Plenty of people seem to be jumping on the ‘Innovation’ band
wagon at present, including the Australian Department of Defence. There’s a
general acknowledgement that Innovation is a good thing, but one wonders how
widely it is understood; and one wonders whether the role of the customer in
the innovation process is properly understood, or even acknowledged.
In Australia (and in most other developed nations) the
defence market is shaped by the Customer-Active
Paradigm (CAP), identified by Eric Von Hippel, who studied the role played
by customers in determining and defining the need for innovation. This is
typical of markets where equipment users consist of a community of expert
practitioners whose specialist knowledge is essential to the development of new
tools or methods. Von Hippel concluded that the CAP cannot apply where the user
is ignorant of his needs, while the opposite case, the Manufacturer-Active Paradigm, or MAP, cannot apply where the point
of need is inaccessible by the manufacturer – which is often the case in the
defence market.
Given the necessary secrecy with which defence forces draw
up their threat assessments and strategies, and then their requirements for
equipment and services, it was a reasonable hypothesis that the CAP applies in
the defence market and therefore shapes the product innovation process. And
this was confirmed by my Ph.D research.
In fact, in Australia the effect of the CAP is amplified by
the monopsony nature of the defence market: there is only one customer for
defence goods and services and so, through his budget and his procurement
policies, he determines the size and behaviour of the market and any barriers
to entry.
Long story short: the CAP manifests itself in three features
of the defence market and the innovation process: Customer Attributes; Customer
Controlled Factors (these include Customer Behaviours); and the customer’s
shaping effect on the Market Environment.
A very topical example of the third is the Australian
government’s announcement in early 2015 of the acquisition process for the
Royal Australian Navy’s Future Submarine. It was announced that only three
nations were considered suitable as potential strategic partners for Australia
in this venture: France, Germany and Japan. To the intense surprise of many
submarine industry specialists, a fourth country, Sweden, was deliberately
omitted from this list. This announcement immediately narrowed the field from
which the customer could source equipment and expertise as well as reducing the
number of supply chain opportunities potentially open to innovative Australian
suppliers and sub-contractors.
Customer Attributes,
as I define the term, are those features of the defence customer that are
intrinsic. That is, they are an organic part of his make-up, or which are so
embedded in it that they can be changed only slowly, if at all. At their core
are the technical and professional expertise of the customer. In the case of a
submarine purchase, for example, does the customer understand sea power, its
role in strategic security and the means by which it is exercised and applied?
And does he understand submarines? That includes technical know-how and
operating expertise: how they work, how they are made and how to use them
properly (and how to train the people who use them); and does he also
understand anti-submarine warfare? None of this expertise is created rapidly
and must be grown deliberately, and nurtured.
Looking at professional expertise from a different
viewpoint, does the customer undertake R&D in a strategic and systematic
fashion? Does he understand and embrace the imperatives and opportunities of
change? Can he contemplate the inherent risk in a new submarine project, but
avoid becoming so self-protective that he loses sight of the objective, and
foregoes the prize that comes with it? That sort of professional expertise and confidence
takes time to build.
Customer-Controlled
Factors include Customer Behaviours but extend beyond this. The Behaviours are
the things the customer does: things
that can be learned, changed and
even discarded relatively quickly or easily, for example by changing
procedures, training staff or recruiting individuals with specific skills or
knowledge. Or, with a stroke of the pen, by changing government policy.
They include obvious things like conducting modelling and
simulation activities to validate an operational requirement; engaging with
potential industry suppliers to determine what’s actually available, or credibly
possible; appointing a senior internal champion to steer the project to
completion; developing an acquisition strategy that acknowledges risk,
mitigates it, but isn’t blinded by it; and applying some discipline to the
entire process so that requirements and specifications don’t keep shifting.
These are hardly a surprise.
But additional factors include things like the perceived urgency
of a stated need, the consequences for the industry of the timing of a purchase
(does this help sustain an essential capability, maintain economies of scale to
reduce costs, or assist with export marketing and sales?) and even a decision
to support (or not, as the case may be) an indigenous company that needs export
sales to help it grow and therefore maintain and enhance what may be an important
local industry capability. These factors, and the way they play out in the
capability development and acquisition process, can have a significant bearing
on the outcome of a product innovation project.
