INTERVIEW

ADM: How and why did Daronmont get into the defence business?
Hanna: Originally we were what is euphemistically known as a body-shopping enterprise. In 1990 I acquired a small labour hire business in Melbourne and changed its focus to hiring out far more qualified people, predominantly engineering, accounting and managerial types in a wide variety of industries. Over time we built up the labour hire business to the point where we had nearly a hundred staff out on hire at any one time and a large proportion of those were engaged by Telstra, predominantly on the JORN program.

By 1995 the business had grown from $400,000 a year to approximately $4 million. I did an assessment of our capabilities at that time and decided that instead of just hiring out labour on a body shopping basis we would collate the expertise and capability we had into groups of expertise and bid for scope of work contracts. The first major program we bid on with Telstra was to assist them with major issues in relation to JORN; over time, that grew into a major contract to assist the transfer of the JORN project to RLM Systems. Additionally, in a consulting capacity I was engaged by Telstra to help them dispose of those aspects of the business which Telstra deemed not to be core, and one of these turned out to be surface wave radar. Having collated our expertise in engineering prior to that time we decided to bid on building a surface wave radar for Telstra and we were successful in winning that contract.

From that time we progressively withdrew from hiring out labour and bid on scope of work programs. So in 1998 we changed the name of the company from Daronmont Pty Ltd to Daronmont technologies which better reflected what we did, and we ceased to be a labour hire organisation.

ADM: What is Daronmont’s core business now and what directions do you see the company taking in the foreseeable future?
Hanna: Well, we have a fairly sophisticated strategic planning process and at this stage our mission is fairly clearly stated as systems design, integration and support, centred around surveillance and communications systems. In terms of where we see the business growing, what I’ve described is a fairly broad area. We have over the past few years made a number of small of successful bolt-on acquisitions - Acacia Solutions and Hue Technologies in 2000 and 2001 - to better position ourselves in the signal processing, electro-optics and elint and sigint type markets. These areas still provide opportunities for growth in our view and we are also looking at logistics as an area to flatten out the volatility in our sales and earnings. We’re also looking at more mature market segments within our own level of expertise to level out those wild fluctuations.

ADM: You mentioned SECAR earlier on - it’s been a technical success, but what are the prospects for local and export sales?
Hanna: We originally designed and built the SECAR surface wave radar on behalf of Telstra from 1998 through 2000 and it was successfully trialed off Bathurst Island in August-September of 2000. We submitted a PFI proposal to the Commonwealth at that time to supply a number of these systems for littoral surveillance across the north of Australia. In the event that wasn’t proceeded with but we have just recently sold a system to the Commonwealth on an extended trial basis for three years – again to be deployed up north from early-2004.

Since that was announced in February of this year, we have been bombarded with enquiries from overseas to the point where we have in excess of 27 countries expressing an interest in the system. Our view is that surface wave radar represents an extremely cost-effective way of meeting Australia’s obligations in littoral surveillance for Coastwatch, fisheries and defence purposes and we would expect that once the trial is completed up north the Commonwealth, in one guise or another, will see fit to acquire more systems.

ADM: You’re currently playing a key role in the RAAF’s Vigilare interim solution – do you see a role for the company in the final solution?
Hanna: Daronmont were approached two years ago by US company Solipsys, which specialises in command and control systems for the US Navy and Coastguard. They had an obligation under their existing contract to support the US Navy when their vessels came to port in Australia and were seeking an in-country support organisation to fulfil their obligations. We were selected to fulfil that role and we developed a very strong relationship with Solipsys, culminating in an interim solution for Vigilare, based on Solipsys products, which was installed and operational by May 2002.

In the current negotiations for the long-term solution for Vigilare we approached Solipsys to bid in through Boeing who were the preferred tenderer for the program. Boeing have submitted their solution, inclusive of a Solipsys capability, and we would be performing the integration, maintenance and support function for that solution. The total value of that work has yet to be determined.

ADM: How have Daronmont and Australia’s other SMEs found Australia’s defence business environment over the past four years?
Hanna: Extremely difficult. On the one hand there is an enormous amount of rhetoric coming out of Canberra that the Commonwealth is seeking a vibrant, active and leading-edge defence industry capable of supporting the types of technologies that defence needs in the future. In our view the reality of how that’s manifested is that the Commonwealth is extremely risk-averse, rather than focused on risk management, and as a result it is extremely difficult for an SME to bid successfully for anything but a very minor program against a traditional prime contractor.

As an example of this, three years ago we would be bidding on $50,000 or $100,000 jobs - systems integration, extension of legacy systems, and so on - and found ourselves competing against similar organisations. Today, firstly you’ll find those similar organisations either no longer exist because they have either ceased to operate or have been absorbed into larger primes, and additionally we now find ourselves bidding against major prime contractors for $30, $50, $100,000 jobs.

ADM: The Minister has announced Defence will implement the Kinnaird review of defence procurement. What are your hopes for this process?
Hanna: I’ve have a fairly open mind. Given the type of environment Defence is seeing in the future and the type of defence force we’re looking for and its capability, that presupposes a fairly high level of technology utilisation - and history says that most technological developments originate from SMEs, it involves risk and SMEs have been traditionally good at managing risk

The implications for Defence in my view would be that that historically, there were a number of major programs, for example, in excess of $300 million, where traditionally as much capability as possible was lumped into them and they were subsequently tendered out to major prime contractors to theoretically avoid risk. I envisage a situation in the future where there will be many hundreds of much smaller programs which the SMEs are easily capable of handling, and that has implications for Defence and how it operates.

