Small to medium enterprise businesses (SMEs) make up around 3,000 organisations within the Australian Defence Industry, comprising about 50% of total Defence Sector employment. With the top 20 SMEs seeing revenue figures of $670 million, it’s clear the SME market is a significant contributor to the Defence Industry.
Every six months, Kinexus compiles the data and intel gathered from around 30,000 conversations with Defence Industry members, published as our Defence Industry Insights. From our conversations, a significant development we have noted is that the Defence SME market is experiencing a period of growth, and going through unique changes that will have a flow-on effect to the wider industry.
In Kinexus’ Defence Industry Insights – Fifth Edition, we spoke to SME representatives about their thoughts on the current position and challenges of the Defence SME market, as well as their insights about the Defence Integrated Investment Program (DIIP). While there were a range of responses, we have identified several key themes.
Read on for Kinexus’ summary of the collated responses of the Australian Defence SME market.
1. HOW CONFIDENT ARE YOU THAT SMES WILL BENEFIT FROM DEFENCE’S INTEGRATED INVESTMENT PROGRAM?
The vast majority of SMEs (67%) are confident that the DIIP will be advantageous to them, due to:
A multitude of current and upcoming projects, in line with increased industry spend
Government prioritisation of Australian supply chains and SMEs
Increased availability of government funding, such as the Centre for Defence Industry Capability (CDIC) and Next Generation technologies fund, and the Defence Innovation Hub
The leading view is that funding and work from large-scale projects contracted by Primes or the Commonwealth will eventually flow down to SMEs. This will allow them to expand capabilities and skill sets in order to deliver on long term projects.
However, there are concerns that the DIIP lacks the clarity of previous Defence initiatives, preventing SMEs from developing targeted strategies or predicting outcomes. There is also the perception of a general reactive nature to execution, which is unlikely to meet growing optimistic expectations.
In general, most SMEs acknowledge that building relationships and encouraging stronger collaboration will be key to the success of the DIIP. While we are at the beginning of a long and winding road, the overall outlook is generally optimistic.
2. WILL YOU BE ABLE TO ACCESS THE WORKERS YOU NEED IN THE FUTURE? WHAT DO YOU FEEL WILL INFLUENCE YOUR ABILITY TO ACCESS THE WORKERS YOU NEED IN THE FUTURE?
The majority of SMEs (60%) are confident that they will be able to access the workers they need in the future. Fixed timeframes and long term contract agreements will allow for forward resource planning, as well as the time required to secure the necessary workforce.
To adapt, organisations have had to shift their thinking from “just in time” hiring to long term hiring strategies, along with training and developing personnel, rather than spending unnecessary time looking for candidates who are the “perfect” fit. Organisations that focus on innovation and technological developments are particularly attractive to potential candidates, as well as those that can offer attractive packages and career development opportunities.
Despite this, there is concern about the shortage of skilled workers exists, and some skills are already unavailable in the market. There is also competition between Primes and SMEs for the same talent, particularly individuals with strong technical competencies and relevant defence experience.
Competition for workers with in-demand skills is an ongoing challenge, and the process to grow the talent pool is slow. There is a perception that the measures in place to combat the combined effects of strong competition from concurrent defence programs, an ageing workforce, and slow entry from STEM-based education courses, are insufficient.
Strategies that may help alleviate workforce challenges include university graduate programs, greater STEM investment, technical skill development and training of current workers, transitioning workers from adjacent industries, and enabling easier access to working visas for overseas workers.
Other hiring challenges experienced by SMEs are a symptom of the industry, and organisations do what they can to mitigate the impact. Security clearance issues, International Traffic in Arms Regulations (ITAR) requirements, and increasing salary expectations often act as roadblocks to hiring.
Contract negotiations can also be unpredictably time-consuming, with SMEs often unable to hire until there is a commitment from Primes. This undermines SMEs’ ability to hire at risk and give meaningful work to engineers immediately, often leading to issues with staff retention.
