In this paper, we consider the latest stage in the on-going organisational evolution of the defence procurement function in Australia which has been dominated by calls for an infusion of “commercial” acumen and discipline into Defence procurement arrangements…
Our analysis suggests that efforts by the Australian DMO [Defence Materiel Organisation] to emulate private sector practice through calls for greater commercial orientation and business acumen are fundamentally misplaced. We argue that bonus-based financial incentives will inevitably be weak in the public sector as only a small fraction of the value of the innovative effort will be captured by (offered to) employees. Also, why the public sector often attracts ex-private sector employees, it rarely attracts private sector entrepreneurs, who pursue high payoffs and do not wish to be encumbered by bureaucratic constraints. Private enterprise offers more scope for diversifying financial incentives as it allows the private accumulation of non-human assets, such as equity capital, that are transferable between individuals and usually marketable. Thus, simplistic exhortations to defence managers to use commercial style incentives in grappling with public policy problems risks trivializing both public and private endeavours.
Advocates of a more business-like approach do not explain why people involved in commercial procurement activities are better skilled and more disciplined relative to their public sector counterparts. As we note elsewhere, even a small defence power such as Australia has a procurement budget that few domestic private organisations can match. It also acquires technologically sophisticated products that are beyond the technological (absorption) capacity of most private firms (Markowski and Wylie, 2010). Thus, we argue that the conventional in-house model of service provision need not be less efficient than the pseudo-commercial. [Emphasis added.]
That was part of a provocative conclusion from an IPPA paper, “IN SEARCH OF EFFICIENT AND EFFECTIVE DEFENCE PROCUREMENT: AN AUSTRALIAN CASE STUDY” by Stefan Markowski and Robert Wylie.
I tend to agree that the challenges of defense acquisition are not entirely solved by commercial practices, especially for an organization the size and complexity of the DOD. Three DOD procurements in the FY 2020 budget request, the F-35 ($11.2B for 78 aircraft), the Virginia-class submarine ($10.2B for 3 subs), and the DDG-51 ($5.8B for 3 ships) are greater in funding size than the entire Australian defense budget for 2019. If Australia’s defense system is too large to be run on a commercial business basis, then the DOD is orders of magnitude too large.
A fair question, however, is whether commercial practices have really penetrated government in a broader sense. It’s hard to imagine technology companies today outsourcing not only production, but also all critical aspects of design engineering to outside firms. In order for companies to be smart buyers and understand their value-add, they keep some of the development process in-house.
At least in the US defense, government in-house expertise remains only in the earliest stage science and technology areas, as well as the later stage sustainment areas. They no longer do applied developments, for the most part, like was performed back in the Navy bureau or Army arsenal days, when 25-35 percent of RDT&E funds was executed in-house. Project Hindsight from the 1960s found that government in-house efforts were just as efficient as contractor efforts in developing technologies that made weapon systems possible.
Perhaps what looks like non-market action — government in-house development — is actually making greater use of commercial market practices than having government outsource the entire process to contractors.
This in-house focus on scaling technologies might be one piece of the puzzle in the effort to attract entrepreneurial types from industry into government — and in-house may also help develop an entrepreneurial minded cohort of individuals organically. Of course this brushes over the complexity of government workforce issues, but is an interesting thought.
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