Editorial: Defence's Darwinian outlook | ADM October 2011

Gregor Ferguson | Sydney

There are encouraging signs that Defence is starting to understand more clearly its role in sustaining industry skills and capability.

While SADI (Skilling Australia’s Defence Industries) is a vital and much-praised program created by the DMO to help up-skill Australian defence companies, it’s a single lever with relatively limited control over the complex machinery of the defence economy.

The Priority Industry Capability Innovation Program (PICIP – see p.62) might have greater promise. At the time of writing the exact detail hadn’t been disclosed, but the Ministerial guidelines paint an interesting picture.

“Eligible Activities” under the PICIP program focus on the PICs identified by Defence. However, they aren’t as constrained as many might have anticipated. As well as funding development of new technologies and/or equipment to strengthen or improve a PIC, they encourage companies to look at diversifying an industry capability, either across defence domains or into a commercial application in order to make the capability more sustainable.

Explicitly, the merit criteria for a PICIP grant include “prospects for driving additional commercial work, including in domestic and/or overseas markets.” They also demand expertise and business management skills on the part of the company concerned.

In other words, there is a Darwinian mechanism emerging here that is designed to encourage and reward creative defence companies with the necessary technical, management and marketing smarts. And the cost of this machinery? About $5.6 million a year, on average. If the PICIP achieves its goals that will be remarkably good value for money.

The same could be said of other small-scale initiatives funded by the DMO and CDG: the RPDE and CTD programs (largely funded by CDG, though the latter is managed by DSTO); and the DMTC, which uses a relatively small amount of DMO funding to leverage a substantial contribution from other industry and academic stakeholders. Between them, these programs (including PICIP) cost Defence about $35 million a year, or 0.13 per cent of its total budget, and add significant additional leverage to industry’s own creativity and innovation efforts in support of the ADF.

That $35 million a year is less than 10 per cent of DSTO’s Science & Technology (S&T) budget. DSTO has a specific and very important role supporting the ADF, but this hasn’t required it to develop IP specifically for commercialisation by the Australian defence industry. So a disproportionate amount of the Defence funding which support industry’s R&D and innovation efforts comes from CDG and DMO, which is somewhat counter-intuitive.

This has changed in recent years, however, as DSTO has ramped up its S&T support for the ADF in the Middle East. Some of DSTO’s output has consisted of technical advice direct to equipment users and commanders, but some of the IP resulting from of its work has had to be commercialised so that industry can provide products, equipment and services to the ADF – DSTO doesn’t manufacture, after all.

Successful innovation requires a receptive and engaged customer, especially in the defence market which is unique in a number of ways. There are signs that people in Defence and the ADF are starting to understand this.

Engaging more fully in the innovation and development process, with CTDs, DMTC, RPDE and/or industry directly, actually mitigates risk and ensures a better capability outcome, as MAJGEN John Caligari acknowledges in his interview with Editor Katherine Ziesing (see p.70). These relatively small-scale innovation and R&D mechanisms provide an opportunity for this engagement and for leaders and operators in Defence and the ADF to achieve better outcomes for themselves.

The ADF could obtain even greater value from the CTD program, in particular, but this is a conversation that Defence needs to hold with itself. The capability benefits are certainly there for the taking, if Defence uses the CTD program properly.

What about industry? It’s a truism that the Australian defence customer is too small to support a full-spectrum defence manufacturing and sustainment capability in this country, notwithstanding Defence’s investment in SADI, PICIP and the like. The inescapable fact remains that there’s not enough money in the domestic defence market, and Defence feels no compulsion to shop locally in any case, except in a very few strategic areas. Companies that want to serve the ADF compete with rivals from all over the world. To win Defence orders they need to be world-best, or at least world-competitive.

This is a lesson taken to heart by W&E Platt, which we cover on P.38. Rather like the European and North American “Hidden Champions” discussed in the previous edition of ADM, W&E Platt has achieved a dominant position in a global market niche: it’s able to support the ADF because it makes 95 per cent of its revenue from exports, and wins its export sales through product design, quality and price.

Defence knows it controls a very imperfect market, and is starting to understand it needs to make concessions to strategic reality.

But successful defence companies show that, while Defence may depend on industry, the industry can’t afford to depend on Defence.

Subject: ADM Editorials