Annual Report 2003-04

Defence Materiel Reform

The Defence Materiel Organisation supports the ADF by acquiring and sustaining leading edge military equipment.

The Senate Foreign Affairs, Defence and Trade References Committee tabled its report from the inquiry into materiel acquisition and management in Defence in March 2003. The Committee acknowledged the positive progress that had been made in the Defence Materiel Organisation reform program. The Government decided to implement a range of reforms to improve capability development and acquisition in Defence by further improvement of the capability definition process, providing the organisation with greater independence to better manage and deliver projects, and by progressing towards a more business-like approach in the organisation. These themes are consistent with the findings of the Senate Inquiry.

After the Government broadly accepted the findings of the Defence Procurement Review, the organisation's priorities were recast to reflect six key themes for materiel reform. Further detail on the themes is provided below.

Defence Procurement Review

In September 2003, the Government announced that, as part of the ongoing reform of Defence procurement, it had agreed to broadly accept the recommendations of the Defence Procurement Review, led by Mr Malcolm Kinnaird. The review recommended the establishment of a new head of capability development at a senior level, strengthening the 'two pass' system for new acquisitions, establishing a high-level advisory board, considering the remuneration and tenure of project managers, and establishing the Defence Materiel Organisation as a prescribed agency. For more detail on the 'two pass' implementation process, refer to Chapter One - New Capability Development and Acquisition Process section.

Key to this reform was the appointment of a new Chief Executive Officer to the Defence Materiel Organisation to lead this reform program. Dr Stephen Gumley took up this appointment in February 2004.

The organisation is being assisted in its reform program by the Defence Procurement Advisory Board, established as a key recommendation of the Kinnaird review. The board comprises senior executives drawn from the public and private sectors, who bring with them a wealth of experience and knowledge. Chaired by Mr David Mortimer, the Board also includes Mr Malcolm Kinnaird, Dr John White and Mr Kevin McCann as the private sector members. General Peter Cosgrove (Chief of the Defence Force), Mr Richard Smith (Secretary of the Department of Defence), Dr Ian Watt (Secretary of the Department of Finance and Administration) and Dr Ken Henry (Secretary to the Treasury) are the public sector members of the board. The Board held its inaugural meeting in March 2004 and is now meeting monthly.

In June 2004, the Chief Executive Officer announced a reorganisation, consistent with adopting a more business-like approach as recommended by the Defence procurement review. The changes consolidated corporate planning and support in the organisation's headquarters, with the creation of new positions of Deputy Chief Executive Officer, Chief Operating Officer, General Counsel, New Ships - Amphibious and New Ships - Air Warfare Destroyer Divisions and a Director-General for Land Vehicle Systems.

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Increased Professionalism

In line with its aspiration to be the premier engineering and project management organisation in Australia, the Defence Materiel Organisation initiated a series of professional development and certification programs to improve recruitment, staff development and retention. The goal is to get the right people in the right positions at the right time. A professional certification framework for all program managers is being developed. The framework will be fully developed and implemented by the end of 2006.

In April 2004, a professional development program for engineers was implemented, and targets have been set for enrolment within the Engineers Australia professional development program. In March 2004, a survey of the qualifications of the organisation's workforce was undertaken, and targets have been established to improve the level of professional qualifications in other employment categories across the organisation.

The Project Manager's Development Program, a 12-month masters-level program run in conjunction with the University of South Australia, is in its sixth year with 15 staff participating in the current program. The program has seen 69 graduates awarded a Masters in Project Management over the past five years. The Quantum Program, a leadership development program for Executive Levels 1 and 2 and military equivalents in the Defence Materiel Organisation, continues into its third year with more than 164 staff participating in the program.

A new policy for the engagement of military personnel in the organisation was developed and will be implemented in 2004-05. This policy seeks to ensure that military staff have the necessary qualifications and tenure to meet the organisation's needs, while also meeting the ADF's needs for the development of its military personnel.

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Standard Processes, Based on Business-Like Best Practice

The Australian Defence contracting suite of tendering and contracting templates continued to mature, having adopted a more commercially-focused business philosophy. The organisation investigated further alternative contracting methodologies and, following a review of existing trial project alliancing contracts, removed the 'trial' status from that approach.

New principles underpinning the organisation's approach to contracting are being established. The basic philosophy of this approach is that industry has a right to a reasonable profit and some certainty of work, while Defence has a right to expect industry to deliver products on time, on budget and to the required capability. The Defence Materiel Organisation's performance in delivering major investment projects within budget and to the specified performance level has been steadily improving. A key goal of the organisation's Chief Executive Officer is to improve schedule performance, and this must include improved performance from industry. Underpinning this must be the development of a skilled workforce, in Defence and in industry, which can effectively deliver not only the current workload, but also the growth projected by the Government in the Defence Capability Plan.

As part of this reform program, ten materiel governance boards have been established to provide independent oversight and assurance of Defence's materiel projects. These boards review the technical, financial, contractual, risk and schedule performance of capital projects. The scope of the involvement of these governance boards in project assurance was extended under the recent Kinnaird review to also consider the sustainment of ADF capability. The boards meet monthly and report regularly to the Chief Executive Officer.

During 2003-04, a new management information and reporting system, called the improve project scheduling and status reporting system, was introduced and has become the cornerstone of the standardised project reporting process. The organisation is also implementing a standardised project management methodology and tool-set across all projects. This process is supported by a corporate-level quality and environmental management system, which is being developed within the organisation to provide people with current information on policies, processes and practices.

A Project Risk Management Manual was released in June 2004 to provide direction on how risk is to be managed across the Defence capability life-cycle's 'needs', 'requirements', and 'acquisition' phases.

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Improve Relationships With Industry

In accordance with the Government's broad industry policy framework, Defence has developed a range of industry and procurement policies to support the delivery of ADF capability requirements and to facilitate greater alignment and partnership between Defence and industry. In February 2004, the Minister for Defence released the public version of the 2004-14 Defence Capability Plan. The plan provides industry with greater certainty about Defence's investment planning and had become Defence's key mechanism for informing industry of its major capital equipment investment intentions.

Following their endorsement by Government in June 2004, Defence is preparing an implementation schedule for the Electronic Systems and Aerospace Sector Plans, which will also include elements of the Naval Shipbuilding and Repair Sector Plan and, when completed, the Land and Weapons Sector Plans.

The seventh and eighth rounds of Company ScoreCards and the first formal round of 360-degree view ScoreCards were conducted in 2003-04. These ScoreCards enable the Defence Materiel Organisation and industry to discuss schedule, budget and project management performance in a constructive way.

Benchmark Against Both Public and Private Sector Organisations

In 2004, the Defence Materiel Organisation initiated work to set productivity objectives consistent with industry benchmarks against both public and private sectors that also recognised the overheads associated with being a government agency. These benchmarks will be further developed in 2004-05 to gauge the organisation's project and platform management performance as well as its overheads.

Reprioritising Activity

The Defence Materiel Organisation is clarifying its roles and responsibilities within Defence as a whole in order to reduce areas of overlap and free up resources to concentrate on high priority tasks.

Outsourcing of some activities will provide an opportunity for the organisation to reprioritise its activity. A major outsourcing contract for integrated storage and distribution was signed in December 2003 with Tenix Toll Defence Ltd. Contract implementation commenced in March 2004 and is expected to be completed by December 2004.

Leading Reform in Defence

The Defence Materiel Organisation has been at the forefront of Defence reform over recent years and, through its ongoing change program to achieve a more business-like focus, will continue to lead reform in Defence. In a number of areas, the success of reform in the Defence Materiel Organisation could create valuable precedents for change elsewhere in Defence.

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