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Industry as FIC: a rose by any other name

Posted By on June 8, 2017 @ 11:45

It has been a little over a year since the government released its Defence Industry Policy Statement. As well as setting a new world record for using the word ‘innovation’ in a single document, the Statement also elevated industry to the status of a fundamental input to capability. As I’ll briefly explain, I think it’s the latest attempt to square the circle that is the big-D Defence and industry relationship. I don’t think it’s doomed to failure by any means, but nor do I think it’s guaranteed to work.

And this isn’t the first time we’ve tried to do industry differently. We’ve tried baroque variations on ‘industry as FIC’ before, a recent example being Strategic Industry Capabilities and Priority Industry Capabilities. There’s nothing intrinsically wrong with the idea of identifying those areas of industry that are truly critical to the delivery and support of ADF equipment. But with the PICs and SICs we made the multiple errors of identifying too many—including some that weren’t critical by any sensible measure—not putting any money where the policy’s mouth was and, in at least one high profile case, we identified a priority area and encouraged substantial local investment, before deciding that the global market could provide a solution that better met Defence’s requirements. Those sorts of experiences leave a sour taste for industry.

It’s hard to get the relationship between Defence and industry right. Defence industry policy is necessarily an exercise in balancing competing interests. I think it’s fair to say that before the latest industry statement there was a prevailing view in industry that Defence’s view was too much one of competition at all costs—even when it came at the cost of a local industry player that was expecting to get a good run because of being in a PIC or SIC business.

The First Principles review took a hard look the relationship between industry and defence and decided that it needed some work. I expect that they heard many of the same stories that Mike Kalms and I did when doing the legwork for the industry policy under David Johnston. The FPR was the origin of the ‘industry as FIC’ policy, though it didn’t explain precisely how that change would fix the relationship. And for the reasons I explained a few minutes ago, there will always be tension there—there aren’t too many losing bidders in competitive processes that stand back to reflect on the beauty of the experience.

At one level I can understand the logic of industry as FIC, because suitable industry support is clearly critical to both developing and sustaining the ADF’s capability. And I agree that the relationship between Defence and industry isn’t always as synergistic as it could be. So I think a new approach might work, but there are a couple of underdeveloped aspects that I think need further intellectual development.

First, there’s the simple observation that the new FIC isn’t like any of the others. It doesn’t belong to Defence, and it’s not an asset that the department can manage through its own internal processes. Industry has its own interests and goals, and a profit motive that requires it to look at the Commonwealth as a source of revenue. None of the other FICS are like that. With his capability manager hat on, a service chief can task his people to rewrite doctrine or change the services personnel policy. He can swing resources around to do more training if he thinks it’s needed. Defence facilities and the wider estate are managed internally, again with input from the capability managers. There’s a Logistics Command that is responsive to service needs. In other words, all of the other FICS are within the control of either a service chief or a Defence committee into which the chief has a direct input.

But a service chief can’t tell Thales or Boeing or Austal, or an SME, what their corporate priorities are—at least not in the same direct way they can direct the development of the other FICS. It’s true that Defence has some sway over industry priority setting; the $195 billion of capital investment over the next decade is certainly enough to get their attention. But that brings me to the second way in which defence industry differs from the other FICS—the party/counterparty nature of the relationship. Defence wants to spend the money for capability outcomes and protect its own interests. Industry is happy to help to deliver the capability outcomes, but what it really wants is the money.

When spending that $195 billion, it will be the duty of those in Defence signing those contracts on the behalf of the Commonwealth to do the best they can to obtain value for money for the taxpayer. That requires a degree of arm’s length to the relationship quite different to the intimacy of the relationship between the capability managers and the other FICS.

So there are some things that need to be worked out. And if it encourages some broader thinking about the ability of industry to deliver now and in the future within Defence’s capability development and acquisition processes, that’s a good thing. To give one example, if ‘industry as FIC’ means that the notion of value for money is extended beyond a narrow focus on the contract of the moment, that would likely be a good thing. Decisions on specific projects are often only locally optimal—that is, it’s the best decision for that particular purchase—but mightn’t look so flash when the whole portfolio of defence projects or the whole of life management of capability are taken into account.

A simple example is contracting for construction projects without thinking about supporting the platforms after delivery—just as is the case for the three Hobart class vessels about to be delivered. A truly smart buyer would have been thinking about ‘building for support’ a decade ago, and looking for ways to provide incentives for the builder to reduce through-life costs. The Chief of Navy certainly has an interest in making sure his new vessels are supportable, as well as driving down through-life costs. Instead, just as we did with the Collins class, we’ve built first, and thought about support later.

But let’s be clear: you don’t need to elevate industry to a FIC in order to think about it during the capability development process. The ability of the market to provide the desired capability or, conversely, the costs associated with creating an industrial base to get what we want should be part of the development of a business case for investment.

If Defence reduces ‘industry as FIC’ to a few prescribed steps in the new capability development process, I don’t think we’ll gain anything. “Sought industry input – tick!” won’t help anyone. Nor will industry expectations of getting an inside rail. What this should be all about is a respectful, mature relationship where information is exchanged (or bought and sold) when appropriate and expectations are realistic. To be honest, I don’t care how it’s badged. “Industry as a FIC” is as good as anything.



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