The Market
Environment is a combination of external ‘shapers’ of the innovation market.
These include classic market features such as levels of demand, customer
budgets, levels of competition in the market place, and so on. In a
high-technology marketplace they also include things like technology development,
levels of R&D and sources of Intellectual Property (IP). In the defence
market specifically, they must include things like the evolution of the threat
environment (possibly a function of technology development) and the tempo of
operations.
The CAP amplifies these considerably: the market
environment, as it is perceived by the innovating company, is shaped by the
customer’s response to real or perceived changes in the threat environment, and
his response to the threats and opportunities thrown up by technological
change. A government may consider a certain casualty rate in a
counter-insurgency campaign quite acceptable, for instance, and therefore
refuse to countenance buying new protected vehicles for its troops or
up-armouring the vehicles in service. The introduction of a new, more lethal
weapon by the enemy may force a change. It may stimulate a sense of urgency; or
it may not. Whatever is happening in the outside world, in a monopsony the
market forces that might otherwise drive innovation and the development of new
products and services are moderated and channelled by the customer.
So what are the rules a defence customer should follow if he
wants new equipment projects to have a reasonable chance of success?
1.
Nurture and grow your technical expertise
2.
Nurture and grow your professional expertise
3.
Maintain your situational awareness: keep
abreast of emerging threats as well as merging technologies and their potential
effects on your own operations
4.
Understand your needs and articulate them
properly
5.
Be methodical in conducting R&D: this will
help you understand your needs, as well as helping you identify solutions
6.
Seek opportunities for innovation in your
organisational practices and processes as well as in your equipment inventory
7.
Be aware of risk (see 1 and 2 above), but
remember that obsessive risk-aversion is itself another source of risk
8.
If it needs to be done at all, do it quickly. Urgency
eliminates irrelevancy: a short deadline ensures a focus on the outcome, not
the process
9.
Establish a disciplined acquisition strategy
that both reflects the urgency of the need and tolerates sensible risks (see 1
and 2 above)
10. Appoint
a champion with sufficient seniority to drive the project forward – or to kill
it, if this turns out to be the correct course of action; and give him or her
the best possible project team
11. Make
sure you’re nurturing your industry base – In a technology driven
monopsony a smart customer doesn’t allow his industry base to fall into a
technical rut or to fall behind in a technology sense.
12. Nurture
a culture and capacity to work with your industry base to identify
opportunities and develop solutions, both for yourself and also, potentially,
for allies and export customers.
Coincidentally, as I was working on this set of rules, the
Minister for Defence released the report and recommendations from his First
Principles Review of Defence. One of the key recommendations was the abolition
of Defence’s Capability Development Group (CDG) and Defence Materiel
Organisation (DMO) and their replacement with a new Capability Acquisition and
Sustainment Group. Six of the report’s eight recommendations are:
- Abolition of the Capability Development Group and the Defence Materiel Organisation in their current form;
- Creation of a Capability Acquisition and Sustainment Group under a Deputy Secretary reporting to the Secretary;
- Moving to a leaner ‘smart buyer’ model that better leverages industry, is more commercially oriented and delivers value for money;
- Strengthening the front end of the capability development life cycle by revising the two pass process, establishing an entry gate and creating more opportunity to tailor and fast track projects;
- Strengthening and placing at arm’s-length a continuous contestability function that operates throughout the capability development life cycle from concept to disposal; and
- Transferring accountability for requirements setting and management to the Vice Chief of the Defence Force and the Service Chiefs within a regime of strong, arm’s-length contestability.
These changes, if implemented successfully, would have the
benefit of integrating more closely the end user, the purchaser and the
supplier. In any sort of developmental project this relationship needs to be
close; it needs also to be moderated externally, however, so that the project and its
participants remain grounded and that no ‘at all costs’ mentality or ‘conspiracy
of optimism’ emerges; the fifth and sixth dot points above recommend establishing this
function in a reshaped bureaucracy. An implicit assumption (and for me a necessary condition) is that the senior
ADF officers and other officials who are empowered by these changes embody the professional and
technical skills required.
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