When Defence and defence industry meet at the negotiating table the playing field hasn’t always been a level one. ADM spoke with those working to improve the negotiated value of outcomes on Defence projects – for both sides of the table.

Patrick Durrant | Sydney

Simon Kelland is the Australian managing partner at negotiating skills consultancy Scotwork with extensive experience consulting to both Defence and industry negotiating teams. Scotwork is currently one of the industry partners of the negotiation services support panel, set up in 2014 within Capability Acquisition and Sustainment Group (CASG), to provide project teams with access to a broad range of specialist providers capable of leading, supporting or preparing Defence for complex contract negotiations.

He related an anecdote which has entered folklore from the time when CASG was the DMO. Defence had put out a tender for handheld mine detectors for deployment in the Middle East. The requirement was for “about 140” units. Apparently, so the story goes, when the shortlisted tenderers sat down to negotiate, one contractor signalled that they could actually offer a lower total contract value if the volume could be increased to 150 units as a result of a peculiarity of their pricing structure.

“Both Defence and Industry may need to accept a paradigm shift and standardisation of approaches."

“The response from the Defence negotiating team was, according to legend: ‘the approval doesn’t go above 149.’ Kelland reckoned that if the story is true, inflexibility potentially cost Defence several million dollars.

A lot has changed since that time. The recent creation of the CASG, its absorption of the Capability Development Group and the implementation of the First Principles Review are part of the broad ‘One Defence’ strategy that, among other things, aims to transform Defence into a smart buyer while forming effective long term partnerships with industry.

Kelland said that Defence is now finally breaking away from the old model of procurement which rested very much on the buyer/supplier model, whereby its relationship with industry could well have been summed up by the idiom ‘don‘t bite the hand that feeds you’.

Industry of course has a vastly different approach.

“If I’m a CEO of a large Defence contractor in Australia I will take a relationship view in my approach to Defence contracts because I’ll know I’ve got a number of different types of major contracts across multiple domains at varying stages of maturity – I’ve got a business relationship to nurture,” Kelland said.

This has meant that traditionally, the starting point in any negotiation between Defence and industry has been somewhat asymmetrical.

“While the commercial organisation is quite comfortable trading off a bit more in this contract for a bit less later on and vice versa, there is no capacity within Defence for this – it is hamstrung because there is no flexibility to bend.”

Kitty Marmanidis is the director of the Evaluation and Negotiation Cell and PPP embedded in the Commercial Centre of Expertise (CoE). The Evaluation and Negotiation Cell was established in 2014 for the purpose of enhancing Defence’s capability in activities relevant to the critical evaluation and negotiation phases of a procurement.

Marmanidis said one of the biggest challenges from her perspective was maximising effectiveness and collaboration in working together between Defence and industry where possible.

“Both Defence and Industry may need to accept a paradigm shift and standardisation of approaches – there needs to be acceptance of key commercial terms and acceptance within the negotiation community, an understanding of savvy negotiation strategy to deliver better outcomes for the Commonwealth.

Kelland agreed and said that both sides needed each other in the longer term.

“The larger defence contractors in particular need the Commonwealth to sustain their workforces over the longer term, and of course the Commonwealth needs them to commit resources to support capability so it’s a symbiotic or mutually dependant relationship,” he said.

According to Kelland, for the commercial sector there is always risk and reward associated with either worse than or better than expected outcomes.

“There’s a commercial incentive for a defence contractor to make money. In Defence you don’t have flexibility. In the time honoured words of Yes Minister’s Sir Humphrey Appleby, there’s nothing in it for somebody in Defence to make a ‘courageous decision, minister’”.

This results in Defence taking a very overcautious approach to any negotiation process.

“So at one end you’ve got this relationship asymmetry and at the other end you have this commercial risk or personal risk asymmetry,” Kelland said.

Director General Major Surface Ships, Commodore Michael Houghton, RAN (seated, centre right), and Chief Executive Officer Thales Australia, Mr. Chris Jenkins (seated, centre left) sign the Adelaide Class guided missile frigates (FFGs) Group Maintenance Contract, joined by staff who participated in planning and negotiation, at Garden Island, Sydney.

Kelland said consequently there had always been suspicion within government of the profit motive, with a tendency on their part to assume that good negotiation means “screw it down”.

“That mindset has consequences though – across a portfolio of projects with a given contractor, some will be more balanced than others from a risk/reward perspective.”

He suggested that late delivery of capability for projects and their subsequent elevation to ‘projects of concern’ was often “just rational behaviour from a corporate entity putting minimal resources into the project because it’s not making them any money”.

As long as Defence could ensure the taxpayer was getting good value on a project in terms of cost and risk and was willing to allow industry to do what it could to make a profit in delivering it, Kelland could see no reason as to why there wouldn’t be improved efficiencies in delivery.

A senior ADF officer told Kelland, “the true test of a good negotiated agreement in the Defence world comes a good two years after contract signing when it’s in implementation”.

Kelland said if this is the case then both parties have to walk away from the table believing there is enough value in it for them that they’re going to commit to its implementation of their own free will – not because it’s written in the contract.

“It recognises that everyone is in this for the long term and everyone has to work together for mutually beneficial outcomes. It’s not just about the money and is much broader than that and actually aligns nicely with the smart buyer vibe – partnering and the movement away from traditional procurement contracts to the performance-based relationship.

Marmanidis said upskilling of personnel is just one aspect of the reform changes occurring within CASG at the moment.

“Certainly in my space, the primary responsibility is to provide specialist advice on the development of procurement and negotiation strategies for complex major capital acquisition projects. Training is probably only one main component of that, recognising that we need to upskill so that our own people can work with our industry partners,” she said.

According to Marmanidis, CASG has completed a process to establish a knowledge base to capture and maintain lessons learnt from past negotiations with major Defence and commercial contractors.

Another initiative is the review of the negotiation framework and artefacts. Marmanidis said there needed to be a mindset within CASG to managing both the risk and the way that negotiation strategy was developed but this wasn’t just in the negotiation phase of a lifecycle.

“Negotiation needs to start with the preparation and planning of the project execution strategy right through the procurement and then into evaluation and then into the actual negotiation phase – this is especially the case for large complex projects,” Marmanidis said.

Both Kelland and Marmanidis agree there is some way to go.

Marmanidis said the reforms currently being implemented within CASG are at a fledgling stage and it will be some time before their impact is felt.

“Anecdotally we have had what we see as some positive outcomes from engaging with our industry partners, developing up what I call 'savvy' negotiation strategies, with better engagement of specialist expertise. But I’d say it’s early days yet.”

Kelland said in his experience, a tipping point within an organisation would be reached where a threshold number of trained personnel share the same terminology and have a finer understanding of negotiation skills and work more cohesively as a team.

“But first there needs to be a re-wiring of the mindset and some changes in policy – then you will start to achieve better outcomes.”