Cumulative percentage life cycle cost over time Source: Defense Systems Management College, 1993. It is in these early phases of the capability development process that a buyer’s capability requirements are attempted to be defined, specifications decided, and ‘ make ’ or ‘ buy ’ decisions made (Burt et al 2003). For Defence, this means much of the early conceptual work, often of a security nature, is undertaken on a ‘make’ basis by the Defence Science and Technology Organization (DSTO), with the Defence Acquisition Organization then implementing the required capability (Figure 2). 

Contexts in source publication

Context 1

... is central to the transaction cost economics exercise. Transaction cost economics holds that the chief lesson of bounded rationality for the study of economic organization is that all complex contracts, such as capability contracts, are unavoidably incomplete (Williamson 2002c Concept, design and development phases account for twenty percent of the cumulative percentage of a capability's life cycle costs; that the cost to extract defects increases considerably with time; and that the concept and design phases commit seventy percent of costs with the development phase adding a further fifteen percent to committed costs (Figure 1). Based on this research, the most important phases are those pre contract award ie the concept, design and development phases, because if these are poorly done, the cost to a buyer to extract defects will come after significant costs have been accumulated. ...

Context 2

... is no exception. In FY2008/9 ADoD will spend more than AU$9.6 billion acquiring and sustaining military equipment and services, and employ over 7,500 people in more than 40 locations around Australia and overseas (ADoD 2008). The ADoD is the leading, largest and most experienced procurer of high tech strategic capabilities in Australia. However, such capabilities are often not able to be completely, clearly or satisfactorily defined at contract award – there usually remain many unknowns, a common problem facing many businesses, particularly the multi national enterprises (MNEs). This leaves buyers and suppliers vulnerable to misunderstandings, failure to achieve perceived required outcomes, often with significant costs and subsequent contract claims. The buyer/supplier relationship rapidly deteriorates in such environment. An incompletely defined capability can cause costly losses. F or example, ADoD’s Seasprite helicopter project committed costs of AU$1.25bn and was six years behind schedule before the project was cancelled (Department of Defence 2008), and BHP’s failed hot briquetted iron facility in WA was even more costly (Matters, 2007). Corrective action by a buyer or supplier can be delayed or defeated by bargaining over potential gains. This is possibly the case for many current forms of capability delivery, including Public Private Partnerships. There seems to be little evidence of any methodology which will pick up aberrant investment early in the capability delivery process. If there is a capability delivery governance structure which has superior properties, then the mitigation of hazards through identification of this best practice mode of governance should provide significant efficiency gains. It may be that transaction cost and duration data could provide guidance as to a best practice capability governance process. This paper therefore aims to analyse the way in which a buyer can most efficiently deliver required capability using transaction costs and duration as quantitative measures in finding best practice processes. This is undertaken by examining the corporate governance of capability development processes of the ADoD, using publicly available data. Comparative case study data of 106 randomly selected representative ADoD capability developments was collected by the author with the assistance of the respective capability /project managers, with a view to determining best practice. The capability scope or specification determines ‘asset specificity’, and this includes both ‘general purpose’ products, and ‘specific purpose, technology and service products’ (Williamson 2002b). Hayek (1945) emphasized spontaneous adaptation through markets. Barnard (1938, p. 4) emphasized cooperative adaptation of a ‘conscious, deliberate, purposeful’ kind through administration. Transaction cost economics makes provision for both (Williamson 1991a,b). General purpose products are those available for purchase from sellers in the marketplace without alteration, that is, off the shelf products that have already been through a development process and are now into production runs – generically often identified as commodities. These will usually be purchased competitively by choice from the marketplace after minimal specification of buyer requirements. Specific purpose, technology and service products on the other hand are often those unique or small batch products requiring significant investment in concept, design, development and production, often over a lengthy period - a structure within which a buyer seeks to secure its own privately defined objectives that cannot be efficiently secured through simple market exchanges (Buchanan 1987, p. 296), and Williamson’s ‘private ordering’ (2002a, p2). This involves identifying a required capability, specifying/designing that capability in terms of a product (good or service); development of that product through its manufacture; and finally, product delivery. This generic procurement process has a duration and a transaction cost, ‘the costs of contracting’ (Williamson 2002b), ‘institution costs’ (Cheung (1998) and ‘the costs of the economic system’ (John and Weitz 1988). Williamson (2002a) states that