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Risk and reward: Balancing lifecycle costs

Canadian firms have a long history of servicing and supporting Canadian Forces fleets. But recent contracts for aircraft and pending contracts for helicopters have raised concerns about the nature of long-term work Canadian contractors are likely to receive, so much so that the Aerospace Industries Association of Canada asked for government intervention in a letter to Defence Minister Peter MacKay in January.

Richard Mohns, director of business development for L-3 MAS Canada, is a former Canadian Forces aerospace engineer with extensive project management experience in Forces platforms, and senior program management experience with Boeing and General Dynamics Canada. A retired Colonel, he spoke with associate editor Chris Thatcher about the changes and challenges affecting integrated logistics support.

How has integrated logistics support changed in the past decade?

There have been a number of significant advances in information technology and materials, but I would have to say it is the end-user demand for longer term, firm, fixed, performance-based contracts that has been the most significant. Advances in support tools have made these long-term, power-by-the-hour contracts a feasible option for service providers – it’s cause and effect. However, the end-user demand that industry take on more risk is ultimately what I would categorize as the most significant change of the last decade. It is shaping the way integrated logistics support is being developed and offered by suppliers.

Has this been a gradual shift or is it driven by economics? And is the Canadian context different in any significant way from what is happening globally?

It has been a long and steady shift going back probably to the late ‘80s. And it is consistent, at least across western nations. It began in Canada with the realization that the “i” in integrated logistics support needed to be more focused on integration of the various elements in order to optimize them. The way it was being managed by government – contracts for ILS elements in separate discrete work packages – was inefficient so they have slowly transitioned that responsibility to industry and are holding industry accountable for the true optimization of an integrated solution. Ultimately what governments are looking at is total life cycle cost; they want to be able to predict the costs of support and bring those costs down, so they are holding industry responsible for putting together innovative, integrated solutions. The transition is at varying stages for each weapon system, but it is well under way.

Is this due in part to cuts in government personnel – fewer project management specialists – or is it just part of an evolving process?

I think it’s a combination of these factors. Governments struggled throughout the ‘70s and ‘80s to reduce their infrastructure across the board. At the same, it is due to advances in technology, both the reliability of materials but more specifically the availability of processing power. It is the information environments that are enabling the integration of the copious quantities of data that ultimately enable equipment designers and providers of logistics support to optimize the solutions.

Has the pendulum swung too far? Has industry been asked to assume too much risk? Is there a way to balance that risk more equitably?

That is already happening to a degree. There has been a little bit of push back from industry towards governments, and it’s primarily in the terms and conditions in the contracting area. It gets to a point where risk equals money. So industry is pushing back and saying, we will take that on, however, you have to understand that we have to put money against that risk – it is a fundamental business principle. So there is an equilibrium that is beginning to be established. We are starting to see government work with industry to create contracts that provide a number of financial incentives rewarding innovation and risk-taking.

Are there countries with comparable sized militaries where this is working well?

There are a number. Australia is often one that Canada looks to because of comparable size and character. The Netherlands and the UK are others we – both government and industry – often confer with. And I would say that all are having their share of successes and failures. This transformation is a work in progress. In large part, it’s because the newly designed systems have not yet proven themselves. The Maritime Helicopter Program is an example. The design of the system can only be described as the most technically advanced of any in the world. And on paper it looks good so far, but it will take some time to prove itself.

Has the proliferation of the so-called “web of rules” had an effect on these sorts of contracts?

Time will tell. There has been a proliferation of rules and regulations that make contracts with government a real challenge for industry, and they have attempted to impose more and more responsibility on industry through terms and conditions. I understand why governments are attempting to do that: it’s because of demands for reduced funding, for more accountability and transparency. There are always new rules, but ultimately business principles will drive the rules to a reasonable level.

Is there a better understanding of the true lifecycle costs of equipment or are we still at a stage where multiple revisions are required at later dates?

There is a better sense and feel for the accuracy of projections now then there was 10 to 20 years ago. It’s a function of the fact that governments are demanding more accountability and transparency. But ultimately it has to do with technology and the availability of more real-time data. The level of confidence in the accuracy of projections is better than what it was, but I would be reluctant to say there was total confidence. As I mentioned, time will tell whether these very long term, firm, fixed-priced contracts were a good deal for both sides. I’m personally doubtful that anybody can predict accurate costs beyond a period of 10 years. History has shown us that there will be changes to configuration driven by any number of reasons, whether it’s operational needs or unforeseen problems in the technical design. So what happens in the second 10 years of a 20-year contract when the baseline of your system design changes? As your baseline changes, the original forecasts for year 13 are no longer valid.

Does that also apply to predicting the availability of spares?

