The release of the Defence Procurement Strategy (DPS) in February 2014 has significantly transformed the way equipment is acquired by the Canadian Armed Forces. Industry bids for defence contracts will be assessed not only on their technical merit and price, but also on the economic contribution they make to Canada – at 10 percent of an overall bid score, potentially an important differentiator.
For Industry Canada, the goal is to leverage the major recapitalization effort underway across the Army, Navy and Air Force to help Canadian companies and innovators grow, conduct R&D and find new markets. Among the department’s new tools are an industrial benefits policy focused on technological opportunities and weighted and rated value propositions on which to assess company bids.
Following the release of the Value Proposition Guide in December, Philip Jennings, Assistant Deputy Minister for Industry Canada’s Industry Sector, has been touring the country to explain how this will affect the defence and aerospace sector. He recently sat down with editor Chris Thatcher.
Is there a larger vision for the defence and aerospace sector or is the DPS more about improving processes that people have been critical of for many years?
There is absolutely a larger vision for the defence and aerospace sector in Canada, one whose long-term competitiveness is grounded in innovation, a focus on global markets, and a shift to higher-value knowledge work. The sector has been a priority for the government, with direct programs and a formal offset policy since 1986. What we strive to do is get better outcomes for the sector. The government has recently transformed the offset policy to motivate companies to make higher quality investments that have a longer-term impact. In his report, Tom Jenkins references the fact that we have a window of investment that the CAF and Canadian Coast Guard would be making, and what you want to do is build and leave behind a legacy of strong Canadian capabilities that will outlast the life of those procurements and create an industrial base that will continue to grow and access opportunities both domestically and globally. Of course, improving processes under the DPS is one of the ways we will achieve that vision.
There is a vigorous debate in the U.S. over a perceived loss of a military technological edge. Is that factoring into how you look at defence capability for Canada?
We realize that for firms in Canada to remain competitive, they have to continue to invest in R&D and be at the cutting edge of technology. So our tools are always focused on supporting that type of innovation. The Strategic Aerospace and Defence Initiative and the recently announced Technology Demonstration Program are really focused on supporting that R&D and innovation investment and making sure that we support an ecosystem. For example, the Technology Demonstration Program by definition requires larger companies to partner with smaller companies, as well as research institutions, and it’s really about trying to create an innovation cluster that supports the growth of the sector.
Canada’s offset policy has always had a focus on innovation. Under the Industrial and Regional Benefits (IRB) Policy, we had what we called multipliers – enhanced credit – for firms who made investments in R&D, including in public/private consortia. That remains in place, but now under the Industrial and Technological Benefits (ITB) Policy, strong R&D investments are further incented in Value Propositions that are rated and are a weighted element in the bid selection.
In presentations you have delivered over the past months, you have placed a lot of emphasis on early engagement with the industry. What is the nature of the relationship you are trying to achieve?
Engagement is one of the tenets of the DPS and it permeates every aspect of what we do. What we have learned through past procurement experiences is that early engagement is positive, that it ensures Canadian industry can better position themselves to participate in procurement process, and it also allows the government to better understand the landscape before it proceeds with a procurement – who the bidders are likely to be and how much Canadian industry participation there can be.
You want to leverage the best economic outcomes you can for the Forces and the only way to fully understand what Canadian capabilities may be out there and what solutions may apply to what you are trying to procure is by engaging with industry. You also want to understand all the issues that could come up in a procurement and early consultation helps to identify some of those so you can move forward with a streamlined process and procure in a timely way.
What is also different is that we are broadening who we are engaging with. In the past there was often a larger focus on the bidders; now we are trying to understand the full landscape of Canadian capabilities. That means that the voice of SMEs, of other Canadian suppliers that may not bid but might be part of a team that bids, or have an interest in being part of a solution that is acquired, that we understand and hear that voice early on in the process. And that could help shape how we proceed with a procurement and it will certainly shape how we structure the value proposition.
This requires a much deeper dive into the defence landscape than would have been done in the past?
Yes. While we have always had a relatively good understanding of the defence landscape, it was not procurement specific. Now, through proactive and early engagement and analysis of Canadian capabilities, we have a much more complete picture of the defence sector and how best to leverage the ITB policy.
The services have well defined process for capability gap identification and options analysis. At what point are you now trying to engage with industry? Is it before Treasury Board approves funding?
We have seen through many procurements that while DND understands the capability that they need, industry can often propose a way of achieving that solution that we, as a government, have not considered, so we’d like to engage as early as makes sense. By engaging with industry well in advance of the procurement through solicitations of information on buyandsell.gc.ca and through industry engagement events such as industry days, companies will be better able to prepare strong bid packages and will have more time to engage with the Regional Development Agencies and create stronger supply chain opportunities for Canadian-based companies.