corporate governance mitigating the post contract award hazards of opportunism takes place through the pre-contract award choice of governance. This is central to the transaction cost economics exercise. Transaction cost economics holds that the chief lesson of bounded rationality for the study of economic organization is that all complex contracts, such as capability contracts, are unavoidably incomplete (Williamson 2002c). Concept, design and development phases account for twenty percent of the cumulative percentage of a capability’s life cycle costs; that the cost to extract defects increases considerably with time; and that the concept and design phases commit seventy percent of costs with the development phase adding a further fifteen percent to committed costs (Figure 1). Based on this research, the most important phases are those pre contract award ie the concept, design and development phases, because if these are poorly done, the cost to a buyer to extract defects will come after significant costs have been accumulated. This becomes complicated and risky where the capability can not be completely specified prior to contract award. The main contract is usually awarded after the Development Phase, with minor contracts prior to that depending upon the buyer’s ‘make’ or ‘buy’ policies (Burt, Dobler and Starling, 2003). Figure 2 : The ADoD ‘make’ or ‘buy’ structure. These pre contract award determinations involve durations and transaction costs for both buyer and supplier. Corporate governance arrangements during these phases which affect duration and transaction costs include those that increase the alignment between buyer and supplier, improve future adaptive properties and flow of information, and reduce buyer and supplier self interest and uncertainty (Williamson 2002a). Thus, the ability to influence the overall cost and duration of a capability is at its greatest early in the e-procurement process, that is, during the concept, design and development phases. The transaction costs and durations during these phases include the transaction costs and duration of the economic system (the external to organization costs), the transaction costs and duration of contracting (the product concept, design and development costs), and the institution transaction costs and duration (internal to organization costs). Measurement of these transaction costs and durations may provide an indication of the overall and the relative efficiency of capability development. No such data is currently available. The unit of analysis selected is the transaction. While transactions may differ in attributes, they differ in their cost and competence, and so provide a comparative measure of their economy (Williamson, 2002b). Transaction cost economics operates in many alternative modes of governance - markets, firms, bureaus, and has an effect on the strengths and weaknesses of each (Williamson 2002b). It relies in a general way on competition to perform a sort between more and less efficient modes of governance (Williamson 2000c). Thus, buyers can choose competition to ‘perform the sort’, with some protection of the cho ices of supplier being provided by ‘selection of the fittest’ supplier to survive in a particular environment (Darwin 1859). This subscribes to a weak- form of selection since ‘in a relative sense, the fitter survive, but there is no reason to suppose that they are fittest in any absolute sense (Simon 1983, p. 69). For Defence, transaction cost and duration economy can be measured from concept to contract award over the concept, design and development phases; the productions/test phase and the operations through disposals phase for each procurement (Figure 3). This can be undertaken on a longitudinal embedded case study basis (Yin, 2003), and results compared. The embedded case study methodology will provide a means of integrating quantitative and qualitative methods into a single research study (Scholz & Tietje, 2002; Yin 2003). The identification of the many different capability developments allows for a detailed level of inquiry in describing the features, context, and processes. Such multiple sources of evidence will add breadth and depth to the data collection, will assist in bringing data together through triangulation, and will contribute to the validity of the research (Yin, 2003). The strength of this methodology is its ability to combine a variety of information sources. ‘The case study is preferred in examining contemporary events, when the relevant behaviours cannot be manipulated’ (Yin, 2003, p. 7). The embedded case study approach is particularly relevant to examination of an environment where the boundaries between the phenomenon of interest and context are not clearly evident. transaction apply to the completeness of the specification of the required capability. This is difficult to achieve prior to contract award because of rapidly developing technologies in a turbulent environment (Emery and Trist, 1984), or worse, in a hyper environment (Selsky, Goes, and Baburoglu, 2007). Capability developments build and deepen asset specificity (Williamson 2002c), but complete asset specificity is difficult if not impossible for contract purposes because of the nature of rapidly changing high tech requirements (Figure 5). The transaction cost and duration approach enabled Hayek’s (1945) marketplace ‘general purchase’ commodity purchases (low value, high volume) by businesses to be differentiated from Barnard’s (1938 p4) ‘conscious, deliberate, purposeful’ procurements (high value, low volume). Identification of these different transactions is shown in Table 1. Table 1 provides summaries of two of the seven financial years of value and number of transactions captured in ...