From The Source: Jim Whalley, CEO Nova Defence | ADM Mar 2010

He and partner Pete Nikoloff founded Nova Aerospace in 2000 as a Test & Evaluation and specialist engineering organisation.

This has grown into the Nova Group, Australia's largest employer of T&E and specialist engineering services to Defence, with over a 130 staff across the country.

A Physics graduate with an MBA from the University of Adelaide, Jim Whalley is also Chairman of the Defence Teaming Centre in Adelaide.

He spoke to ADM's Editor at Large, Gregor Ferguson.

PROFILE - Jim Whalley
2008 Elected Chairman of the Defence Teaming Centre
2000 CEO Nova Aerospace
2000 MBA - University of Adelaide
1995 Graduated from the Empire Test Pilots School, Boscombe Down
1988 Graduated from RAAF Pilots' Course
1986 Graduated from ADFA

ADM: Nova Defence has grown remarkably quickly in a defence business environment that's not always been benign.

How have you achieved this?

Whalley: I think we've actually had a good environment.

Governments on both sides of politics have been supportive of defence over the last ten years and there's been great opportunities for companies that were willing to have a bit of a go and I'd put us in that category.

The last year or two there's been probably a few difficulties, but overall I actually think it's been pretty positive for companies and I think those that have had the smarts and dedication to break into the sector have done well.

We've always planned to grow the business and success requires that we have the right reputation with clients and potential staff.

We focus on niche areas to maximise our expertise and minimise competition.

Employing competent and motivated specialists who are committed to customer success attracts similarly motivated professionals.

And having a reputation for taking responsibility for outcomes brings client trust.

The consequence is that during tougher economic times, clients still favour our specialist skills and experience.

ADM: How has the global financial crisis affected the SMEs in particular, if at all?

Whalley: I think there's no doubt it has, and it's affected them in different ways.

Competition increased.

We saw a number of consulting engineering firms previously focussed on mining and infrastructure projects turn their gaze to chase the Defence dollar along with overseas based consulting firms look to set up partnerships or satellite offices to compete the SME market.

A couple of the overseas primes were also talking about bringing along their homeland SME partners as well.

And for some of those companies that had diversified into other sectors to offset some of the ups and downs of defence, well they found their non defence businesses in some trouble.

The timing of the GFC, White Paper and the SRP are not easily decoupled.

However, as a gross generalisation organisations working on established DMO projects were probably least affected, at least initially, while those supporting sustainment programs and other Defence non-DMO funded initiatives saw their contracts significantly diminish.

Each time funding cuts are imposed the usual targets are professional service SMEs, training, consulting and travel.

Professional service firms have had to work hard to maintain revenue streams, but many have had to let go of staff during the period.

And if our recruitment enquiries are an accurate metric, many of the primes have had to make staff redundant as well.

It is difficult to reconcile comments from government that Defence is facing a chronic shortage of skilled engineers when the last 12 months have witnessed such a high separation rate.

There are SMEs that have, because of the cyclic nature of the defence business, and the current economic climate been significantly affected and in some cases gone out of business.

It will be interesting to see if there's a follow-on effect after the next election when the Government is trying to get us back into surplus and other areas of public spending need to be reduced.

Hopefully defence won't suffer under that, but if we reflect on what has followed previous economic downturns then it is extremely likely that the Government will target the defence budget.

ADM: One aspect of the business environment that's been a perennial talking point is the relationship between the primes and the SMEs.

Is this improving in your view?

Is defence industry policy having the right effect?

Whalley: The relationships between the primes and SMEs are actually good in my own experience.

We work with most of the primes and we've always found them to be really professional and easy to deal with.

I am not trying to sugar coat this but often the issues are associated with perceptions and poor communications and expectations.

I think the SMEs have not necessarily understood some of the hoops that the primes have to jump through and what they require of SMEs.

For any business relationship to work, both parties need to understand each other's motivation and success factors and of course, communicate.

Good SMEs that house specialist skills are valued by the primes for two reasons.

Firstly, the SMEs are formed under a common passion to excel in a specialist area which may not be cost effective for the primes to generate in-house.

Secondly, by engaging the SME for a specialist task when needed the prime doesn't have to bear the sustainment cost of those specialist skills.