The quick fix answer would be to give everything to a prime on the assumption that they would look after the SME, if indeed an SME was required. In practice, very little, if any value added work flows down to an SME in this scenario.

ADM: Defence’s emerging industry sectoral plans do acknowledge the importance of the SMEs, but what specifically do you think is required keep the SMEs relevant and competitive and enable them to grow?
Hanna: I think you need to look at what types of work SMEs have traditionally been successful at acquiring. It is inappropriate to look at overall figures and say that SMEs are being looked after because in the last ten years they’ve won, say, a billion dollars worth of work – the statistics on SME contracts include things like services, consumables, low value added and civil works etc… In terms of the type of industry Defence says it needs to support its capabilities in the future, the critical issue is the high level, high-technology value adding. Very little of this business actually flows down to Australian SMEs or in fact Australian primes.

SMEs at this point in time do not operate on a level playing field. They are effectively disallowed from bidding on any medium or larger project that may exceed their total turnover, but the converse is not true for the major primes, hence the example I gave earlier about a major prime being capable of bidding on a $20,000 job when the same opportunity is not available in reverse to an SME.

Currently there is a provision within Defence’s acquisition procedures for the DMO to explain why an SME hasn’t been used for a program that’s under about $100,000. My view is that figure should be lifted dramatically and strengthened to the point where the DMO should be required to show cause why an SME hasn’t been given an opportunity to bid on a program that’s under $10 million - and the major primes should be precluded from that process unless the SMEs have proven they’re incapable of bidding on that job successfully.

ADM: $10 million is an interesting figure – you made the point earlier that modern IT and C3I technology means that users don’t have to spend much money to reap a significant operational benefit.
Hanna: Correct. As I mentioned earlier, the environment I see in the future, particularly if we’re looking for a highly flexible, highly trained and well equipped defence force, presupposes high levels of technology. That doesn’t necessarily mean programs that cost $50 million, $100 million or $500 million. The size of the acquisitions is significantly less. The best example I can give you is our interim solution for Vigilare where the sums involved for that program were minute in comparison with the expectations of the final Vigilare solution as it is currently configured. I see that being replicated.

I should add, major platform acquisitions like the Joint Strike Fighter program or a major shipbuilding program will always go to a prime that has the relevant international expertise and successful track record.

The other issue in regard to SMEs is that Defence would far prefer to avoid risk and give any program of any significance to a major prime on the assumption that this means less risk, and on the understanding that the prime will utilise SMEs wherever possible. Our experience, especially in the past three years, has been that this just does not happen - and why should it? If I were a major prime and there was no imperative to use an SME, why would I give somebody else work that is of strategic importance or of value-added, including IP that is meaningful?

ADM: So you’re saying that Defence just doesn’t understand the relationship between the primes and the SMEs.
Hanna: I don’t believe so - I think they’d like to assume that their obligations to SMEs are being catered for by major primes who, perhaps in good conscience, indicate that they’re prepared to give SMEs work. And perhaps they are, but you need to look at the types of work they are given. We have previously indicated our willingness to act as a sub-contractor to the major primes for appropriate parcels of work that suit our expertise. But with the exception of Boeing and Vigilare we have not met with any success. I believe this experience to be common, except where individuals are hired on an hourly rate basis.

ADM: So if it’s not realistic for Defence to deal with SMEs through the primes, what would be your solution?
Hanna: Well, there has to be an imperative for a prime contractor to use an SME - there’s no point in having a policy if it’s not policed. At the moment the contract value at which Defence has to justify not considering an SME is $100,000, but that’s not policed effectively. So I believe that unless a minimum standard is established that is far greater than the $100,000 currently in force then there is no incentive for a prime to use an SME for any significant amount of value added work. As a result only one of two things can happen – that is, the SME will cease to operate, or he will be acquired. That will ultimately result in defence dealing with just five or six big international players, and that is completely at odds with the policy of having a vibrant Australian-based industry support base for defence capability.

ADM: Some of these issues are addressed in the DMO’s industry sectoral plans, but the new CEO will have a challenging job delivering on these policies…
Hanna: What the minister is talking about in relation to reform of the DMO is, as I understand it, a more commercial approach to the acquisition process. That presupposes change, change is uncomfortable but it also presupposes a new look at the way Defence has traditionally done business. I think it’s the responsibility of the incoming CEO to create a new culture within the organisation while at the same time preserving what was good about the old culture.

Creating the plan initially, as well as creating an implementation plan, will be a prime responsibility for that person. It won’t happen overnight – the current DMO is large and the job is not without its challenges, but that doesn’t necessarily mean change can’t happen; it will just be incremental.

ADM: Do you reckon the new CEO should be more commercially-minded, even a former industry CEO or senior executive?
Hanna: My personal belief is that if they are truly interested in change they will hire somebody from outside the current public service. However, that person will need to have a fairly clear understanding of government processes and the culture that already exists within the DMO, otherwise his job will be twice as difficult. I’m trying not to underestimate the challenges in that role, but it’s definitely a people management and strategic thinking role rather than a detailed understanding of governmental process – there are sufficient people within the DMO already who have that knowledge. As an example, I’m not an engineer but I have extremely well qualified and motivated engineers who fulfil that function. One would hope that there are other roles my engineers are not best suited to that I fill. I see the same thing applying to the DMO’s new CEO. It is clearly a major leadership role and I emphasise the word leadership in all it’s contexts. I think it would be an exciting job and we would wish the successful applicant well.

ENDS