Opinion: Defence’s MSP creation is without strategy, and at a premium for resources

By John Glenn

Wednesday March 3, 2021

Scott Morrison and Defence Minister Linda Reynolds walk past a Boxer Combat Reconnaissance Vehicle as they arrive to speak during the launch of the 2020 DefenceStrategic Update at the Australian Defence Force Academy in Canberra, Wednesday, July 1, 2020. MSP
Scott Morrison and Defence Minister Linda Reynolds walk past a Boxer Combat Reconnaissance Vehicle as they arrive to speak during the launch of the 2020 DefenceStrategic Update at the Australian Defence Force Academy in Canberra, Wednesday, July 1, 2020. (AAP Image/Lukas Coch)

An early lesson as a boy on a farm was that you don’t leave a dog unattended in a sheep pen. They revert to instinct, and so it is with the Defence Major Service Provider Program — its MSPs.

In early 2018, CASG, the Defence group that acquires and sustains military capability, established a panel through which the overwhelming majority of contracted and consulting services to Defence are delivered. We understand that there are in more than 580 panellists across 79 skills sets.

At the same time, CASG sought to engage six consortia as MSPs. It was, in their words, “a strategic and integrated approach for acquiring and sustaining capability”. They settled on four providers.

MSPs are coalitions of convenience

MSPs were established, partly at least, in response to the 2015 First Principles Review that reduced CASG from 7,000 to 5,000 staff — an approach designed to drive better business practices, smarter contracting and more commercial behaviour. From the outset, CASG focussed on resourcing: how many people did it need, what was the workforce impact, how would the MSPs ensure capacity? CASG didn’t seek to change the way it worked, just the way it resourced.

In theory, the MSPs would provide new business practices, satisfying scale and flexibility. They are not companies in which one would invest, they don’t build IP themselves — although their constituents do. They are not natural partners, or they would have existed prior to CASG approaching the market. They have no market value except in the one market created by CASG.

They are coalitions of convenience created solely to serve the unique market created by CASG.

With the tenacity of “Yes, Minister”, CASG avoided the intent of the First Principles Review. Not much has actually changed, and even if the MSPs wanted to offer more they can only respond to the interminable CASG RFT.

Why wouldn’t they? It is instinct.

MSPs are simpler, and faster, but at what cost?

According to Austender, there have been 306 separate contracts totalling $1.524 billion since the inception of the program in February 2018. Unfortunately, Austender data is a bit “dirty”. If you look in more detail, the spend with these companies in just over three years has been closer to $2.246 billion.

1 Feb 2018- 2 Mar 2021 Contract awards Extensions
Jacobs-BECA $365m in 204 awards $270m across 192 extensions
Nova/QuintiQ/PWC $284m across 412 awards $457m across 330 extensions
KBR and EY $227m across 173 contracts $299m across 184 extensions
Downer $229m across 158 awards $115m across 53 extensions
$2.246bn spent with 4 companies in three years through 947 contracts with 759 extensions

 

While not all that work are ‘MSP’ contracts, it is a significant centralisation of expenditure into four companies that have cornered the market and the client. While work does flow down to subcontractors (I understand it is supposed to be 40%), there is no public reporting to validate that. Even if true, every dollar that flows through a company must deliver a margin. At 15% pass through margin, the added cost of 40% SME work through MSPs is between $91million and $135 million. One wonders if that delivers value for money for the commonwealth, though it surely must for the MSPs.

Don’t blame the MSPs — making money is instinct.

Beware the tyranny of the monopsony and oligopoly

Defence is a monopsony — the reverse of a monopoly, which is a single buyer in a market. While not a perfect monopsony, the size of the Defence expenditure skews market behaviour. No one likes to tell a client they are wrong, so you get a lot of sycophants — particularly if you are playing for sheep stations. A sheep station that is worth $2.25 billion is a big one.

“You have to be a sophisticated buyer if you are monopsony — because the way you approach the market defines the market”

It’s difficult to see Defence’s creation of an oligarchy as sophisticated, given all its inherent dangers.

Four companies control an industry. Ninety-seven-and-a-half percent of Australian business have less than 20 employees and 98.5% earn less than $10 million per annum. These four companies are at the top of the food chain. Size, and position afforded by CASG, gives them and their consortia colleagues extraordinary influence.

They have no “for-purpose” agenda. They simply drive to maximise profit and their market share. While they may comply with other obligations, and their marketing may portray altruistic motives, their leadership and their businesses are incentivised on profitability and growth.