The important issue is forging the link between the primes and SMEs, a critical role for government and industry bodies, and ensuring those issues of perception, communications and expectations are addressed.

But certainly I think there's a fantastic cadre of SMEs that if you talk to would say they have got good relationships with the primes.

In reality if an SME does not offer something of value then there is no relationship.

The think that has worried me lately is the trend of some overseas primes to bring their own SMEs into Australia at the cost of local companies.

This is where I squarely draw the line as local SMEs have a much better understanding what needs to be delivered to the Commonwealth, so as long as they are up to speed on quality and cost then they should be getting a go.

This is definitely an area where government need to step in.

In reality it is overseas companies trying to keep there own workforce afloat at the expense of Australian SMEs and bluntly, the Australian tax payer.

Having said all that there are also a number of overseas owned primes that do in fact value using local SMEs and actively go out of their way to engage them, and those companies, and I am sure your readers will know who they are, deserve to be commended accordingly.

I think the strength of Australian SMEs is being improved by organisations such as the Defence Teaming Centre in South Australia.

That's an organisation which really prides itself on, and has a real focus on, bringing primes and SMEs together.

While there is still plenty of work to be done the results are still pretty pleasing.

Other organisations such as AIDN and AIG are also working hard in this area and also doing a great job.

ADM: Looking to the future, we've got a Federal Election this year and we're still awaiting the new defence industry policy statement which could come out in April or May.

What are your expectations about the effects these are going to have on the defence business community?

Whalley: I think both sides of government understand the importance of a strong defence force and a strong defence industry, however, I also think both have been long on rhetoric and short on implementation when it comes to Defence Industry policy.

While I would be delighted to be proved wrong, I am not expecting anything more than a series of incremental policy statements with long term horizons.

The best indicator that any Government was determined to make a difference would be a clearly articulated policy and implementation plan with measures that are quantifiable and made public, or at least distributed within Industry.

The publication of the PICs in July 2009 was a good start; now it would be great to see some performance indicators of whether we actually are maintaining those capabilities.

There are some good things happening that government does need to get credit for.

The Defence Industry Innovation Council is a good example and there are definitely other initiatives out there that should be applauded.

ADM: One of the perennial issues over the next 10 years will be the Strategic Reform Program (SRP); that's going to have a significant shaping effect on Defence and the industry.

Has the SRP had much effect on industry so far?

What does industry need to do to help deliver the Strategic Reform Program, and what does Defence have to do to achieve its own objectives?

Whalley: Defence requires the acquisition, operation and maintenance of warfighting capabilities that are superior to potential adversaries to hopefully deter aggression but primarily allow us to fight and win.

This requires continual renewal of equipment, some of which must break new ground in technical complexity and integration.

What consistently amazes me is that some hold the view that the definition and project management of complex systems - some of which have never previously existed, can be managed with inflexible schedules and costs.

For anyone who has ever built or renovated their home, experience shows how difficult maintaining cost and budget is for even a non-complex venture.

Yet defence and defence industry is expected to know to the month and dollar how long it will take to develop new technologies!

Don't get me wrong; there have been practices in the past like underbidding of which industry should not be proud.

However, the greater integration and understanding between Defence and Industry, for which both DMO and Industry need to take credit, has I hope reduced a lot of these practices and increased the level of trust.

But we still need to understand that superior capability, usually requires the use of new and complex technology and the development of such technology is not without risk.

So one important point is that SRP is not necessarily about removing risk out of projects, it is about managing that risk properly and ensuring that there is a commensurate capability benefit when its taken.

We need to be careful it doesn't become an excuse for avoiding riskier projects that have the ability to give us a fundamental edge in capability.

Another aspect of SRP is structural reform and minimising inefficient resources and practices.

It requires defence and Industry to review how they engage and to better plan for the future.

Without full and frank communication between DMO and Industry, and an understanding of the drivers for both, the full potential of savings will never be realised.

Why do we need open competition and metres of tender documents to support a $2million services contract, when with far less we can buy sole-source JSF, C-17 and Abrams tanks?

The long term prospects are relatively good, but there's no doubt Defence does have a cyclical nature and that makes business in the sector challenging.

For a company such as Nova that prides itself on an annual 3 per cent loss rate of staff the cyclic nature of consulting poses great challenges for us as we grow.

