Over the past 12 months, the Defence Strategic Review 2023 and the Federal Government’s public sector reform has had significant impacts on Australian Defence Industry. Let’s delve into what has happened from a business perspective and consider potential future scenarios depending on the political landscape.
Current State and Developments
1. Government Policy Shifts
Defence Strategic Review (DSR): The DSR outlined several initiatives aimed at bolstering Australia's defense capabilities in the face of evolving threats. These included investments in nuclear submarines, cyber warfare capabilities, guided weapons and explosive ordnance, savings in land warfare capabilities, reinforcement of Australia's alliance through the AUKUS security partnership and emphasis on enhancing defense industry collaboration and innovation.
A key outcome of the DSR is to enable Defence to better meet future potential threats and boost domestic defense manufacturing capabilities and technological self-reliance. The DSR also noted that the Defence Capability Lifecycle and associated procurement processes are not “fit for purpose” and need to be redesigned and streamlined to expediate bringing new capabilities into service.
Increasing the Australian Public Service, reduction in external contractors: The Albanese government has undertaken significant efforts to reduce reliance on “above the line” external contractors within the Australian Public Service (APS), including Defence. This move aims to bring more roles in-house, thereby saving costs and enhancing governmental control over operations.
Initiatives such as the 'additional external labour levy' announced in the 2024 budget and other budgetary measures have resulted in substantial savings, estimated to be around $4 billion, across the Federal Government over a four-year period. This has involved transitioning thousands of contractor roles to public servants.
Defence Department specifics: Defence has seen targeted cuts in consultancy and contractor spending. The department aims to reduce its “above the line” contractor workforce by 20%, down from 10,000 to 8,000, by December 2024, expecting to save $632 million over four years.
These reductions are focused on contractors with skills that would normally be maintained within the APS. It doesn’t include “below the line” Defence primes, major service providers, or consultants with specialist skills.
Given the continued focus on growing the APS as outlined by Senator Katy Gallager, Minister for the Public Service, these targeted cuts in contractors are likely to continue in 2025 and beyond if Labor stays in power.
Policy implications: The introduction of extended moratoriums on re-hiring recently separated Defence personnel into contractor roles highlights efforts to prevent 'revolving door' practices. This move underscores a strategic shift towards maintaining critical skills within the APS rather than relying on external entities.
2. Business Impact
DSR: Over the past 12 months the Australian Defence Industry has been aligning itself to the associated changes in the Integrated Investment Portfolio (IIP) and areas of Defence spending. Companies are focusing on supporting new capabilities and teaming to provide integrated solutions to government. These shifts will continue as major programs within the IIP are rolled out.
Consulting firms: Major consulting firms have seen significantly reduced revenues, reportedly >40%, from Defence contracts over the past 12 months, reflecting a broader trend of decreased reliance on external consultancy.
Issues with some firms (well covered in the media) have also eroded confidence of APS in awarding contracts to these firms. As a result, there have been significant reductions in headcount in Defence consulting businesses within larger consulting firms.
Small and medium enterprises (SMEs): While the policy shifts benefit the government financially and in terms of control, SMEs in the Defence sector have faced challenges. Reductions in Defence spending and stricter hiring policies have affected these businesses, potentially leading to layoffs or stagnation in growth.
Reduced use of contractors and uncertainty over the future of the Major Service Providers (MSP) panel has led to difficulty in forecasting future revenues for large consulting firms and SME’s alike.
M&A activities within Australian Defence Industry have slowed as business owners are no longer able to demand 5 – 7+ times EBIT. High EBIT valuation acquisitions like Envista Pty Ltd, BCT Solutions Pty Ltd and Noetic Pty Ltd are a thing of the past. The future uncertainty in business growth has driven company valuations of many SME into the 2 – 4 EBIT range.
Future Scenarios
Political Landscape: Labour vs. Liberal Coalition
Under Labour (Albanese Government):
Continued Policy Direction: If the Labour party remains in power, the current trajectory of reducing external contractors and enhancing APS capacity is likely to continue. This could mean further tightening of regulations around external hires and continued emphasis on cost-saving measures.
Impact on Defence Sector: Defence will likely see sustained efforts to cut costs and increase internal capabilities. SMEs may continue to struggle unless new policies are introduced to support their role in Defence procurement.
Under Liberal Coalition (Potential Future Scenario):
Potential Policy Shifts: Historically, the Liberal Coalition has favored reducing public sector size and outsourcing certain functions to the private sector. A return to power could see attempts to reverse some of the current policies, potentially increasing reliance on external contractors again.
Impact on Defence Sector: Defence spending might be recalibrated, possibly leading to increased opportunities for external contractors. However, this could also face public scrutiny depending on the narrative around public sector efficiency versus outsourcing costs.
Conclusion
The Australian Defence Department's strategic review and subsequent policy shifts under the Albanese government have significantly reshaped the landscape for contractors, consultants, and SMEs in the Defence industry. These changes reflect broader governmental strategies to enhance efficiency and reduce costs within the public sector.
Looking ahead, the political outcome of the next election could further influence these dynamics. A continuation of current policies under Labor would likely consolidate the trend towards reduced reliance on external contractors. In contrast, a return of the Liberal Coalition might bring about policy shifts favoring increased outsourcing, potentially altering the business environment yet again.
Navigating these changes will be crucial for businesses and investors operating in or with ties to the Australian Defence sector, requiring adaptability to policy shifts and potential opportunities or challenges depending on the electoral outcome.
About the Author
Mark Cooper - General Manager - Defence, Planning, Governance, Growth, Transformation
Throughout a 35-year career, including over 20 years in the defence industry, Mark has cultivated expertise in collaborating with senior stakeholders to devise and execute strategies aimed at aiding thriving organizational cultures, facilitating strong planning and governance, and propelling exponential growth and continuous improvement. His extensive experience and expert knowledge spans across an array of sectors including Defence, Health, Utilities, Construction, Mining, Finance, Government, Industry, and Education, demonstrating his versatility and adaptability in understanding as well as navigating complex environments.
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