The algorithms used for spares forecasting are vastly improved, due once again to advances in the integrated information environment, so predictions for your supply chain right across the board are going to be more accurate. Much like the automotive industry, you have the suppliers working extremely closely with the original equipment manufacture, often physically located with the OEM, in an integrated product team approach to make sure that spares are delivered just in time. It’s less a factor of being able to accurately forecast and more a factor of whether the buyer wants to invest to the levels that are required.

What is the effect on personnel in a system of this nature? Do you have to develop more people to assume tasks militaries’ might have done before? Do you have to be more prepared to deploy in combat zones to provide lifecycle support?

One of the critical elements of ILS is the training systems. When I look at the phenomenal simulation and computer-based training integrated with electronic technical publications, I realize just how much better trained the support personnel are. I don’t see the qualifications or capabilities of personnel as the challenge; the challenge there is more related to the demographics of society.

As for operating in combat zones, that’s not new. Industry, for reasons necessitated by governments pushing down more management responsibility, has had to accept the deployment of resources to the sharp point of an operation. Having said that, industry representatives in theatres such as Afghanistan or Iraq are back in safer rear echelons. It’s the military technicians who take it forward to the riskier zones. Having industry in rear echelons is one thing but any thought of bringing them forward is not entertained – by either side. Ultimately, anybody operating outside of the rear echelon has to have soldiering skills.

How has ILS affected the design of equipment? Is ILS factored into the process much earlier than ever before?

I think the biggest impact has been the evolution of health monitoring systems. Advances in both materials and processes have enable machines to be self-diagnostic. Embedded sensors and the ability to take the data, incorporate it into health diagnostic systems to yield valid and immediate results – those are the big differences that enable support managers to optimize the business. And those advances continue as sensors miniaturize. Embedded sensors make for more accurate detection of potential cracking and prediction of maintenance requirements.

You’ve mentioned automation: what needs to happen to improve this?

There is never enough bandwidth. That will be a challenge, because the next step is to have autonomous systems that are gathering and reporting data in real time. That can affect operations because equipment availability hinges in many cases on predicting maintenance and inspection requirements, and sometimes there are delays in getting usage data back for analysis. So a system deployed in Afghanistan will send real time maintenance data, any fault diagnostics being picked up by the embedded sensors or built in tests systems, and report it via satellite to ground stations for real time analysis. That is the future, but it will demand greater bandwidth. That’s happening as we speak.

Though defence spending is up, you’ve noted that customers are demanding more for less. How does the current economic climate affect this?

It’s difficult to speculate, but I think it is safe to say that the pressures on government, particularly in light of the current economic conditions, will continue, if not be exacerbated. So one of the pressures that will be pushed down to industry will be to find better ways to support systems. I think all of this will inspire companies to further their research and development to become more innovative – there will be further advances in integration in an attempt to optimize costs. Will there be decreasing budgets? I think that is a likely scenario.

It’s one thing to adopt this approach under normal conditions. How has the current operational tempo of the military affected ILS and costing? Has it played havoc with certain terms in contracts?

What it does is play havoc with a military’s ability to keep its capability balanced – to keep some in reserve for the future. Systems, particularly aircraft systems, have a predicted limited life. If you use it up too fast, you will get to the point where it will ultimately cost you more to modernize, upgrade, refurbish. The challenge for militaries is to manage usage. There has always been an identified need for surge built into contracts. Surge will sometimes impact the schedule inspection, periodicity of a weapons system, but it ultimately does not change the number of hours in the life cycle of a weapons system. It just assumes that if you have a surge, you will have a period of less use to balance it out.

You have said before, “the future of integrated logistics support is here.” How so? And what more are likely to see?

You will continue to see more sophisticated health monitoring systems. They will become more embedded. Their algorithms will become somewhat more complex. And commensurate with that, the processing power needed to take and use that data will advance. And it will all be done in a real time environment. You will still need a high skilled individual technician but he’s going to have very powerful tools starting with integrated electronic technical publications – he’ll have a hand held device, be able to identify a component, play a three–dimensional, interactive repair video that will show him not only how to disassemble but also identify availability of replacement components, and tell him a probable diagnostic for each and every item.

Is there a government industrial strategy to help this happen?

Industry is eager for Canada to articulate a well-structured industrial strategy. To date we have not seen one and it is long overdue. We’ve heard the Australians describe theirs – it seems to be a very comprehensive policy. I’ve read bits of the American – they also have a very comprehensive policy. I think it’s important for Canada to work with industry to articulate a policy that provides a strong Canadian industrial base. In the absence of that there is the concern that we will lose much of the systems integration capability that Canada has and should be proud of. It puts us in a top class in world markets. It has enabled industry to develop support solutions that have then been marketed abroad. And if we don’t retain that systems integration capability it would be most unfortunate. We would lose some of the high value jobs. And it’s not just the systems integrators, it’s the suppliers as well; there is a whole other layer of supply chain that would disappear along with this vital national capability.

 

An interview with Richard Mohns

Author: Vanguard Staff

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