Major Flaws in CSC Procurement Process

Kudos to FrontLine magazine. In a recent issue (Issue 6, 2015), it detailed the steps in the National Shipbuilding Procurement Strategy (NSPS) that are being followed in the acquisition of the Canadian Surface Combatant (CSC). As a believer in the maxim “a picture is worth a thousand words”, I have translated FrontLine’s articulation into a pictorial presentation (figure 2). To facilitate analysis and comparison, I have also depicted in a pictorial fashion an open, fair and transparent (OFT) process (figure 1). The contrast between the two figures is striking. Nevertheless, the following points will serve to highlight the major flaws in the NSPS.

Foundational SOR Missing
A well-constructed building begins with a solid foundation. So too, with defence procurement. In this case, its foundation is a Statement of Requirements (SOR), without which the defence procurement process is destined to be unwieldy, convoluted and lacking transparency. One needs only compare figures 1 and 2 for a visual confirmation of this reality.

It may be surprising for some to read that the preparation of an SOR is an art, not a science. A properly crafted SOR must keep one eye focused on the needs of the military. But it must also keep one eye focused on the marketplace. In so doing, it achieves two main benefits. First, it provides assurance that the requirements are available in the marketplace. This is not to say that implementation risks are small, nevertheless, they are certainly minimized. In Canada, we tend to favour acquiring off-the-shelf products to avoid the high risk, highly developmental products. Second, products already in the marketplace have a sales history that can be used to generate reasonable cost estimates.

Lacking the groundwork of an SOR, the CSC procurement process is forced to resort to a time-consuming, iterative process to try and force-fit the systems and capabilities of the selected suppliers into the now changing specifications of the military (multiple design spirals). 

One final point regarding the lack of an SOR. The design and build of a warship has been described as complex as building a small but highly automated city from the ground up. It is hard to imagine selecting the best companies to design and build the Surface Combatants and to integrate the systems without having articulated the specific requirements. Yet, this is exactly what the CSS process purports to do. 

Current Drawbacks
With respect to choosing the contractors to undertake the work, the two figures highlight the stark contrast in their selection. Under the OFT process, the government allows industry to organize itself into consortiums. It runs a competition and selects the consortium that best meets the SOR.

Under the current CSC process, separate competitions are launched to select the ship builder, the warship designer (WD), and the ship’s combat systems integrator (CSI). The government selected Irving Shipbuilding Industries as the builder and will also select the CSI. The shipbuilder will select the WD. 

The drawbacks with this approach are many and they are significant.

First, the members of a well-structured consortium share common values. Their leaders get along and they know they can work in harmony. Delivering billion dollar programs requires this trust and smooth working relationships, something that no government can impose or determine. 
Second, as mentioned above, Irving Shipbuilding was selected to build the ships and will also select the warship designer. While none of us can be certain that Irving will select a WD that will be in the best interests of the Canadian taxpayer or the Canadian Navy, what is certain is that the choice will be in the best interests of Irving and its shareholders. Frankly, any business owner would do the same.

A third drawback is time. Under an OFT process, the military should need no more than two years to prepare its SOR and the civilian bureaucrats at DND and Public Services and Procurement Canada should need no more than an additional two years to complete the process and sign a contract. In other words, it should only have taken four years, not the 11-12 years currently forecast to sign a contract. In a world where Canada is supposedly buying off the shelf equipment, the CSC time frames are completely unjustified and unacceptable.

And we cannot ignore costs. How can the taxpayer expect any reasonable cost estimate if the government hasn’t defined what it wants? Furthermore, the CSC’s excessively long process will exacerbate the cost pressures even further. Longer times mean more inflationary and overhead costs will be incurred by industry, forcing them to maintain their project teams for many more years. You cannot expect industry to just absorb these costs.

Another critical concern surrounds Intellectual Property (IP). Organizations with minimal investment in IP tend to wave off this concern as irrelevant, however, sharing IP can be a deal breaker because it could eliminate competitive advantages gained from years of investment and could place the company’s future in a precarious position. As the FrontLine article outlined, potential bidders are rightly concerned that their IP rights would not be protected. 

All of this highlights the fact that industry, and industry alone, should be accountable for selecting its partners. Government interference generates these kinds of serious issues. 

Next Steps
The basic tenets of procurement are openness, fairness and transparency. The NSPS can best be described as secretive, subjective and opaque. The new Liberal government should realize that, as difficult and as painful as it may be, it should examine whether it can terminate any of its existing contracts and begin anew. With $35 billion at stake it is well worth the effort.

With respect to the CSC, if the government cannot, or will not, undo its current contractual arrangements, it should instead abandon its plan have Irving select the WD while government selects only the CSI. Instead, the government should run one competition for both the WD and the CSI – and let industry ‘partner up’ to provide an integrated solution with true accountability.

The government should begin with a clearly defined SOR, followed by the release of an RFP with clearly defined evaluation criteria. Conducted properly, this approach will dramatically reduce the procurement time cycle, encourage competition, ensure off the shelf rather than highly developmental designs and reduce costs. 

Former Assistant Deputy Minister (Materiel) for DND (1999-2005) Alan Williams is now President of The Williams Group, providing expertise in policy, programs and procurement.