For the smaller companies in particular the peaks and troughs can be quite significant, and from a cash flow point of view they can be quite debilitating.

SRP and other initiatives will bring some great long term benefits but in the near future it's important that the flow of money from defence to industry is not reduced so significantly that capabilities that exist in industry will wither and die before those longer term benefits are realised.

For SMEs and Primes alike resource levelling and cash flow is a major issue and it just gets harder when the process slows down which is an inevitable part of any major reform.

There's no doubt some companies are hurting at the moment and while I'm sure others are doing well, we've still got to try and smooth things out a bit.

I see lots of good things coming out of DMO and Defence and I think there's some real positives and a really good view of how to work together, but all us still have more to do.

I hope the new defence industry policy will be supportive of all that!

ADM: But if Defence is looking to save ten percent on the Defence budget over the next 20 years, can Defence and industry carry on doing business the way that they've been doing in the past?

What sort of changes do you think will be necessary to actually deliver those changes and make them last?

Whalley: As I said, the changes are essentially structural changes in terms of the way we do business and deliver capability.

I think industry will have to make changes in terms of being more efficient and that means, I think, better leadership, management, process and without doubt structural change both inside organisations and at the wider industry level.

However the efficiencies are not going to be achieved by someone simply cutting people and dollars.

There is still work to be done and without implementing more efficient business processes, interfaces and the like in the end we achieve nothing.

Over the past few years Industry and Defence in general have spent a lot of time, effort and money on developing technical skills, and there's no doubt that that's an area that needs lots of work.

But there's been very little done I think on developing the leadership and management skills of industry.

DMO have worked hard on raising the professionalism and commercial acumen of their managers and I think industry and SMEs in particular need to do the same.

I was really pleased to see that in South Australia the State government here through the Department of Further Education, Employment, Science and Technology (DFEEST) and the Defence Teaming Centre have just implemented a program for defence industry leadership, the South Australian Defence Industry Leaders Program (SADILP), which is aimed providing industry leaders in the state with increased professional development.

I think those are the sorts of initiatives we need to see happen if we are going to achieve some of those longer-term aims of things like the SRP - good leadership, good management, and other changes that will allow us to save money through better process and decision-making, rather than just cutting wages and resources.

With the big mining machine gearing up again cutting wages is simply not a smart strategy.

ADM: That all goes to the global competitiveness of the defence industry and one of the things that Defence seems committed to, of course, is helping local firms, and especially SMEs, join the global supply chains of overseas defence primes.

What's it going to take for both industry and Defence to achieve that goal?

Whalley: I think, number one, Defence and Government across the board needs to provide levels of support to industry to give Australian industry a fair go, and that's challenging sometimes under FMS and with issues like ITARs where the processes and procedures often make it difficult to use local suppliers.

It is interesting that a number of European programs are stipulating that if there are ITARS agreements associated with their products then they will be disqualified from tendering.

There are also challenges for Australian SMEs where larger foreign-owned primes have small suppliers in their own countries which they are more willing to support, because of the regs in their own countires forcing them to do so.

This is where the play ground gets a little bit uneven.

I don't believe the solution is to use protectionist policies ourselves, but we do need to pick areas where we are more cost effective and capable at what we do and make sure that we are fairly assessed and government policy is an important part of that.

We need to be clear that Australian companies aren't going to get the work unless they are world class and better.

But if they are then they should get a go at it.

A few years back we seriously discussed taking out the Australian Owned slogan as it was apparent to be local was not seen as a positive thing.

We in Nova are of course unashamedly branded as Australian owned and operated.

ADM: What about SMEs such as Nova, or even Prime Contractors, who provide services and intellectual horsepower but who don't actually manufacture products that you can put in a box and ship overseas; what are the export prospects for companies like you?

Whalley: I think it is quite a challenge.

We're doing work overseas at the moment and we've found that it's been a really good experience for us.

There are often issues with security and culture, the same sort of issues companies face when coming into Australia.

Australia is probably more open to foreign companies, and that's probably evidenced by the number of foreign owned organisations that operate here.

But once you establish some understanding, relationships and trust then the opportunities are there.

You just need to understand that it's a gradual process and that its not point complaining if you do get the work overnight.

