In the first part ^[1] of this series we saw that Australia’s Defence Department is increasingly reliant on a large number of contractors that are costing a lot of money. Should we be worried about this trend? And, if so, what should we do about it?

The fact that a contractor’s daily pay rate is substantially more than what Defence pays its own staff isn’t necessarily a problem. The value Defence should get from paying more is performance and flexibility. If the major service providers on Defence’s support services panel supply it with the skilled workforce it needs, when it needs it—and only when it needs it—then potentially it’s getting value.

But it’s not just about the financial bottom line. A key element of value that is very difficult to quantify is the ability to be a smart buyer (or sustainer). In addition to the risk of overpaying, there’s the risk of outsourcing skills that need to be kept in-house. The navy learned this the hard way when it couldn’t get any of its amphibious ships to sea. It’s been implementing the recommendations of the Rizzo review ^[2] ever since to rebuild its core engineering skills.

As I noted in the first part, there will always be debate about which functions frontline units need to retain and which can be performed by external service providers. The navy has recognised the need to upskill its technical workforce, implementing measures such as the Fleet Support Unit ^[3], which develops its people’s skills when they are onshore to take with them to sea.

Defence is continuing to explore the benefits of outsourcing. Its use of commercial partners under the HydroScheme Industry Partnership Program ^[4] to undertake surveying tasks is likely to provide better services at a better price. But now that it has outsourced everyday hydrographic tasks, it will be interesting to see whether the navy can develop and retain a critical mass of internal skills to perform the hydrographic tasks that can be done only by uniformed personnel.

It’s hard for outsiders to assess whether Defence is getting value for money. So the announcement earlier this month that a Senate inquiry ^[5] will investigate ‘the current capability of the Australian Public Service’, including staffing caps ^[6] and the use of external workers, is a timely one (even if such inquiries are prone to political point-scoring).

We need to have informed discussions about value and avoid simplistic assumptions that fewer public servants means greater efficiency. The first principles review ^[7] of Defence commissioned by the government cautioned that ‘the focus on setting arbitrary targets for public service reductions in Defence does not encourage good business practice’, and the government accepted its recommendation that ‘the use of measures such as the teeth-to-tail ratio … should cease’. But conversely, assumptions that jobs traditionally performed by public servants need always to be performed by public servants need to be tested.

Defence’s external workforce will continue to grow at substantial public expense. So public scrutiny is required, but that shouldn’t just be through one-off parliamentary inquiries. If the exact amounts that public servants are paid are public, why shouldn’t the amount of public funds that contractors and consultants are paid to do the same work also be made public? This information need not necessarily state what individual service providers or companies are paid for particular pieces of work, but there’s no reason why the salary bands that the support services panellists use shouldn’t be public.

As the saying goes, what gets measured gets managed. So Defence needs to demonstrate it has systems in place to measure the value it is getting from its external workforce. If Defence doesn’t know what benefit it is getting for what cost, that should be immediately rectified.

Since publishing the first part of this series, I’ve been told Defence is about to conduct a review of its major service provider arrangements. This is the right thing to be doing now that it’s two years into the program. Commendably, there will be a public report to promote transparency and continuous improvement. I’d encourage everybody with an interest in issues relating to Defence’s workforce to seek out the terms of reference and make a submission.

The reduction in Defence public service positions appears to have bottomed out. The 2020 strategic update slated a small increase in positions and stated that the government will consider Defence’s longer-term workforce requirements in 2021. But it’s unlikely that the government will let Defence’s project management workforce grow substantially, particularly when it’s also pushing to reduce acquisition red tape. It seems ironic that the government is touting jobs for life for shipbuilders and their children and grandchildren, but seems to prefer a much more ‘flexible’ workforce model in other vital areas.

There are other issues coming down the track to consider. The funding model and investment plan presented in the 2016 defence white paper and reconfirmed and extended in the strategic update foreshadows substantial growth in Defence’s acquisition budget. If the government achieves its goal of increasing the share of that budget that is spent domestically, Defence’s local acquisition spend could grow from $2.6 billion to $10 billion a year by the end of the decade—that’s in addition to local sustainment costs that could pass $15 billion a year. Not only is the industry workforce going to have to grow dramatically to deliver and sustain that amount of capability, but so too will the number of people managing those programs. Debating whether they should be public servants or contractors is an academic exercise if Australia can’t develop the requisite workforce in the first place.

As demand outstrips supply, simple market dynamics state that the cost of that workforce will grow. We risk a three-way bidding war between Defence, major service providers and industry—all of which require a workforce with similar skills. Defence has only limited means to improve its remuneration to public servants. Industry providers, however, can charge whatever the market will bear.

As Defence comes under greater pressure to deliver a domestic capability program reaching $25 billion a year, it will likely employ the main tool at its disposal, which is simply to pay more for a contracted workforce. If we are concerned about the disparity between public service and contractor pay rates today, that gap could be about to get even bigger. While the government is comfortable capping public service numbers, it may also need to find ways in the long term to exert downward pressure on contractor rates ^[8]. Regardless, Defence will likely need to make some hard decisions about what skills it needs to keep in-house, and what it can rely on its industry partners for on an enduring basis.