Defence Magazine

Spending taxpayers' money wisely and maintaining public confidence were key motivators in the Government's decision to commission a report into the Defence procurement process in December 2002.

As is normally the case, the decision was met with a degree of scepticism by the media and Defence Industry. Would this report, unlike those that had come before it, really be the key to bring lasting reform in Defence?

With two months to go until the deadline for the Defence Materiel Organisation (DMO) prescription, it's probably timely to reflect on what has changed and see how Defence is answering the critics.

The major recommendations

Defence should present an assessment of the types of contingencies; advice on the military force required and the capacity of the ADF to apply this force now and in the future; and advice on the capability to be sustained, acquired or retired to ensure this can be achieved at acceptable cost; to the Government on an annual basis.
Appoint a three-star officer to be responsible and accountable for capability definition and assessment and establish the Capability Development Group
Government should mandate, and enforce via revised Cabinet rules, a rigorous two-pass system for new acquisitions with Government considerations dependent on comprehensive analyses of technology, cost and schedule risks subjected to external verification.
Following second pass approval, the capability managers should have the authority and responsibility to report, and be accountable for reporting, on the development of Defence capability. To undertake this role they should have access to all information necessary to enable them to fully inform Government on all aspects of capability.
An Advisory Board should be appointed with immediate effect, to provide advice and support to the head of the DMO and report on the implementation of all Defence Procurement Review recommendations.
The DMO should become an executive agency [Note: Government decided instead that DMO be created as a prescribed agency].
Project managers should be selected on merit by the head of the DMO particularly for their project management skills. Managers could be drawn from the military, industry or the public service and they should be accountable to the head of the DMO and have minimum tenures, usually of five years. Remuneration levels should be set at the relevant level to attract and retain project management specialists.
The head of the DMO should be consulted on military postings to the DMO and should have the authority to accept only those ADF personnel who possess the requisite skills and experience.
Capability Managers should have the option to locate their representatives in the DMO to monitor the acquisition and logistics management for approved capabilities.
The role of the project governance boards should be extended to include through-life-support of ADF equipment and report to the head of the DMO on potential difficulties.

The recommendations

The Defence Procurement Review (DPR) report presented to the Government in August 2003 contained 10 major and 12 minor recommendations aimed at making Defence procurement more streamlined, business-like and accountable. The Government announced the following month that it had accepted all but one recommendation - DMO would be established as a prescribed agency, rather than an executive agency.

Broadly speaking there were two main areas of concern; making sure the capability being acquired for Defence meets Australia's needs and then ensuring that capability is acquired in a way that best serves the Australian Government and taxpayers.

The recommendations were aligned with these concerns. They proposed a number of organisational changes - establishing a new Capability Development Group with three-star leadership, strengthening the 'two pass' system for new acquisitions, the appointment of a new Chief Executive Officer for the DMO, the creation of an Advisory Board, a review of project manager remuneration and tenure and of course the prescription of DMO.

What has been done?

It has been a busy 20 months. More than a third of the Kinnaird recommendations have already been fully implemented and the rest of the tasks are on track for completion, according to the latest Defence Procurement Review Implementation Progress Report.

On the capability side of the house

In December 2003 the first of the three major organisational structural changes was made with the appointment of Lieutenant General David Hurley as Chief of the new Capability Development Group (CDG), responsible for managing the capability development process for Defence.

Lieutenant General Hurley says, 17 months on, his group is working hard delivering the DCP to the required timetable, and continuing to implement the Kinnaird recommendations.

"CDG has two standout goals - first is to link strategic guidance to the Defence Capability Plan with a rigorous and transparent capability planning process, following through on the Kinnaird review, and develop an achievable, balanced and affordable Defence Capability Plan. The second is to meet the Defence Capability Plan timetable".

He reports that CDG is well on the way to achieving the benchmark, recommended by Kinnaird, of five to ten per cent up-front investment in projects to mitigate risk.

"Our current projected spend is just under five per cent across the whole program. In some of the new projects coming through after Kinnaird we are looking to spend beyond ten percent in an up-front investment to mitigate risk," he says.

Another achievement was the implementation of the strengthened 'two pass' system in May 2004. This two-part process aims to assist Government to make informed decisions on approving spending for new acquisitions.

The revised process formally incorporates assessments of technical risk and has been agreed to by the Government. It was successfully implemented on 26 projects in 2004 and two projects have already been progressed to second pass approval this year.

In the materiel world

Two months after Lieutenant General Hurley's appointment, the DMO's Chief Executive Officer was appointed. In line with the Kinnaird recommendations, Dr Stephen Gumley was given clear authority, responsibility and accountability for ensuring DMO operates in a businesslike manner. He was also charged with the task of overseeing the second major structural change - steering DMO toward prescription (see side box).

Under his guidance there has been extensive change throughout the DMO over the last 12 months.

"Our top level goal at DMO is to deliver projects and sustainment on time, on budget and to the required quality, capability and safety. To do this we need to make the DMO more business-like, accountable and outcome driven. Our aim is to make DMO the premier project management and engineering services organisation in the country," says Dr Gumley.

