Friday, 10 January 2020

Innovation - something counter-intuitive

You wouldn’t expect an oil company to be working on the leading edge of space and robotics technology, but that’s where the vision of Perth-based Woodside Petroleum has taken the company. It works with NASA and the Australian Space Agency, among other partners. 

Wait, what? But Woodside’s just an oil company! True – but it’s one that understands its business very well. It's more than 'just' an oil company.

The company produces and sells oil and Liquid Petroleum Gas (LPG) from a number of sites onshore and offshore and around the world. To do that efficiently and safely, it is turning increasingly to robotic technology deployed across continental distances (using satellite links) to manage remote production and distribution sites. And it invests in R&D into things like surface coatings, AI and hydrogen as a future fuel. More than that – it commercialises the resulting IP (if it works – sometimes it doesn’t). That makes it an innovator.

Woodside’s CEO, Peter Coleman, was interviewed in the business section of The Australian today (Friday 10 January) and had this to say about innovation.

“We conduct our own R&D we leverage that we fund through our partner universities – Monash, the University of Western Australia, Curtin and Edith Cowan. For us it’s all about using technology to solve business problems. [For example] maintenance is one of the biggest costs for an asset-intensive business like ours. The prize is substantial – in maintenance alone, there is an opportunity for a 30 per cent cost saving, which reaches hundreds of millions of dollars pretty quickly.”

Funny – he could almost be talking about managing a fleet of warships, or combat aircraft, or tanks. A 30 per cent saving is big news in anybody’s currency. However, he doesn’t disclose what the company invests annually in R&D and innovation – but it’s pretty substantial, if that’s the scale of the savings he’s hoping for.

Innovation has been described simply as ‘making a difference’ – the trick is usually to identify where making a difference can have a significant effect. Which is why Woodside is working with space and robotics specialists as well as traditional petroleum and mechanical, mining and marine engineers. It has a sense of those parts of its business where the leverage yielded by an investment in some form of innovation can deliver significant effects. And it’s not afraid to be counter-intuitive in what it does. 

Looks obvious, doesn’t it? But it’s not - there’s leadership and culture at play here, and they make a massive difference. 

This is the last in a series of posts about innovation, just to get your juices flowing at the start of the year.

Happy New Year everybody!

Innovation - from another expert

Yesterday it was Sarah Williamson, CEO of FCLT Global. Today (Friday 3 January) it’s Mr Dig Howitt, CEO of Cochlear, the Sydney-based company that does those magical hearing implants – they both agree that investment in ongoing innovation is essential and they’re both saying so to The Australian (see p.19 of today’s edition).

Dig Howitt is an interesting study. His company depends entirely on technology and operates from facilities across the globe. It invests about 12% of its revenue each year in R&D – I’ll say that again: 12%. In 2019 this amounted to $180 million. 

I’ll repeat that one more time in case you didn't understand what I'm saying: in 2019, Cochlear invested $180 million, or about 12% of its revenue, in self-funded R&D. Any other Australian companies out there matching the scale or effectiveness of this R&D investment?

Although it’s a life sciences firm its technology journey has important lessons for high-technology companies operating in the defence and other adjacent markets. Here’s a selection of what he has to say:

“We see constant innovation as a must. The primary focus of our R&D is investing in improving hearing outcomes. We also invest in integrating our products with everyday lives. Finally, we are investing in building the clinical evidence that shows …the economic and social benefits of treating hearing loss effectively.”

Multiple reviews over the past five years or so agree that Australia’s future prosperity will be driven by knowledge-intensive companies that collaborate, innovate and export, Mr Howitt says. However, he warns that Australia is not competing as actively as peer nations such as the UK and Ireland for R&D investment, advanced manufacturing and life sciences businesses. Reintroducing the RDTI (R&D Tax Incentive) legislation would help, if it passes Australia’s senate. So would a stronger incentives regime for companies doing cutting edge R&D and IP development; and so also would a more flexible regulatory framework that allows local firms to be globally competitive while protecting local consumers.

A couple of thoughts: firstly, Cochlear understands its absolute dependence on technology and the need to invest constantly in refreshing its technology base and IP; secondly, it has a global market with multiple paths to the customer, so it can build its business and generate a return in a realistic time frame. The demand is there, the paths to market exist and so opportunities continue to exist for Cochlear in the global health market.

How does that sit with Australia’s defence industry? Thoughts?

Innovation - the follow-up

My recent thoughts on innovation were well received, which is gratifying, and elicited a couple of comments; there was also some comment in today’s The Australian that caught my eye. I thought I’d offer some follow-up comment of my own.