The problem for SMEs whether in the services or manufacturing sector is that it does take time, dollars and management attention and that can be at the expense of an existing successful business.

So you need to balance the resources required, the risk and opportunities.

For SMEs that sometimes means its just not practical.

In our own case training has been a good way to establish credibility, trust and relationships overseas and to hopefully get a wider understanding of some of our overseas clients and a platform to provide other services.

ADM: Going on to the wider defence industry outlook, we've seen successive reviews of defence acquisition and sustainment by Mortimer and Pappas recommending that we do more MOTS and COTS purchases.

There's good reasons why they've said that, but what would be the implications of such a thing for the local primes and SMEs?

Whalley: I think the MOTS/COTS one is interesting.

Sometimes there is an assumption that when we buy something off-the-shelf that'll just go straight into service, and obviously that's not the case.

We need military equipment that can operate in our unique physical and operational environment and with our existing systems and support structures.

Even when we buy well-developed platforms there is still a lot of work to be done to make sure that those platforms operate within our own systems and interfaces.

So there's still a fair bit of work to be done and obviously companies like ours benefit from that.

But there's no doubt that if we go all the way down the MOTS and COTS path we're going to loose some of the ability to manufacture and develop equipment ourselves, and I think that's a risk.

I think if we are going to buy MOTS and COTS equipment then one of the things that needs to be identified is what implications it will have for industry, and by implication the longer-term sustainability of platforms and defence capability.

If we don't design and build equipment here then obviously our ability to modify and sustain it is reduced.

The other thing that's important from a defence point of view is that if we buy MOTS and COTS equipment, and it's freely available to others, then if we're looking for a capability edge it can't be platform or hardware based.

It's going to have to be in terms of how we operate, the processes that we use, and the support aspects.

Defence needs to think carefully before making this decision as it takes significant time to grow the expertise in country to design and produce high end military equipment and/or integrate systems.

Obvioulsy DMO and Defence have got to be careful how they spend the public dollar, and I understand some of the drivers for that.

But there's no doubt there are implications; if we go all MOTS and COTS and we don't maintain the indigenous capability to design and manufacture then this will have a significant effect on defence industry and a significant effect on our capability as a nation to defend ourselves in the longer term.

Most countries around the world retain a higher level of self-reliance, where as in Australia, since Tenix was sold the only Australian prime remaining is ASC.

ADM: We seem to be coming close to the fundamentals of defence self-reliance.

What do you consider to be the key components of self-reliance?

Whalley: There's no doubt that one of the core components of self-reliance is the ability to sustain and modify the equipment and systems we've got, and the ability to develop, manufacture and integrate systems is a capability that is intrinsic to that.

Part of the reason it's intrinsic is that if you have been involved in the design and manufacture then the chances are you're going to have a fair understanding of how to support, sustain and modify the capability; so I think that's an important question.

The systems we are getting are becoming more and more complex; they're simply more highly integrated, so I think there are questions about our sovereign capability.

In several areas, whether it's EW or other technologies, we must be able to modify systems and adjust them to Australia's unique threats or conditions in which Australian forces are operating and as importantly to do so in a timely manner.

That means not relying on third parties remote from our shores.

ADM: Defence have actually acknowledged what you said by naming the Priority Industry Capabilities, or PICs, but now that we've got a public list of these, in your opinion, what's it going to take to keep them healthy?

Whalley: It's simple, money and allocation of DMO priorities.

I'm a big believer that we've got to do things as well here as anywhere else in the world, but there are some aspects where the size of the marketplace for supporting these activities is becoming unsustainable.

If Government is serious about retaining these capabilities then directed funding will be required.

Electronic Warfare is something that's going to be really critical to us as a nation and in all its variations - whether it's land, maritime or air.

Unless Government and Defence really understand what capabilities we have, what's required to maintain those capabilities in-country then I think we could find ourselves in a very difficult situation.

There are areas covered by the PICs that we have in the past had significant capability in.

But some of those same areas have suffered significantly with cancellation of projects and the industry resident capabilities are declining as a result with people being retrenched and moving away from defence.

Getting some of those capabilities back will not be easy so if they are identified as PICs then something needs to be done ASAP.

