Sunday, 5 April 2015

Defence Innovation - How to be a Good Customer

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.

Overall, the First Principles Review seems to acknowledge the importance of professional and technical mastery within the ADF and the wider Defence Department and how these are necessary to shape the capability development and acquisition process and therefore, hopefully, capture the rewards resulting from a better (and better managed) process.

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