Firstly, Heinz Zimmermann pointed out that a successful nation has innovation in all walks of life and on all levels, such as consumer, health, energy, space, communication, automotive (especially hydrogen technology), and so on. He’s absolutely right, and that’s the reason I singled out the National Innovation and Science Agenda (NISA) for comment.

NISA may be associated with Malcolm Turnbull, but that doesn’t make it bad policy – in fact, it’s extremely good policy and something that a nation that wants to be called ‘the clever country’ should be implementing and pursuing, rather than criticising. But I guess that’s the Australian way. Changing the culture will take a while, which is why policy and budgetary consistency and persistence are so important.

Peter Freed pointed out that a willingness to allow the transition of innovations into operational use is also a necessity, adding that the so-called ‘valley of death’ isn’t confined solely to the shipbuilding sector.

This goes to what Heinz was saying: we need an innovation culture in this country – in defence and also right across the economy – in which market pull is given its rightful status as a key stimulant of innovation in Australia. This isn’t to argue for an industry-led defence policy but rather for an acknowledgement that if we seek a strategic operational advantage based on in-country innovation and industry excellence, the monopsony customer in our supposedly market-led defence economy needs to play a critical role. And he starts by acknowledging both the existence and the importance of that role. Many in Canberra and the ADF get that; many more simply don’t, and look on the equipping of our defence force as simply a transactional arrangement with a bunch of overseas supplier, with brute haggling (when you get down to brass tacks) determining the price paid and ignoring the value received.

Which brings me to this morning’s edition of The Australian. On page 13, under the headline “Dividends ‘a drain on performance’”, there’s an interview with a woman named Sarah Williamson, who is CEO of an American not-for-profit called FCLT Global. That stands for ‘Focussing Capital on the Long Term’ and part of the thrust of what she said related to the short-termism of many investors. They seek a short-term share price or dividend gain and ignore longer-term investments such as corporate R&D. 

The company recently published a report titled ‘Predicting Long Term Success’, which says that spending on corporate R&D can boost returns. Says Ms Williamson, ‘[The report] looks at not just the total amount of money [spent on R&D] but the productivity of the research… Companies that do well over the long term are investing in R&D. A lot of large corporates innovated very well but it is hard to see it. And investors may not give them credit for it – for example, if you are a dividend-seeking investor, you may not care about a cool piece of innovation.”

This insight isn’t new – IBISWorld and the University of Melbourne used to publish an annual R&D and Intellectual Property Scoreboard, benchmarking innovation in Australian enterprises, which pointed out exactly the same thing. My own research independently validated this also. The IBISWorld figures show a direct correlation between the amount a company invests in self-funded R&D and its overall performance and growth; my own research showed this applied also to defence innovation project success.

All this presupposes a reasonably efficient market, of course. In non-defence AI, fintech, manufacturing, bio-tech, aerospace, automotive, etc, markets are pretty efficient – companies that invest in R&D and innovation to give themselves an advantage tend to do significantly better than companies that don’t. 

But the Australian defence market is a monopsony that exists at the pleasure of the Department of Defence and ADF who are still grappling with the cultural changes necessary to be an efficient customer. It’s early days yet, in public service terms, but one of the early lessons the public service needs to internalise and act upon is that, as far as innovation in concerned, the world thinks, decides and acts much faster than it does. As I said before, many in Canberra get this, but too many don’t.

Innovation – the combat edge and the need for an innovation strategy

Why do we need to innovate, and why is innovation the bed rock of a thriving Australian defence industry? Good questions, and I’ll start answering by first asking another question: can you spot the difference between the ‘export’ version of an F-15 Eagle or Su-35 or T-80 main battle tank, and the version the manufacturer’s government buys? 


The vast majority of differences between the ‘export’ and ’domestic’ versions of any bit of military equipment are invisible until you actually send them to war. What does that tell us? A good platform may be important (and it is!), but it’s the performance of its sensors and weapons and the effectiveness of the systems integration binding them all together that provide the combat edge operators are looking for. Which is why the Americans, Russians and Europeans keep their crown jewels to themselves, regardless of their export aspirations.

Which brings us to Australia’s defence innovation system. Being realistic, Australia will probably never design and build an entire guided weapon, nor a main battle tank, nor a manned fighter - though Boeing’s Loyal Wingman program will likely see us design and build simpler, stealthy unmanned combat aircraft. And although we build them in-country, we probably couldn’t contemplate at present designing a surface combatant entirely from scratch, nor a submarine, though that might change in 20 years’ time. 

