structures. 

“I wanted to use Company X as my sub-system manufacturer/maintainer, but the non-recurring expenses (facilities, specialist equipment engineering know-how) just make them cost noncompetitive” 

You see today, a problem seems to arise when you apply this traditional, globally successful, defence project structure to our unique Australian defence industry sector. Primes get to the stage of ‘selecting local Australian industry partners’ and struggle to find anyone with the scale necessary to take on a large (let’s say >$150m) sub-contract. If you work through this project-by-project this becomes the consistent norm. The local Australian solution is discounted in favour of a distant, mature, global supply chain solution.

This ‘bias back to the global option’ is very often recognised in the Defence organisation too, but it’s very hard to make an alternate decision when you’re a project manager constrained by tightly approved cost envelopes. Consideration of the ‘national good’ is simply beyond the scope of individual acquisition or sustainment leaders, who are operating within highly visible budget, scope and schedule. Commonwealth Procurement Rules require procurement to be ‘efficient, effective, ethical and economical’ but how these attributes are interpreted depends where the delegate sits in the organisation - there is regular debate inside Defence as where exactly ‘national good’ sits within these 4E’s.

To defeat this, perhaps our Australian defence industry structure requires a different approach, rather than vertically slicing through the sector project-by-project to find a lack of sub-contractor scale for any given project, perhaps we should assign specific horizontal slices in areas where we can see the potential for an ‘at scale’ domestic provider (across multiple projects).

In limited areas, often highly specialised or complex fields, this already occurs. For example, Army has acquired a Battle Management System to be installed across numerous fleets (rather than trying to integrate multiple unique systems acquired by individual projects). In even rarer instances Defence continues to own key assets such as the Government Owned Contractor Operated propellant and munitions factories in Mulwala and Benalla that provide products for use across a large number of capability sets. However these instances are the exception rather than the norm – should they be the precedent rather than the anomaly?

Those familiar with the sector can quickly imagine where we might find such opportunities: remote weapon stations across land combat vehicle fleets, maintenance of aircraft hydraulic systems, support of ship self-defence systems - these are all possible examples. In some instances there are opportunities that scale up existing multi-domains providers, such as diesel and gas-turbine engine sustainment. But would further analysis show us even more of these opportunities, larger, perhaps not so easily seen, with large local content, local jobs dividends?

The role of Government in this type of model is to analyse and predict where an ‘at scale’ domestic supplier could be built, and then to fairly select that provider, mandating them into multiple projects thereafter. Yes, you end up with winner and losers in defence industry if we take this path, that will be hard to navigate. And yes there is the risk that once selected you might encounter rent seeking behaviours, these would need to be addressed. But you might also find a material cost benefit to Defence in a scaled local supplier, you might find a reduction in ‘margin-on-margin’ costs, you might find an export champion in the making, and you might find a consistent, long-term defence industry employer, and who is not harassing government project-to-project for the next role.

The current trajectory in Defence contracting has been towards expanding the role of the primes – meaning that the few examples of companies structured to deliver ‘horizontally’ are typically now at the sub-contractor level. That’s ok for now. Providing the space for greater cross platform consideration does not mean reversing or walking away from this approach. But it would require nuanced judgement to be applied, across projects in the acquisition organisation, as to the particular systems and areas that would benefit most from this approach. Not all will. Criteria such as: high per unit costs (which negates stock piling spares); longer turn-around times (typically arising due to time in transit to global repair depots), and; sovereign priority; are all indicators we might have a horizontal opportunity in the making. 

Seasoned defence professionals will observe that initially the most significant opportunities sit within the sustainment side of the Defence organisation. Implementing these solutions across in-service platforms, already contracted, will be challenging (but not impossible). But where Government has the most freedom of action is early in the Defence Capability Life Cycle – when they are conducting approaches to market to identify sustainment solutions. Decision on horizontals at that early stage will enable clarity for all in Defence and industry, and maximises the Commonwealth’s leverage to overcome routine complexities such as IP and technical data transfer.

Consideration of these horizontal opportunities is yet another reason for what some call ‘sustainment first thinking’ in Defence, in contrast to what we might call a more traditional acquisition centric mindset. This type of thinking isn’t new, there are global examples, some good, some not. But is it an idea worth considering today? As we stand at the front of a $200B re-capitalisation of the defence inventory, yes I think it is.