For certain procurements it would be feasible for us to engage prior to Treasury Board approval. Again, it is trying to get a sense of the art of the possible before you get to final approvals in terms of how you want to move forward on a procurement. It really depends on what you are procuring and the timelines for when you need to procure it.
If you now have a deeper knowledge base, do you also have a greater “match making” role, advising SMEs and OEMs of possible connections they might not have picked up on?
The “match-making” role is important and Industry Canada works in strong partnership with the Regional Development Agencies (RDAs), which are key partners in highlighting where Canadian capabilities exist. The RDAs play an integral matchmaking role, linking Canadian-based suppliers with prime contractors, setting up networking opportunities and keeping industry in their regions aware of what is going.
A tool from the IRB policy which we will retain is: companies had to develop “regional plans” as well as SME plans to demonstrate that they had sought out solutions from across the country to support the acquisition. In that process, the RDAs play an important role coordinating and working with the potential bidders to understand what Canadian solutions could support their bid. On top of that, we have a much stronger incentive in a sense; we now have a rated criteria for supplier development. So we do expect to have an even stronger role than in the past in terms of match making.
Are the RDAs engaged in a different way as well?
Just as Industry Canada has a much bigger role than we used to in and throughout the procurement process, I’ve seen the RDAs step up, recognizing the greater impact of the new policy. We now have a stronger tool to incent high-quality outcomes and now a number of regional agencies are starting to align some of their programming to support the defence sector. Western Economic Diversification, for example, has the defence sector as one of its priority areas. The RDAs have and will continue to have an important role in the evaluation of bids, evaluating the quality of the value propositions that come in. That role in the past used to be a pass/fail, which was easier than the rated system we are moving to. All the agencies have embraced this and see the potential to support the defence sector in their own regions.
This strategy is anchored on six pretty broad key industrial capabilities (KICs) identified by the Jenkins panel. How will you apply them?
These six areas are broad in scope and most companies can see themselves on the list. That was the point. When Canada has a capability in an area directly related to a procurement, companies should have an opportunity to participate in that procurement. That’s our first and foremost objective. However, there are cases where leveraging a direct participation in a procurement may not be the best leveraging outcome. A case in point would be a product that is nearing the end of its production cycle and doesn’t have a strong Canadian supply chain. In that case, you may want to support indirect benefits under the policy, but making sure those indirect benefits are of high quality. Before, we did not have as strong a tool to do that.
Decisions on capabilities will always be informed by industry engagement, in depth research and analysis and expert third-party advice as required. We have already begun this approach in practice. On a procurement-by-procurement basis, we mine our extensive data holdings – which includes subscriptions to commercial sources of data and market intelligence – to produce snapshots on where Canada has a capability with a significant export opportunity, where Canada does not have a capability in areas of significant export opportunity, and how prime contractors are positioning themselves globally and what part of the value chain Canada occupies.
So where you see an opportunity where Canada doesn’t have a strength for export, you would try to encourage investment in that area?
Yes. I don’t view the KICs as being static. I think we have a fairly good understanding of our strengths at the moment, but this is really about looking forward. How do we best want to position the defence sector for growth and success in the long term? You need to understand the growth opportunities and how we can leverage the policy and the value propositions to achieve strong outcomes and foster new capabilities.
Given that a number of spin-offs occur beyond the defence sector, is the intent to have indirect benefits also focused on the sector or are you open to investments in other sectors?
The IRB policy supported investments that have a technological value that is as high or higher than what is being procured. The ITB policy, with the release of the Value Proposition Guide, listed four criteria that are key to driving where we want to see investment take place: investments in the defence sector; investments in supplier development; investments in R&D and innovation; and investments in export potential. If an investment hits all four of those criteria, then that will score better than others, all things being equal. Our ultimate goal is to support economic growth, and the ITB policy does not eliminate the possibility of high-quality investments that are not in the defence sector.
The Value Proposition Guide is a flexible framework and the requirements will be determined on a procurement-by-procurement basis. We want to engage with industry early so that they can inform the procurement strategy decisions. If investments in other sectors make sense on a particular procurement, we want industry to let us know.
You mentioned retaining regional plans. What other aspects of the IRB policy do you intend to keep?
Most of the successful elements of the IRB policy will remain under the ITB policy. Policy features such as the Investment Framework, a tool which was recently used by Boeing Canada to invest in a small firm in Newfoundland and Labrador, will continue to be utilized to support investments in innovation and SMEs. The ITB policy will also continue to incentivize R&D activities in partnership with publicly funded research organizations by allowing prime contractors to receive multiplied credits for these types of investments.