But those platforms in themselves don’t give the ADF its combat edge, not today. The ADF gets its combat edge from a combination of leading-edge sensors and weapons, effective systems integration and good training - and the ability to change and upgrade them quickly.
This is where money invested in R&D, innovation and industry capability development can deliver the most significant return. 

In unconventional warfare against, typically, agile non-state players, the likelihood is that the ADF’s adversaries will pursue an asymmetric advantage by adopting new technologies and new tactics – look at the West’s bitter experiences in Iraq and Afghanistan. The ADF needs to be able to learn, adapt and respond – it needs to be able to develop and field both new tactics and new equipment, quickly.

In conventional warfare, the ADF might be fighting what looks like an old-fashioned, industrial-era slugging match against an adversary who fields similar weapons and equipment. Good tactics and training make a huge difference, but so does an incremental technical advantage, one that needs to be maintained and extended constantly. Every conventional war that has lasted more than a few months demonstrates this.

The cost of both defeat and victory is counted partly in human lives destroyed, and partly in the unimaginable social and infrastructure damage both sides suffer. In conventional war, the cost to the loser is usually much, much higher. In an unconventional conflict the arithmetic is more complicated: a non-state player fighting for a cause may not give a damn – and may even welcome human, social and infrastructure damage because of its propaganda value, especially if a poorly equipped conventional force’s only response to asymmetry is needless, destructive violence.

So winning is important. Therefore, so are the moral and technical means of securing victory. And that’s why a strong, responsive national R&D and industry base is so important – because a national research and industry base that understands the needs of the ADF is able to respond to those needs, and any sudden changes, very quickly. 

We’re not talking about designing and building new ships, aircraft, tanks and submarines. Those platform designs, for the most part, can’t be changed quickly or affordably. But we can enhance and change on-board sensors and weapons; we can improve combat management systems; we can improve our C4ISR systems and processes; we can improve simple things like body armour and personal weapon sights quickly; we can enhance the counter-IED capabilities we field quickly; if necessary we can completely change the way we do things and achieve an immediate and unexpected advantage. We’re talking about making the rapid, incremental changes to our operational capability that provide the ADF with a combat edge, that can save lives and prevent injuries and, we hope, deliver victory.

We can do all of this quickly, but only if we can do it in-country. If we need to depend on a foreign company in a foreign country, we get what they’re allowed to give us, whether or not we’ve asked for the right thing or not (and they may not be able to correct us if we’re asking for the wrong thing). And their delivery schedule may, or may not, reflect our own sense of urgency. 

That is why it is important to have a strong, sustainable domestic R&D and industry base. The cost of such a base can’t be counted in dollar terms alone. If that were the sole measure, we wouldn’t have a domestic industry base at all – Defence would simply buy everything we need from an overseas supplier and then wait patiently (or impatiently) for design changes and upgrades, at the pleasure of an overseas government. The ADF’s combat capability would be dictated and limited by a foreign power.

The value of a strong, sustainable domestic R&D and industry base ought to be unarguable: it allows us the freedom to respond quickly to the contingencies that matter to us; it allows us the freedom both to choose how we respond to emergent threats and to think for ourselves about how and why those threats might emerge and what else we can and should do to address them. It allows us to think strategically and to set our own R&D and capability priorities.

If we’re going to set capability priorities, and revise them rapidly in the face of emerging threats and contingencies, we need a strategy for analysing problems quickly and then developing and delivering the smart equipment or tactics the situation demands. 

The ability to identify and solve problems and improve our circumstances significantly is called ‘innovation’. 

The strategy that delivers an innovative capacity is one that welcomes lateral thinkers and fast movers; sometimes this involves making judgement calls and picking winners. The strategy we need as a nation is one that creates and sustains the intellectual and cultural environment in which the right judgement calls are made and, if necessary, the right winners are selected. That means selecting and training people who can operate effectively and thrive in this environment – and who can live with the fact they may never be more than about 80-90 per cent right. Making a quick call that’s roughly correct has been shown repeatedly to be better than taking ages to try and be 100 per cent correct – you’ll never be exactly right, and if you take too long it won’t matter anyway: you’ll be a goner. That’s the nature of innovation: you may not be entirely right, but that doesn’t matter as long as you’re successful.

