Outsourcing in the Australian Defence Forces

Author

Editorial Staff

Subjects

History - general

Tags

Royal Australian Navy, Serco

RAN Ships

None noted.

Publication

September 2017 edition of the Naval Historical Review (all rights reserved)

Sooner or later, everything old is new again

From The Colorado Kid by Stephen King

Outsourcing

Outsourcing is a practice used to reduce costs by transferring portions of work to outside suppliers. It has been estimated that cost reductions of around 15% may be brought about by these means. While this may also bring gains in efficiency, a disadvantage is the threat to security as another party gains access to confidential information. This may also lead to unemployment and work may go offshore in seeking lower cost options. Over time the principal may lose the ability and skills to conduct these activities and becomes beholden to another party and the profit from cost savings often ends up offshore to the detriment of the local economy.

A recent snippet from the Sydney Morning Herald (20 February 2017) says the Secretary of Defence, Dennis Richardson, has revealed that consultants, contractors and other service providers now outnumber the department’s public service workforce. With recent cuts the department is now down to about 17,200 permanent civilian staff but they were supported by about 18,000 contractors. Unlikely to be included in these numbers are so called ‘Partners’.

The above demonstrates an example of the casualisation of the workforce allowing employers to quickly find fit-to-purpose resources for projects and to flex these up and down as necessary. A contrary view is that there is little or no training, and overall teamwork and morale is marginalised. Most importantly there is unlikely to be any continuity after the project completes.

Partnerships

The new vogue is to enter into partnerships between the buyer and seller. This helps overcome corporate short-term capital which tends to focus on market driven quarterly horizons. Defence programs are mostly long-term with inherent risks between conception and delivery. The ideal partnership spreads the risk equally between parties which is monitored at set points throughout the project. Long-term sustainability is always preferable to short-term popularised gains which may quickly evaporate. The partnership approach favours well establish and resourced organisations, often multinationals, and disadvantages smaller home grown companies who may be more competitive but with an increased risk profile.

The unspoken issue is controlling risk with only the largest partners being able to absorb the failure of a major project. National defence however cannot be fully outsourced with plentiful examples of projects that have not been completed within agreed budgets and/or timeframes. This leads to the conclusion that partnerships between government instrumentalities such as Defence and suppliers are rarely equal with the client invariably having the upper hand but also accepting most of the risk.

Australian Experience

The RAN’s experience in contracting out of services can be traced back to the Royal Navy and we have ample evidence of widespread abuses stemming from the times of Samuel Pepys (1633–1703). While Pepys, as the gamekeeper, did much to improve naval administration he, like many of his contemporaries, was hypocritical in manipulating navy funds for his own benefit. The introduction of Royal Naval Dockyards and Royal Military Arsenals saw much work being brought back in-house with improved measures of control. However increased supervision brought a new bureaucracy and this together with outmoded labour relationships and lack of innovation led to inefficiencies.

Government controlled dockyards were gradually closed, sold or leased to private enterprise. New providers sought to employ modern management techniques which included using outsourcing of supplies and services. One company now enjoying a major share of Australian Government business through outsourcing is Serco Asia-Pacific Pty Ltd. Given the long-term nature of some outsourcing contracts it may be insightful to look briefly into the history of Serco.

The Serco Group plc

The company can trace its roots back to the 1920s as a British subsidiary of the Radio Corporation of America, providing technical support to the growing cinema industry. RCA Services Ltd remained in business throughout WWII and beyond as a moderately profitable electronics division of a fading American conglomerate. Its main post war business was providing maintenance services to two highly classified military facilities: firstly the ballistic missile early warning system at RAF Flyingdales on the Yorkshire Moors and secondly to the radar facility at the Orford Ness atomic weapons research base in Suffolk.

When the ‘Iron Lady’ Margaret Thatcher, whose philosophy emphasised deregulation and privatisation, started hiving off government businesses this was a defining moment for RCA. In 1984, RCA won the Ministry of Defence’s first outsourcing contract, to operate a large supply depot at RAF Quedgeley in Gloucestershire. They had never run a stores depot in their lives but that did not seem to matter as the RAF storekeepers, who transferred to the new company, knew how. Three years later senior staff led by chemist Richard White bought out the management from RCA and formed Serco, which they listed on the London Stock Exchange. With a new injection of capital they were shooting for the stars. The company went quickly from strength to strength as it became known as an outsourcing expert. A think-tank known as the Serco Institute was set up to look for new opportunities. One of their inspirations came from a past outsourcing success – the 18th century contracts in transporting convicts to Australia. Serco’s confidence and research set it apart from its rivals and for many years it was securing 70% of the work for which it bid.

In 1989, Serco had 3,000 employees and revenue of £59m. Ten years later, as Serco became an international business, they had 27,000 employees and revenue in excess of £800m. In the late 1990s Serco sent senior staff to Australia, including Antarctica, with the aim of gaining government work.

Serco continued to prosper and the company was proud of its labour relations and ensured that inherited public services systems, which had fallen into disrepute, were changed to become worker friendly. In about 2009 the company again started a new expansion phase and was acquiring new riskier business of dubious profitability.  All went well until 2013 when the company, now with 100,000 employees, reported record revenue of nearly £5bn, realising profits in excess of £300m. But then the roof fell in.

Worrying stories began surfacing of overcharging the public purse and even more damaging, of fraudently charging for nonexistent work. With a crisis looming the share price crashed and its chief executive, Chris Hyman, who had been with the company since it was founded, resigned. A new broom was required to sweep the stables, check upon processes, and get rid of unprofitable business. An unprofitable contract which they were surprisingly able to off-load was for the maintenance of RAN patrol boats. In 2014 a new chief executive was found in 56 year old Rupert Soames, a grandson of Winston Churchill. Soames did sterling work that his grandfather would have been proud of in getting rid of deadwood and quickly turning disaster into triumph, providing stability and leading the company back into profitability.