One of the things about many of the PICs is they are in areas where the interaction of several different systems are really vital to the capability.

Let's take EW for example: you can procure an EW system from overseas; but the actual capability to meet Australian needs requires the collection or signals, programming and validation of the system.

If we don't have a thorough understanding of how those systems operate then the interactions with other sensors and equipment may do more harm than good.

Without a thorough understanding of those systems then our ability to maximise the effectiveness of the capability is going to be lost.

ADM: Looking at another aspect of the industrial underpinning for combat capabilities, when ADF seeks to buy things like the C-17, the Super Hornet, or missiles like AMRAAM and JASSM off-the-shelf, what's the role for indigenous systems engineering practitioners or T&E practitioners?

If we're buying stuff off-the-shelf, how far can you actually apply the systems engineering process to bring that into service?

Whalley: There's no doubt that there's a limited role for Australian industry.

Testing has migrated from being very platform-centric to more of a validation approach where the effectiveness of particular system is dependent on being integrated with other systems to form a capability.

In the case of Hornet and JASSM this will be its ability to operate in the Australian environment against our specific threats while being supported by our intelligence and weapons planning systems.

So whilst traditionally we would have been involved in specific T&E of the platform itself, the T&E focus is now on how the system, by which I mean the platform, people and processes, operates as whole and how it interact with other systems.

So while MOTS and COTS will reduce the volume of platform specific T&E, its still going to require a high level or system wide T&E, for example Operational T&E.

Nova prides itself on providing advice in these situations as much on what not to test as to what does need to be tested.

It has definitely changed the nature of T&E and meant that an early understanding of T&E requirements and associated planning is essential.

ADM: One very specific topic is the future of the Woomera range.

There's been perennial concern about encroachments by non-defence and aerospace interests using it as a repository for low level nuclear waste and so on; what are the dangers facing Woomera and how important is Woomera to the defence community generally?

Whalley: I'll start off by saying Woomera is a special place for Nova as most of our Adelaide staff have had a long association with the place, so I may be a little biased about the place.

Woomera is absolutely critical to our defence capability, and not only to the defence of Australia - it's also critical for many of our coalition partners.

As the largest over-land range in the world Woomera is unique.

Couple that with a very clean electro-magnetic environment and relative sparse population then it is even more so and therefore one of the best places in the world for testing things like stand off weapons, EW and unmanned systems.

There's just nowhere else that can provide the sorts of capabilities that Woomera does.

If Australia and its coalition partners are to maintain a military edge then ranges like Woomera are absolutely critical.

Defence understands that, as evidenced by reference to the range in the white paper and the establishment of a major project for its upgrade, but there are obviously other industries that don't and that our obviously pushing their own interest.

I'm a fundamental believer in the fact that Woomera is a national asset that needs to be protected and that encroachment needs to be controlled and other uses of the area managed.

Now that's not to say that other industries can't operate there but it needs to be very carefully thought about.

ADM: You've mentioned future projects, both Australian and foreign: where's the military aerospace market in this country heading over the next 10-15 years?

Most of the big ticket projects are either in contract such as MRTT, Wedgetail, Super Hornet, even JSF, or they're imminent, such as the new naval helicopter and the battlefield airlifter.

So where's the market heading and what do you think the prospects are for local firms, large and small?

Whalley: I think aerospace has certainly had a fantastic run over the past few years and there's projects that will still be going for several years to come, so I think in the immediate term the prospects are still good; but there's no doubt maritime projects are going to take significantly more of the defence budget.

Companies need to adapt to that; I know ours has.

We identified several years ago that whilst work in the aerospace sector was great and there was plenty to be done there, there was also a significant increase in the maritime sector and other sectors such as land and electronic systems and that we needed to broaden the capabilities of the company.

So we set about identifying the sort of resources and capabilities we needed to support maritime projects and set about recruiting and developing them.

The result, in Adelaide for example, is that the majority of our work is now in the maritime domain.

Companies need to understand that the landscape changes on a periodic basis.

The great thing about doing defence work is you get a lot of visibility of what's going on and you've got a fair bit of time to work it out.

So I don't think there's necessarily an excuse for not being able to shift focus, and certainly I'd like to think we at Nova have been pretty effective at doing that and making a mark in those other sectors, and developing some really good capabilities.