All of which leads us to where we are today: we have a defence innovation system that will spend about $1.5 billion over a decade on short- and long-range R&D and innovation and on developing Australia’s industry capacity. This forms part of a broader National Innovation and Science Agenda (NISA) which deserves far more credit than it has received for the scale and ambition of the national economic transformation it set out to achieve. 

The former Secretary of Defence Sir Arthur Tange once famously said, “Until you’re talking dollars, you’re not talking strategy.” Thanks to the NISA and the 2016 Defence White Paper and Defence Industry Policy Statement, Australia has the policy foundations and some of the budgetary tools it needs to deliver this economic transformation, but we as a nation need two things: the promise of continued funding for this transformation process, and consistency in both funding and policy. Without these, we don’t have a workable innovation and industry strategy; and without that strategy, we won’t deliver our defence and industry capability goals. 

Anticipating the unimaginable...

Last September’s drone attack on Saudi Arabia’s oil refining facilities came as a shock, but not a surprise. Something like it had been anticipated for ages.
In an age of ‘Hybrid Warfare’ we must anticipate the use of innovative, asymmetric equipment and tactics targeted on unexpected vulnerabilities. In September 2019 somebody did some very smart targeting using high-order geospatial intelligence to achieve a surgical drone and smart weapon strike on Saudi Arabia’s Abqaiq oil refinery. 
Anybody capable of lateral thinking understands that key parts of any nation’s critical infrastructure are vulnerable to asymmetric attack. The attack surface accessible by a potential adversary is huge: every part of a nation’s infrastructure has not-so-well-hidden vulnerabilities. Damage or destroy some of these and the nation’s capacity to respond to a threat is diminished severely. 
One side’s capacity to think and act faster than the other’s and to do the unexpected, perhaps with novel equipment, gives it a major advantage. Example: the 1973 Yom Kippur War – the Egyptians used massive water cannon to destroy Israeli emplacements in the sand dunes overlooking the Suez Canal and effect an innovative, rapid and highly successful water crossing. 
This is the challenge for defence innovators: who might threaten us? What does an adversary seek to achieve? How – what are the vulnerabilities he might exploit? How do you protect these? How do you ensure sufficient awareness of a threat and sufficient warning of an attack? The scope for innovation in addressing each of these points is huge. 
The ability to wage industrial-age warfare with tanks, guns, ships, bombers and masses of infantry may still be a necessary deterrent, or war-winner. But you can’t change the design of a ship, tank or bomber quickly. 
You can, however, change and enhance things like situational awareness, intelligence, command and control, logistics and the processes that deliver good-ish decisions quickly enough that you can respond to an aggressor effectively, or pre-empt a hostile action. And that aggressor could be a super power, a regional power or a non-state terrorist group. 
Good intelligence and an informed imagination can identify potential aggressors and your own vulnerabilities; innovation – research, development, experimentation, all conducted iteratively and continuously – can provide solutions. The right kit can give you a competitive advantage but, to quote a former head of DMO’s Land Systems Division, our acquisition system must also be part of our competitive advantage – a good idea is useless if it can’t be turned into something a soldier can actually use in a timely way.
This is a whole of Defence challenge: imagining how to fight a traditional battle better and, simultaneously, how to counter (or pose) a new and unimaginable asymmetric threat. The innovation process requires Defence to confide in both industry and the research sector – none of them know enough by themselves to solve the problem, but together they can add up to considerably more than the sum of their parts. 
However, Australia’s sustainable advantage lies in the collective capacity of Defence and adjacent agencies – the AFP, Border Force, ASIO and so on – firstly to identify and then assess threats and devise effective ways to respond. And then, when the unexpected happens (“Of the two courses of action open to the enemy, he will always choose the third…”), they need the institutional capacity to quickly absorb the shock of the new, understand what’s happening and respond effectively. That demands careful selection and training of leaders and the led and a flexible organisation that encourages innovative thinking.
This means that innovation isn’t a discrete process conducted by an elite (or sidelined) few. Innovation needs to involve the whole enterprise, at every level. 
The enterprise must be capable of incremental innovation: improving what we’ve got so we can do things better. And it must embrace disruptive innovation: anticipating, or inventing, completely new ways of doing things. Both require a close, trusting relationship with industry and the research sector and a nimble acquisition system. And finally, leaders and their staffs owe it to the men and women they lead, and those who pay them, to develop the capacity to be imaginative, innovative, effective and resilient. 
The whole enterprise needs to be innovative in preparing for and responding to threats and contingencies – and that means continually challenging and potentially disrupting the traditional relationships and ingrained processes which govern our defence and security. It’s an endless journey and it starts here.