In line with this objective, an assessment of the education, experience, competency and knowledge of existing DMO program managers was conducted at the end of 2004 and found there were areas of weakness across all competencies when measured against private industry standards.

The blueprint for a new project management certification framework was released for staff and union consideration in March. It is proposed that all program managers and directors will be expected to gain accreditation with the national project management body. An interim certification system for DMO will be in place from July 2005, and the full certification framework will be operational by December 2006.

Other changes have included implementing merit-based selection for all project managers and strategies to attract and retain highly qualified, experienced project managers. Dr Gumley is now consulted on military postings and has the authority to accept staff only if they have the skills and experience required to meet DMO's needs. Both project and non-project management positions filled by military personnel have agreed tenures and specified replacement criteria.

The merit-based approach to selection extends to all senior appointments. Using this system Dr Gumley has appointed a senior executive team with extensive public and private sector experience. He has also introduced a General Counsel to advise on contracting and legal issues, established the role of Deputy CEO to continue the standardisation of the organisation's processes, and established the role of Chief Operating Officer to take responsibility for corporate support functions aligning with commercial practice and improving management visibility.

"I have been very lucky and fortunate in recruiting a fantastic, enthusiastic, capable management team at the Two Star/Band Two level. They are doing a great job in driving the change processes deep into the organisation," says Dr Gumley.

The Advisory Board

The third major structural change was implemented in early 2004 when the Government established an advisory board to provide advice and support to the Chief Executive Officer of DMO and report on the implementation of the DPR recommendations to Government.

The Advisory Board - chaired by Mr David Mortimer with Mr Malcolm Kinnaird, Dr John White and Mr Kevin McCann as the other private sector members - conducted their first meeting on March 5, 2004, and have met regularly since. The Board has expressed its pleasure with the progress in the implementation of the Kinnaird recommendations.

"The desired outcomes are beginning to be demonstrated in many areas. There are indications that the new arrangements are having a positive impact on equipment delivery, in particular improved rigour and discipline in the two-pass process and improvements in project management in DMO" Mr Mortimer told us.

Working together

One significant misconception, expressed in some quarters, is that the new business model separates the end-users from the procurers. The senior staff in Defence and DMO take their relationship seriously and see it as key to ongoing success for capability acquisition and sustainment. Both Dr Gumley and Lieutenant General Hurley are committed to maintaining a strong working relationship between their organisations. Lieutenant General Hurley sees DMO's involvement in the two-step approval system as a crucial part of the connectivity between the two groups and foresees that post-prescription DMO and CDG staff will work even more closely on "first pass" consideration.

"I expect that both DMO and CDG will remain committed to maintaining our partnership to accomplish our shared goal of delivering an achievable, balanced and affordable DCP. We are firmly committed to delivering the DCP in a cooperative manner in a team-based environment. The Chief Executive Officer DMO and I are committed to our overriding objective to always provide the best value for money equipment to the ADF, on time and on budget," he says.

While it will be some time before it can be determined if the changes made over the last year and a half will have the desired long-term effect, early indications - such as the recent on-time, on budget delivery of the Tiger Helicopter - suggest they are working. Key stakeholders, like the Advisory Board, are optimistic.

"There are indications that the new arrangements are having a positive impact on equipment delivery, in particular improved rigour and discipline in the two-pass process and improvements in project management in DMO," says David Mortimer.

Prescribed Agency deadline approaching

The 1 July 2005 deadline for DMO's prescription is fast approaching and work is well underway to establish the DMO as a prescribed agency under the Financial Management and Accountability Act 1997.

Speaking at the recent Senior Leadership Group Summit, Dr Gumley confirmed his commitment to the deadline, "At this point I want to make one thing very clear. DMO will become a prescribed agency on 1 July 2005 and there is no scope for any delay."

DMO's business model has been developed in consultation with the Department of Finance and Administration, Prime Minister and Cabinet and the Treasury. Under the model, Dr Gumley will be accountable to the Minister for effective and ethical use of Commonwealth resources. He will also remain accountable to the Secretary of Defence and Chief of the Defence Force for administration under the Public Service and Defence Acts.

This model will establish a more transparent relationship with Defence through Agency Agreements and funding arrangements. A framework of agreements between Defence and DMO has been established to define accountabilities and responsibilities.

The separation has meant a huge amount of financial work has had to be completed to modify the financial management information systems to identify Defence and DMO as independent organisations so that, come 1 July, DMO will have a separate budget and annual financial statements. This process was further complicated when issues were identified with Defence's financial statements. While work is being done to address the ANAO audit findings, DMO will carry audit qualifications into prescription, but this will not prohibit or delay the prescription.

The Department of Finance and Administration has been formally asked to table the regulations for establishing DMO as a prescribed agency. Dr Gumley is adamant that DMO will be ready.

"It is imperative that we complete all of the required tasks to establish DMO before 1 July so we can then focus on our core business and provide Defence with the best service possible," he said.

Kathryn Fitch

Defence

Feature

Reflecting on Reform