The new Defence Procurement Strategy (DPS), announced in February 2014, seeks to streamline procurement processes to get our Canadian Armed Forces members the right equipment at the right price, and as much as possible, to leverage the world-class capabilities present in Canadian industry and to grow the defence industrial base. That last point is key to the operations of my organization, the Canadian Association of Defence and Security Industries (CADSI).

Contrary to common belief, the DPS has not yet been implemented as fully envisaged – not to any stretch of the imagination. We are just now moving into the implementation and operationalization phase of the strategy. You may have heard of policy tools presently being designed, such as Industrial and Technological Benefits (ITBs) and leveraging mechanisms such as Value Propositions (VPs), but equally important is the knowledge arm that underpins the strategy – the proposed establishment of a Defence Analytics Institute (DAI).

The Defence Analytics Institute is an important pillar of the DPS because it will be difficult if not impossible to make good procurement decisions without a clear understanding of Canada’s complex and diverse defence industrial base.

A strong DAI will support the DPS with independent, objective and rigorous research and analysis of Canada’s defence industrial base – its capabilities, the gaps and the trends in the marketplace that drive the industry agenda. Irrespective of the ­perception of who knows what about the defence industrial base and defence procurement, there is very little objective data available, and certainly limited defence economic analysis from which to derive conclusions. We need, as a nation, to get beyond what are presently simply opinions on the subject.

CADSI and Industry Canada have been working together to measure and characterize the defence sector. A proposed 2015 Industry Canada/Statistics Canada study of our industrial sector will help set a baseline from which we can measure growth and performance, and upon which we can base important procurement decisions that will be informed by continuous industry engage­ment. All of this will be necessary to shape procurement policy over time.

Why would industry want be in on what might appear to be a government responsibility or an academic exercise? To succeed, the Defence Procurement Strategy must draw on the knowledge of the Canadian defence industrial base: how companies behave and business considerations; how we are structured and incentivised, and how that affects outcomes. Such knowledge resides largely within companies. With Industry Canada putting greater emphasis on research into the defence/military industrial base, and with the advent of the DAI, that could well change. But, if industry doesn’t participate in the design of these studies, the government and the DAI will not get usable data.

It is critical that we get the mandate and composition of the DAI correct now because the defence and security industry is a significant contributor to Canada’s employment, gross domestic product, taxation, trade and innovation. It is one of the few sectors of the Canadian economy competing in a global market in which most countries employ national preference policies in recognition of the unique strategic importance of this industry to domestic economic performance, sovereignty and national security. The policies and actions of governments, both in Canada and abroad, have a direct impact on the industry’s success.

The knowledge that resides presently within industry is essential to a DAI and the DPS. When we all have the facts and data around the DPS available, we can evolve it, question it and improve it to continuously derive better outcomes. Given that there is a component to DPS that will always be about incentivizing industry to deliver economic benefit, studying the behaviours of our community and its reactions is key to that outcome.

The complex structures of large defence companies – in addition to the tight interdependencies that occur with resources and the product/service and defence/commercial mix for small business – can be challenging for accurate measurement of the defence industry base. In fact, such complexities can easily confound these types of studies, which is why people involved in designing industrial base studies, and gathering and interpreting the data, truly need to have significant direct knowledge of and experience working in this rather complex and unique sector of our economy.

The Defence Sector
There is no universally-accepted definition of a “defence company”, and within any given company, separating commercial from military activity can be difficult. Most if not all defence companies create commercial variants of their products and services. We refer to this as “dual-use”. So, it is incorrect to simply count jobs solely associated with defence products and services, or to correlate a company’s revenue from its military business as a percentage of its total revenue for the purpose of generating a job metric.

Companies will often set up “core activities” that are shared across multiple business units: research and technologies, core engineering, shared services and information technology, and so on. If a company is not queried on its “core” or its corporate structure, job counts and economic contribution can be significantly understated.

Large companies are moving towards outsourcing or subcontracting special purpose equipment, particularly information technology equipment – a circuit card, for instance – used interchangeably in military and commercial products. The subcontractor, who may be Canadian, may not know how the card will be used and therefore cannot attribute its employee base to either the defence or the commercial sector. Indeed, these subcontractor jobs would probably be considered unrelated to defence, thus contributing to understated job metrics and aggregate economic contribution for the defence industrial base.

Reporting by Large Defence Companies
Large defence companies will often “sell” products from one line of business to another, which influences how revenue and employment is recognized. There could be, therefore, an entire defence-related revenue stream that is not represented, for accounting purposes, in a military product or service being delivered.

Challenges for Small to Medium Defence Companies
Small to medium-sized businesses (SMEs) make up the vast majority of defence firms in Canada. Many provide dual-use products and services, and also require a shared critical mass to keep the business viable.

In SMEs, employees often wear many hats, which means that measuring only the percentage of work that an employee does for military products and services may ­produce an inaccurate picture.

For example, employees can function as software or hardware designer, system integrator, product manager and project manager and sometimes even sales rep, toggling between commercial variants and military variants and sometimes not realizing that they are providing the products and services for military applications.

Many of these companies have a critical mass or minimum employee load below which the entire company operation is placed in jeopardy. Consider this scenario: A company has two highly skilled hardware designers, Bob and Anne. The company reports half an FTE (full-time equivalent) employee as directly attributable to the defence sector. Why? Because both Bob and Anne wear four hats, and each is perceived as providing one quarter of a FTE to the defence activity. But, if the defence activity goes away, Bob or Anne, or both, could lose their jobs. This would represent a loss of one or two jobs, not half a job. With Bob and Anne gone, Sasha will no longer be needed for payroll, HR, sales and marketing. In a five-person company, CEO Bill and his daughter Eve could be facing the decision to close shop. So, a reported half FTE could, in a business slowdown, translate into closure of a company and complete loss of a capability.

Understanding the Environment
How does all of this affect government decision-making? Large procurement decisions need data provided by these companies that truly and fairly characterizes the defence/military industrial base.

In designing the 2015 Statistics Canada survey of the military industrial base, Industry Canada has been working with the Organization for Economic Co-operation and Development and the Department of Defense in the United States to understand international best practices for measuring this complex sector. Still, for reasons of history, policy and geography, CADSI believes the Canadian defence industrial base is unique in the world. So, in addition to international best practices, we believe this research must also incorporate the knowledge and wisdom of Canadians who have experience in this industry.

Direct knowledge about the complexities of large and small businesses is relevant to a data-driven conversation, and successful collaboration will help to create skilled employment and prosperity for all Canadians – and deliver world-class equipment for our Canadian Armed Forces.

___
Christyn Cianfarani is President of CADSI.
© 2014 FrontLine Defence