Fundamentally, the ITB policy strengthens the successful attributes of the IRB policy by requiring bidders to compete on the basis of economic benefits that they can bring to Canada. In particular, whereas before bidders were selected on the basis of price and technical merit, under the DPS the government will now also assess the value propositions.
You have set some aggressive benchmarks to measure the success of the four drivers of value propositions: growth in the sector; sales within the supply chain; R&D; and export sales. What is your 40 percent growth target in each of these areas based on? And what do you need to do to get from where you are now to that target?
The use of benchmarks reflects confidence in the Canadian defence sector and the potential to leverage strong outcomes from the planned investments by the Forces and Coast Guard through the DPS, and with the complementary programming already in place. The ITB policy will play an important role in building Canadian capabilities. Industry Canada has also consulted with a small group of industry representatives about the target and they too feel that while aggressive, the target is achievable.
All of this is predicated on good metrics. Is a role for the Defence Analytics Institute (DAI) to help measure how well you are meeting those targets?
On behalf of Industry Canada, Statistics Canada performed a comprehensive survey of the sector in 2013 and it will conduct a more detailed follow up survey this year. So part of how we are going to get there is by establishing some solid metrics and we are well on our way.
When the DPS was in development, Industry Canada in parallel made sure we started setting up a baseline, and we are now deepening our analysis. As I mentioned, Industry Canada has subscriptions to commercial sources of data and market intelligence, and we supplement this through consultations with industry and other government departments and agencies to ensure we have as comprehensive a picture of the sector as we can. The government’s key gap, therefore, relates not so much to gathering more data as it does to harnessing additional analytic capabilities to translate this data into policy relevant information and analysis. To that end, an external analytic function performed by an independent party could be beneficial.
The government is now considering the advice it received from the interim DAI on the establishment of external analytic capacity to help inform various aspects of the procurement process and this includes the development and sustainment of key industrial capabilities, research and insight on the defence industrial base, information on global export market opportunities, trends and issues relating to foreign defence markets, and insights on technological trends in global defence and well as Canada’s industrial capability to develop new technologies in these areas. The interim DAI’s mandate was to lay out what it views as the best way to set up a more permanent capacity in Canada for the analytics it believes we need, as well as to lay out a multi-year work plan and some first priorities.
You have said you expect ITBs to apply to about 15 procurements per year, up from about five per year. If you have to engage earlier and delve deeper with industry, do you have the workforce for that substantial increase?
This is definitely a significantly enhanced role for Industry Canada. It is one we embrace. I have said at a number of forums that having a tool as powerful as the ITB policy is something I wish I had to support growth, innovation and investments in other sectors. But as you mentioned, the transformation from the IRB to the ITB policy has expanded the scope of our work, not just in terms of our role in each procurement but now in every procurement over $20 million, so we do expect that this will almost triple the number of leveraged procurements than was the case under the IRB policy.
To fulfill our heightened role under DPS, there has been a realignment within the department and in my own sector to ensure we have the right structure and resources in place to support this. We have brought on some new people. We are also looking to other departments such as National Defence and Foreign Affairs, Trade and Development and the regional development agencies to contribute insights and expertise and support of our procurement-by-procurement market analysis. And we will also be tapping into third-party expertise to validate and supplement our internal analysis.
You have now begun applying some aspects of the DPS on a few procurement projects. What are you hearing from industry? Are there any particular concerns?
Overall we have had very positive feedback. Of course, there is still a level of careful enthusiasm as we work out the details in DPS implementation. People like the direction that has been set out by the government and are now closely looking at how this gets implemented to ensure we hit the outcomes that were laid out.
People understand that this is a challenge, that it is a very different approach than we have taken in the past, and when you have such a transformational policy there are bumps you may hit along the road. But what people are pleased with is the fact that we continue to engage to work through those bumps and stay focused on the ultimate goals we are trying to achieve.
Any early lessons from those procurements?
I see two early lessons from these procurements – the importance of early engagement and the leveraging potential of value propositions. On engagement, understanding industry players’ perspectives on how we may want to proceed in developing value propositions for specific procurements is a key insight. We’re also learning that each procurement has its own unique aspects, so taking a cookie cutter approach is really not the right way to get the best leveraging outcomes. It’s about thinking through what you are trying to achieve overall and then how you might apply that to each procurement. Industry Canada will continue to invite regular feedback from industry, and make adjustments as required, to ensure that government defence procurement leverages significant economic benefit for Canadians.
On leveraging potential, those companies that proactively propose value propositions with a stronger impact on the economy are benefiting by scoring well in bids and better tapping into world-class Canadian capabilities.
