I guess the subtitle of this column should be “can the government really help New Space companies?” The simple answer is – “well not really, if all it does is treat them like Old Space companies.” Of course the real answer is a lot more complicated than that.
The fundamental issue is that government departments, agencies, and individual officials have, or feel they have, very limited options when it comes to interacting with private companies. This is because virtually every government program that provides direct financial support to companies one way or another gets passed through the lens, and pushed into the mold, of public procurement.
The reasons for this are subtle. They have to do with “the machinery of government” and they probably aren’t worth going into detail about here. Suffice it to say that whenever a new government initiative is proposed, there is a natural tendency for government executives to want to find existing analogs of that initiative. This is so that the new program can be governed, and evaluated, and ultimately its risks can be managed, using norms that are well understood and accepted within government policy circles
Why this happens and whether or not it’s a good thing is worth a full and frank discussion, but maybe not here, and not today.
But, as the saying goes “When all you have us a hammer, everything looks like a nail.” And since the only hammer the government has to build programs that directly support industry is procurement, every new initiative ends up being run like a procurement whether it is labelled that way or not.
Since the government has been dealing with traditional space companies using this traditional approach it works very well for those companies. For New Space companies, though, this is not ideal at all. In fact, the standard procurement approach is often counterproductive. This is because the whole thing that makes New Space companies New (and therefore attractive to government policy makers) is they have a very different business model than is traditional for companies that work for the government.
And one of the important “new” things about New Space companies is that they are attractive to sources of funding and investment that have never been attracted to the traditional space business.
By which I mean private capital – rather than public sector funding.
This, in turn, makes New Space companies attractive to government because it is hoped that this new business model will allow government to leverage private capital to develop capabilities and functionalities for which the public sector does not have to foot the entire bill. Governments are also attracted to the hope that New space companies, focused as they are on broader commercial markets, will enjoy economies of scale that will ultimately make their products and services cheaper than if the government had been the only customer.
This makes perfect sense. But, unfortunately, some realities of government procurement tend to interfere with this logic.
The first of these realities is that government procurement inherently defines the government as THE customer, not merely A customer. Government procurement policy very much assumes that the government will be able to assert the right to exercise significant control over the design, development, and delivery of goods and services.
Without going into the gory details, let’s just say that getting approval inside government for any procurement or procurement-style program will invariably require those requesting approval to explain how they will exercise this control in order to ensure that the government gets – and can prove that it got – value for money.
Now, in government-speak, “got value for money” is not equivalent to “paid the market price.” Since the government version of “value” is almost always calculated as a function of cost to the producer, rather than value to the market or the customer this means that government procurement rules force suppliers into justifying their price based on their costs.
This is dramatically at odds with the standard pricing strategy and model that drives market-driven, venture-backed companies. The business plans of such firms are almost always based on a risk-reward calculation that expects that, having invested significant resources in developing a product with unique and valuable features, a price premium will be charged that will allow that investment to be recouped – usually several times over.
Government procurement policy, which is highly, some would say toxically, allergic to the profit motive, is going to be hard to align with this pricing strategy. Which, in turn, means that companies that want to benefit from government programs will need to develop not only a new pricing strategy, but also new business processes to support it.
Which means they will have to start thinking more like “old” style space companies and less like New space.
These effects can be subtle, but over time they become very important. Doing business with the government is simply not like doing business in a commercial market. If further evidence of this fact is needed, just observe that almost every company that combines both kinds of business does so by having completely separate business units. One for government, one for commercial business. These business units that have different standards and expectations for just about every important metric. These business units, will tend to share very few resources and there is often little employee mobility between them.
Doing business with government – and being good at it – requires different skills, different training and a different mindset than doing business with a commercial market. I will certainly attest to that from very personal experience.
There is a lot more detail that I could provide on how and why using government procurement rules inherently guide – or even force – companies into adopting business models that are more typical of the old style space sector than the new. Perhaps I will explore some of those factors at a later date. For now, I just want to emphasize, that it does not matter whether the program or project is called a procurement. It matters whether it is designed, developed, evaluated, approved and implemented using what is fundamentally a procurement model. Which government programs that support industry almost always are.
When this happens and New Space companies take advantage of such initiatives government succeeds in supporting New Space companies. But it does so by making them into newer versions of the Old Space companies.
Solving this problem is not a matter of good intentions. It is not a matter of effort, or resources or even political will.
Solving this problem requires someone in government to be curious about the real problem they are trying to solve – and expecting that doing so will require an approach that is different, fundamentally, from what has been tried before.