Serco and Defence Maritime Services

Serco commenced providing services to the Australian Defence Forces in 1997, when through a subsidiary company Defence Maritime Services (DMS), they began operating support craft on behalf of the RAN. These include eight ocean going vessels and over 100 harbour craft, employing 350 staff. In October 2010 DMS won a $500m contract for the maintenance of patrol craft over a ten year period. In 2011 DMS won a $49.5m contract for the maintenance of the 19 Pacific Patrol Boats gifted to various Pacific island nations. This contract is for five years with an option of a twelve year extension. In December 2012 Serco purchased the remaining 50% equity stake in DMS from its joint venture partner P & O Maritime Services for a consideration of $106m. This did not include the P & O Maritime operating contact for provision of supply services to Antarctica.

An article titled Navy Patrol Boat repairs blow out by $45min The Australianon 6 January 2016 reported: ‘Defence has been unhappy with the quality of the maintenance program given to the Armidalefleet in the past and has agreed with in-service support contractor Serco to end the contract earlier than planned, next year. There is no further explanation as to the failure of this partnership.’

DMS operates a number of auxiliary vessels on behalf of the RAN which includes an Aviation Training Ship Sycamore, Navigational Training Ships Seahorse Horizon  and Seahorse Mercator, Submarine Rescue and Escape Ships Besant and Stoker, Diving Tenders Dugong, Sealand Shark, General Purpose Tenders Seahorse Spirit and Seahorse Standard; even the Admiral’s Barge comes into this category.

The most recent acquisition, the Aviation Training Vessel MV Sycamore, arrived in Sydney on 26 June 2017 to be based at HMAS Waterhen. Sycamore is a Danish designed but Vietnamese built multi-purpose training vessel primarily designed for helicopter operations but also suitable for junior officer training and mine warfare and diving support. She is expected to enter service in January 2018. She is owned, crewed and operated by DMS and leased to the RAN.

Serco also provides simulator training in navigation and command and control at HMAS Watson, and maintains the simulators. Garrison support services are provided to a number of defence bases throughout Australia covering building and grounds maintenance, cleaning, hotel services, food services and health care. Offshore, Serco provides logistic support and supply chain services to Australian Defence forward bases in the Middle East, Afghanistan and Papua New Guinea.

Antarctica

P & O Maritime operates two ships out of Hobart which support facilities in Antarctica. The French flagged ice strengthen support vessel L’Astrolabe and the Australian flagged Aurora Australis supporting the Australian Antarctic Division. Because of age both ships are due for replacement. The 2,150 ton L’Astrolabe is due to be replaced this year (2017) by a much larger vessel of the same name operated from Australia by the French Navy. The 6,574 ton Aurora Australis is to be replaced in 2019 by a purpose built icebreaking ship of 23,800 tons under a through-life contract awarded to Defence Maritime Services (Serco) which is expected to run for 30 years.  In June 2017 Serco announced that steel cutting had commenced at Galati in Romania for this icebreaker under a $1.91bn investment by the Australian Government which Serco is project managing. It is understood that only one company, DMS, bid for this contract; surely this is unusual. The retirement of Aurora Australis possibly draws the final curtain over the once proud and mighty Peninsular & Oriental (P & O) Steam Navigation Company’s operations in Australia.

The Tasmanian independent Federal MP and retired army officer, Andrew Wilkie, whose constituents have most to gain from this initiative, said in an ABC interview: ‘The fact that only one company is prepared to pursue this contract does show that the request for tender and the tender process is flawed. There is the risk we will end up with a dud.’

It may be coincidental that the Royal New Zealand Navy is retiring its 30 year old tanker HMNZS Endeavour. She is being replaced by a 24,000 ton ice capable new fleet tanker being built in South Korea for delivery in 2020. Her hull is being ice-strengthened for operations in Antarctica which will allow her to deliver fuel and stores in support of New Zealand bases during the Austral summer. Seemingly, New Zealand and French naval personnel will gain experience in operating in an inhospitable Antarctic environment, but not those of the RAN.

Other business

In addition to Defence business, since 2009 Serco has been responsible for the management of 11 immigration detention centres on mainland Australia plus one on Christmas Island. This five year contact (which has since been extended) had an estimated value of $1bn and called for a workforce of 2,000 personnel. The offshore detention facilities on Nauru and Manus Islands were managed under a $1.2bn contract by an Australian company Transfield Services, now known as Broadspectrum, and in 2016 sold to the Spanish based Ferrovial Services Corporation.

Since 2008 Serco Custodial Services has been providing private prison services in Australia and New Zealand on behalf of State and National Governments. Three prisons are in operation, one each in Western Australia, Queensland and New Zealand.  It would seem that the management of no government organisation or service is beyond the capabilities of Serco.

Summary

Experience tells us that many Government businesses become bureaucratic, lethargic and inefficient. Implementing change management is difficult and unlikely to appeal to short-term government cycles found throughout Australia. Outsourcing is an expedient way of achieving change and efficiency gains, at least in the short-term. However, a careful watch needs to be maintained on the gamekeeper.

Companies such as Serco are able to capitalise upon the failings of Government businesses and offer modern management techniques and improved productivity with less staff. All factors usually resulting in monetary savings. As we have seen this is not necessarily a long-term solution as management companies come and go and ownership changes may bring unknown consequences.  As Stephen King tells us: ‘sooner or later, everything old is new again’, and someone will discover another management concept with untold promises of even greater benefits.