Their behaviours control the market. The iron laws of oligarchy are imposed — “you will contract this way, behave this way, deliver this way — if you want work”. We know that oligarchies stifle innovation and competition, demand obedience, and new entrants are blocked. It is the preserve of the few.

It can’t be good for a sustainable, competitive, free industry — except for the four.

To be fair, MSPs aren’t behaving badly, just following instinct and the lead of CASG.

MSPs are the start. Where does it end?

The end state is predictable. It is a race to the bottom, evidenced by current behaviours. Where the over-riding interest is profitability, then you use your own staff first. You don’t give away a relationship with the client, but intermediate between subcontractor and the client. If there is a downturn in demand, then subcontractors leave first.

It’s the way of business.

While obligated to flow down a share of work to smaller businesses, there is no gain to an MSP in over-achieving. Mostly they do it because they cannot hire enough staff themselves, or it’s a risk minimisation — a hedge against demand fluctuation.

It’s not wrong, it’s natural.

What we do see is a growing fraternity of new businesses servicing the MSPs: low value proposition, low IP, revolving door, staffing companies masquerading as consulting businesses. They service CASG’s insatiable drive for resources — without bringing any new ways of working to the table. Defence is paying a premium for resources.

Highly profitable, a few of these new companies have been acquired to their owner’s benefit. No argument that it is good for them, but it is not good for the industry or Defence. There is no future in this model — just a transactional competition for resources at best price. No potential for a sustainable industry that can better service Defence, anyone outside of Defence.

Establishing the MSPs was done without thought to strategy, and the long-term effects on the market and broader industry capability.

The consequential loss

“All work through an MSP”, the mantra across CASG and spreading wider across Defence, is easy. If everyone does it the same way, follows the same rules, adopts the same processes, mistakes will be controlled. There will be no criticism. It reduces risk. It seems safe.

It is certainly the easiest path to follow, but it is not leadership.

The organisation slows, becomes moribund. Slow witted. People work in fear of breaking a rule, compliance is de rigueur. Thinking and decision-making are centralised. There are no new approaches, no experimentation, no innovation in delivery.

Growth companies seek innovation and autonomy at the lowest level so they can remain competitive and responsive. In the safety of the public service, where there is no competition, no threat to survival, there is no drive to innovate or excel. CASG needs to be a “growth company” if it is to lead in capability delivery.

Centralised control is eschewed in the military. Leaders are developed to have the courage to put their faith in mission command and corporals. We don’t see the same courage, corporately.

I don’t argue that a construct to support large work packages and the complexity of some elements of CASG isn’t needed. But the imposition of an oligarchy of four companies, reinforced by mandate and dogma over MSPs, is stifling and counterproductive — to Defence and industry.

CASG needs the courage to lead, to offer freedom and flexibility, and to accept complexity if it wishes to unlock value.

Full disclosure

I run a consulting company. We work in Defence but not through an MSP, and consequently not CASG. We have danced with MSPs, but it never works out. We end with no relationship with the client, and a squeeze on rates. There is never a conversation about value.

We would be giving the MSP our IP and know how, our delivery model and our reputation for their benefit — not ours. Even when the Defence client has asked an MSP to engage us, the MSP has either declined or, by using its favoured status, seized the opportunity and cut us out.

Our people are proud of what they do and what they have contributed — to Defence. They have built a company. They have been awarded more than half a dozen Defence commendations — individually and corporately — from the CDF down.

While we would like to work with CASG, and believe we have something unique to offer, we are not giving it away to an MSP. So, we choose not to pursue work in CASG under the MSP construct.

We don’t blame the MSPs, their behaviour is instinctual. We just choose not to stay in the pen with them.

A review of MSPs is underway

A review of the MSP model has been announced. Indications are that it was initiated by the Defence minister.

We are told it is to be conducted by an un-named, independent consultant — through a process of consultation using a structured questionnaire. No data on MSP performance has been provided. There is no mention of open debate, open forums — and the below the line contractors, the ones who actually deliver capability, seem to be excluded.

It is very structured, predictable, thus far.

We will be delighted to contribute to the addressing of the systemic weaknesses in the current model, and any attempt that seeks to build a sustainable industry that services the needs of Defence, CASG, the MSPs and the SMEs.

But the signs are that this “is a broad ranging”, “independent” review, with a wide terms-of-reference that will deliver a report to be properly considered in the fullness of time”.

I wonder if the minister is in danger of being “Yes, Ministered”?


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