Op-Ed: The use of risk to distort supply chains

Many Australian companies have been supplying goods and services into Defence for a number of years, it is a reasonable assumption that what they have been supplying has been acceptable as you would naturally assume that they would quickly be removed from the supply chain if this was not the case.

It is simply not good enough for a prime contractor to place a risk provision onto an Australian company to artificially justify the employment of their incumbent suppliers and this tactic needs to be called out by Defence, and it is something that the Government should rightfully be expecting from its Defence bureaucrats.

According to the Project Management Institute, risk is defined as an uncertain event or set of circumstances that, should it occur, will have an effect on achievement of one or more of the project’s objectives.

Risk minimisation is often cited as a reason as to why a certain decision has been made, however it is important to ensure that perceived risk, because all risk is perceived until it is realised, does not become a useful tool to dress up a pre-ordained outcome as the result of objective analysis.

Defence by its very nature is a conservative organisation, and like any conservative organisation it is risk averse, therefore the ability to minimise risk becomes a cultural marker.

There is no fundamental flaw in Defence being risk averse, the activities of a defence force are by their very nature dangerous, defence equipment is costly and often requires modifications to meet any unique requirements that a particular country may have.

Finally, all Defence activities are underwritten by the Australian taxpayer, so Defence has a responsibility to provide sound financial management.

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Risk, however, requires management as it is unavoidable, and it is in the management of the risk that inevitably the program outcomes can be achieved. Programs that have struggled or failed in the past have largely done so because of a failure to understand the degree of the risk, to identify the risk and then a failure to manage this risk.

Because of the unavoidable nature of risk combined with Defence’s natural conservatism and then the added complexity of concern over past failures, risk can become a debilitating factor in Defence’s decision making. And as such yields an overly cautious approach to all program aspects involving risk.

Not all risk is the same, and therefore all risk needs to be approached on its own merits.

The consequence of the above discussion is that the prime contractor for a particular program can cite risk as a reason for their decisions regarding suppliers, or provide the Department with options that have varying scales of risk, with the risk levels applied to suit the particular outcome that the prime contractor seeks to achieve.

Finally, all this risk is then passed onto Defence, something that the department cannot absorb. As a consequence, taking the prime contractor’s least risky option inevitably becomes the chosen path.

There rightfully is a great deal of debate around the inclusion of Australian companies into the supply chains of the foreign owned prime contractors, and AIDN has a very clear position on this; it is not acceptable for the prime contractors to default to their overseas supply chains, and it is not acceptable to utilise an incumbent overseas supply chain for the first few platforms with a ‘commitment’ to include Australian companies in subsequent platforms.

AIDN does not endorse the use of ‘risk’ to exclude Australia companies. Why is there more risk to employing an Australian company, if that Australian company has been provided the specifications and appropriate technology transfer is undertaken?

After all, in each successful bid the prime contractors have repeatedly advised at multiple industry sessions that they understand how to undertake technology transfers, they are able to cite numerous Australian companies as examples of potential recipients of technology transfer and often include them in their offers to Defence.

What, we may well ask, changes after they are awarded the contract?

If an Australian company is given the specifications and requirements of a particular piece of equipment and can demonstrate that it can produce that piece of equipment to the required standard, then there is no logical reason that they can be considered to be fundamentally riskier than an overseas supplier.

What is required is simple - prime contractors must honour their pre-contract award promises and facilitate the transfer of technology and undertake the process to have the Australian suppliers integrated from the outset into the supply chain.

To apply unnecessary and often unfair levels of risk onto an Australian supplier is simply a commercial tactic to drive the outcome that the prime contractor is seeking.

AIDN recognises that it is in the best commercial interests of the prime contractor to employ their known supply chain, and that from the prime’s perspective this will be the desired outcome. By retaining their current supply chain, they can drive their overall per unit costs down across all of their programs.

In many cases these prime contractors have a policy requirement from other countries, Canada being one as an example, to ensure that there is matched expenditure for indigenous companies, and this can be achieved by awarding contracts to those indigenous companies into overseas programs.

This is an obvious danger for Australia companies – prime contractors that have multiple international obligations and domestic pressures, awarding contracts in Australia seeking to award subcontracts to businesses in those countries where there are firm expenditure quotas to fulfil, rather than to Australian businesses for which there is no equivalent quota obligation nor government legislation preventing this type of behaviour or requiring Australian industry inclusion.

And this brings us back to the use of risk to drive an outcome.

Only the Department can challenge the prime contractor when risk is placed upon the inclusion of Australian suppliers into the supply chain for these programs.

The Department has to take the lead, after all the Department claims to be an informed customer. The Department needs to require the prime contractors to fully articulate the risk that is being applied and, as importantly, why.

Brent Clark is the chief executive of the Australian Industry and Defence Network (AIDN).