3. ARE THERE PARTICULAR SKILLS YOU ARE CURRENTLY SEEING IN-DEMAND?
Demand is high across the board, particularly for individuals with security clearances and relevant Defence Industry experience.
Skills in strong demand include:
The full array of engineering and technical skills, particularly electronics and software engineers
Systems engineers, especially in the Maritime Sector
Project and engineering management skills, as well as general leadership skills to manage complex, large-scale projects
Skills with newer technologies, including Artificial Intelligence (AI), automation, and deep learning
Information and Logistics Support (ILS) practitioners, particularly those highly skilled in acquisition-based ILS, as well as analysis and product development
Supply chain skills with an engineering focus
Security-cleared Cyber skills
Overall, the view is that it is going to get harder to recruit the right skills, and the shortage is only going to worsen.
4. ARE THERE PARTICULAR SKILLS YOU ARE CURRENTLY SEEING DECLINE IN DEMAND?
Although there are not many skills in strict decline, some roles have experienced changes, including program management and business development skills, which have become more integrated. In response to the skill shortage, there has also been a move towards hiring or fostering workers with multiple skill sets, enabling them to fulfil multiple functions across various projects.
5. AS AN SME, WHAT DO YOU FEEL ARE THE MOST SIGNIFICANT CHALLENGES YOUR BUSINESS IS FACING?
Primarily, SMEs are facing the challenge of getting into contract with Primes in a timely manner. With the advent of organisations such as the CDIC, there is a shared perception that it is easier to get into contract with CASG than Primes.
SMEs often find that the negotiation process with both Primes and CASG can have a negative effect on project timelines, which can cause subsequent risk to the delivery of projects on time and within budget. There is also the sense that while funding is available, the process of accessing it is unclear to some SMEs.
Once in contract or within the development phase, SMEs must develop the ability to manage larger projects over a longer period of time than they have had to historically. This has repercussions on the skills and development of the current team, as well as compliance flow-down.
A significant challenge faced by most SMEs is retaining and hiring talent. A number of employees are moving between workplaces due to the number of new and exciting projects running concurrently. This can be difficult for SMEs to manage, as they are already relying on a small and specific group of individuals for their talent pool.
With this in mind, the SMEs engaged in innovative products and projects appear to be thriving, enjoying access to both funding and workers showing a keen interest in new technology streams.
6. FROM AN SME PERSPECTIVE, WHAT DO YOU SEE AS THE MOST IMPORTANT DEVELOPMENT FOR THE INDUSTRY AS A WHOLE?
Prioritisation of Australian industry
The most important development for Australian SMEs is the government’s recognition of Australian industry as a fundamental input to Defence capability. Increased government investment in Australian-based research and manufacturing has strengthened the Australian Defence SME sector, while also signalling a clear definition of priority of Australian industry capability.
Investment in SMEs
Government support of the Australian SME sector has shown a marked increase. Due to the need to deliver on increasingly complex and large-scale projects on a national scale, there has been a growing understanding and appreciation of how SMEs, Primes, and the Commonwealth can work together to achieve a shared goal.
The longer term outcome needs to be a well-planned and coordinated effort across all areas, including workforce planning, contract support, and compliance.
Structure Defence initiatives
The use of structured government incentives such as the DIIP, the Defence Sovereign Capability Plan, and the Defence White Paper have defined a clear set of outcomes required of industry. The standardisation of industry models, frameworks, and priorities have enabled SMEs to shape their capabilities and resources in order to meet the known requirements and expectations.
Large-scale and longer term contracts released by the government, as well as funding and research and development (R&D) are contributing to a shared sense of optimism among most SMEs.
That wraps up our insights into the Australian Defence SME market.
For more information on what’s happening across the wider industry, including a sector overview and a breakdown by state, company hiring intentions, and an update on industry gender diversity measures, download the Kinexus Defence Industry Insights – Fifth Edition here.