Transforming Defence and defence industry
There is a need to adopt an enterprise approach to supply chain resilience that reduces the risk of interference in the development and delivery of capability but also ensures sufficient depth in Australian industry’s capabilities and skills.
The Mandarin first published this essay. Authors: David Schmidtchen and Michael Mahy.
Australia’s treasurer, Josh Frydenberg, recently urged business leaders to bolster business resilience in response to growing strategic competition. The treasurer believes that while Australia’s economy has continued to grow strongly, Australian companies will need to keep pivoting to find new markets and buyers for their goods and services.
Increasing strategic competition is a persistent theme of Australia’s changing strategic environment. The 2020 Defence Strategic Update paints a bleak and uncomfortable outlook for Australia’s security. A future defined by more intense strategic competition in the region, higher probability of military conflict, reduced strategic warning times, ongoing ‘grey zone’ activities, economic coercion, and ongoing threats to human security such as the pandemic and natural disasters.
There is a need to adopt an enterprise approach to supply chain resilience that reduces the risk of interference in the development and delivery of capability but also ensures sufficient depth in Australian industry’s capabilities and skills.
This will require a deep, active, mature partnership between Defence and industry. In an environment of increased strategic competition and uncertainty, strategic and operational risk rises. In this environment, the fundamentals of the relationship need to be considered to ensure that it is resilient, adaptive, and focused on a shared strategic goal. Questions that arise include:
How effective is the relationship between Defence and defence industry in ensuring Defence and the national industry support base can mobilise to meet these potential threats?
How will Defence and its supporting industry meet that demand in substantially shorter preparedness times and in a strategic environment that is increasingly unpredictable?
What is ‘resilience’ anyway?
Fortunately, there has been considerable research into resilience across a variety of domains, including ecology, economics and organisation. In this context, resilience is the capacity of Defence and industry to absorb disturbance and reorganise while undergoing change. Resilient organisations can do three things:
They persist – they are continuous.
They adapt – they modify behaviour to best use the available resources.
They transform – they can make functional changes in response to major external pressures.
If Australia is to meet the challenges of increased strategic competition, Defence and industry must put considerable effort into communication, foresight and commitment. This will involve more effectively balancing the occasionally differing motivations of Defence and industry.
Growing supply chain risk
The needs and motivations of industry are inherently tactical and driven to maintain continuity and stability. Changing technology and trade liberalisation have made it easier and cheaper to source goods and services from overseas and equally to export our products and services to other markets. This has brought profound benefits from specialisation and economies of scale. It has also made supply chains more complex. Defence supply chains often rely on inputs from across the globe and involve many businesses to ensure the best possible technology is in the hands of the service member.
Recent experience has shown that supply chains are at risk of disruption from many types of shocks, both in Australia and overseas: geopolitical (for example, a trade war), geostrategic (as outlined in the Defence Strategic Update), environmental (natural disaster), economic (financial crisis), societal (pandemic) and infrastructure related (cyber attack).
For example, the 2020–21 global chip shortage is an ongoing crisis that directly affects Defence and industry and stems from a combination of compounding events:
Societal: The shortage is due to a combination of production and supply chain disruptions, including the pandemic's impact on production facilities at a time when demand across the economy for technology is spiking.
Geopolitical: The tensions between China and the United States have resulted in trade restrictions that negatively impact supply.
Environmental: The worst drought in 50 years has reduced chip manufacturers’ access to the ultra-pure water necessary for chip production.
Defence industry is acutely aware of the need to manage their exposure, using sophisticated tools and strategies, balanced against risk and cost, to gauge their commitment. The chief executives of defence primes are acutely aware of their exposure to markets regionally and globally and how this exposure will affect investment and return.
Typically, it doesn’t matter if one organisation in the market might experience disruption, but rather, it is the exposure to market-level risk that matters most. In other words, the biggest concern arises when the whole market for a product could be at risk of disruption.
In contrast, it may be costly to Defence if the entire system that supplies an essential product is disrupted through conflict, restricted supply chains or trade bans. It would be self-defeating if most of the effort of Defence were absorbed in securing its own long and dispersed supply chains. It would be equally inhibitive in cost and limit access to readily deployable and advanced equipment and supply if Defence were to source its supply through a purely sovereign industry.
History is awash with examples of collective resilience at national and international levels against existential threats. It shows that the capacity to endure and respond is born from government, commerce and defence, reflecting the ‘goodness’ or true potential of each, with each working in close alignment towards a strategic goal.
However, the transactional nature of the current relationship between Defence and industry potentially limits the ability to transform at the scale and rate required to meet changing circumstances. Defence and industry have been staring into each other’s transactional reflection for such a long time now that it is difficult for either party to see past the mirror.
The capability generated from the current Defence and industry relationship is organisationally and socially tight, with many examples of the systems, procurement processes, shared culture and integrated workforce holding its daily operations together. However, we do know from research into resilience that tightly bound systems are fragile and perishable in fast-changing environments.
Transformation is risky but necessary
Transformation at scale is inherently risky because of the planning horizons, complexity and uncertainty. In transformation, things need to be broken to make them anew. Consequently, Defence must be the first to look beyond the mirror to the churning sea.
This is not difficult in theory for Defence leaders but can be paralysing in practice. For example:
Defence procurement is embedded in an administrative bureaucracy that seeks to capture and lock in tightly defined costs. This mindset and culture is grounded in a deterministic view of the future that reduces the scope of adaptability and innovation.
Defence decision-making, planning and management are typically multi-actor processes involving multiple stakeholders with conflicting interests. The decision chains are elongated, reducing the speed of delivery. In an environment of heightened strategic competition, the solutions are often ‘non-standard’. Maintaining the momentum in adaptation may be more critical than securing certainty.
The movement of people from Defence to industry has distinct advantages in shared understanding and knowledge but distinct disadvantages in generating the necessary tension required for transformation and innovation.
Implementing the Defence major service provider (MSP) model exemplifies the challenges.
On the one hand, the MSP model sought to move Defence and industry to a relationship-driven interaction marked by higher levels of collaboration than had been the case in the past. Industry responded positively to the change, which led to strong cooperative and collaborative relationships across previously competing organisations. Defence led, and industry responded.
On the other, the principal challenge in the early implementation of the MSP model was that Defence did not sufficiently transform its systems, culture, processes or people to meet its aspiration. And, philosophically, the approach further embedded the tightly coupled relationship between Defence and industry by reducing industry diversity (although there is intense competition between the MSP consortia). A critical view might conclude that it was a sophisticated rearrangement of the deckchairs.
Structural and cultural change
Transformation is easy to define and describe but horrendously difficult and expensive to implement. It requires vision and ambition, but most of all, it demands endurance.
The risk is apparent in Australia’s national outlook. Defence has articulated its ambition and vision through the 2020 Defence Strategic Update and the Defence Transformation Strategy. However, achieving this will require Defence leaders to relentlessly pursue the micro-transformation of systems and processes. The risk is that without transformation, approaches such as the MSP model are pared back to resemble existing approaches that do not realise the hoped-for innovation and partnership.
Most importantly, it will require a fundamental shift in mindset, culture and behaviour in the relationship between Defence and industry.
The tightly bound relationship between Defence and industry cannot remain in place during growing strategic uncertainty without collapsing under the strain of misaligned systems, processes, culture and people. True transformation will require a partnership with an industry often captured in Defence aspirations but will crumble when confronted with unchanged daily attitudes and practices.
