In May 2008 the Commonwealth Government (Government) commissioned David Mortimer to undertake an independent review of the Defence Materiel Organisation (DMO) and the effectiveness of Australia’s defence procurement systems. The report, Going to the Next Level, was released yesterday.
The Report identifies five principal areas of concern:
- Inadequate project management resources in the Capability Development Group
- The inefficiency of the process leading to government approvals for new projects
- Shortages in DMO personnel
- Delays due to inadequate industry capacity
- Difficulties in the introduction of equipment into full service
The reforms proposed in the report aim to increase business acumen within the DMO and impose greater commercial discipline on the defence procurement and sustainment processes. This reflects the Minister for Defence’s desire for the DMO “...to run more like a business and less like a bureaucracy”.
The report’s main themes concern:
- The need for rigorous assessment requirements for projects before they are included in the Defence Capability Plan.
- The need for DMO to provide sufficient information in the Defence Capability Plan to enable industry to develop strategic business plans.
- Enhancing the Government approval process by implementing a more tailored application of the two pass process as well as introducing a single pass approval process for simple projects.
- Allowing for the provision of off the shelf solutions and requiring a rigorous cost-benefit analysis before any decisions are made to move beyond the requirements of an off-the-shelf solution. The report also emphasised the need to communicate this analysis to Government.
- Encouraging Public-Private-Partnerships for Defence procurement on suitable projects
Summary of key recommendations:
The Strategy and Needs Analysis of Capability Planning
Capability systems remain in service generally for 20 or 30 years, therefore it is critical that long-term defence strategy informs the development of new capability systems or upgrades.
Recommendation 1.1 –Defence should prepare an annual submission detailing current and future capability gaps and the priority for their remediation for Government consideration and approval.
Recommendation 1.2 –Defence should increase the rigour with which projects are assessed for entry into the Defence Capability Plan.
Recommendation 1.3 – The affordability of the Defence Capability Plan should be assessed as part of the annual Defence budget considerations by the Defence Chief Finance Officer.
Recommendation 1.4 – The Defence Capability plan should contain sufficient information to enable industry to develop strategic business plans. The currently used cost bands should be replaced by a measure relative to the DMO Acquisition Category framework.
Defining the Requirements of Capability
The report also contains recommendations aimed at increasing the effectiveness of the Government approval process. Defining requirements and timescales for new projects will ensure that costed, defined solutions are presented to Government for approval.
Recommendation 2.1 – Government approval of major Defence projects should occur through a tailored application of the two-pass process. For simple acquisitions where project definition is complete, Government may decide that Defence Capability Plan entry satisfies first pass requirements.
Recommendation 2.3 – Any decisions to move beyond an off-the-shelf solution must be based on a rigorous cost-benefit analysis which must be clearly communicated to Government.
Recommendation 2.4 – Prior to a project’s entry into the Defence Capability Plan, the Capability Development Group should prepare a capability submission that addresses requirements, costs, schedules and risks.
Recommendation 2.5 – Upon entry into the Defence Capability Plan, a draft Material Acquisition Agreement should be developed detailing the responsibilities and expectations of the stakeholders.
Recommendation 2.6 – Capability Managers should be required to sign the capability submission acknowledging their understanding of the capability being requested and proposed acquisition strategy.
Recommendation 2.7 – DMO should be responsible for the equipment acquisition strategy throughout the requirements definition process.
Recommendation 2.10 – The Chief Executive Officer of DMO should provide independent advice to Government on the cost, schedule, risk and commercial aspects of all major capital equipment acquisitions and be a permanently invited adviser to Government committees considering defence procurement.
The Capability Acquisition Process
Following Government approval of a project, the capability solution is acquired and brought into services. During this process the DMO works with industry to turn the Government’s requirements into functional military equipment. The Review makes the following recommendations to improve the equipment acquisition process:
Recommendation 3.1 – Capability Managers should sign the Material Acquisition Agreements to provide a firm baseline for the delivery of equipment.
Recommendation 3.2 – The Capability Manager should oversee and coordinate all elements necessary for the introduction of a capability.
Recommendation 3.4 – Capability Managers should regularly report to Government on the progress of their capability development initiatives.
Recommendation 3.5 – Project Managers should be held to account for meeting performance targets detailed in their project charter.
Recommendation 3.6 – An independent Project Performance Office should be established within DMO to review projects and assist project teams to solve problems where necessary.
Recommendation 3.8 – Public-private partnerships should be applied to defence procurement on appropriate projects.
Recommendation 3.10 – The Government should work with industry and State Governments to address the skills shortage.
Recommendation 3.11 – The Government should consider implementation of the recommendations of the joint Industry Training Task Force.
Recommendation 3.13 – Changes to the scope of projects should occur through a disciplined process that considers the merit of the change including the impact on cost and schedule.
Recommendation 3.14 – DMO should be held to account for delivering equipment and services as set out in the Material Acquisition Agreements.
Sustaining and Disposing of Capability
Sustainment provides the services and products to meet the in-service material requirements of the Australian Defence Force. Through-life maintenance and support account for more than half of the DMO annual budget and involve about two-thirds of its workforce. Industry also provides goods and services associated with this process.
Recommendation 4.1 – Net Personnel and Operating Cost estimates should be updated annually as part of the budget process.
Recommendation 4.2 – An independent Sustainment Efficiency Office should be created in DMO to improve the efficient delivery of sustainment to the Australian Defence Force.
Recommendation 4.4 – Decisions to either purchase new equipment or maintain existing systems should be based on the through-life cost of each option regardless of whether funding is from the acquisition or sustainment budgets.
Recommendation 4.5 – Systems Program Office Directors should have great delegation to deliver the performance levels set in Material Sustainment Agreements and, where necessary, to negotiate changes with Defence.
Recommendation 4.6 – Systems Program Office Directors should be held to account for meeting the performance targets detailed in their charter.
Recommendation 4.7 – The current functional split between Defence and DMO for warehousing, distribution and disposal should be retained but responsibility for vehicle maintenance should be returned to DMO.
Recommendation 4.8 – Business improvement should continue in Defence and DMO to increase the visibility of costs due to warehousing, freight and disposal, and to reduce the costs of inventory storage and distribution.
Driving Cultural Change in the Defence Materiel Organisation
Alignment of structure and culture with desired outcomes is critical to organizational success. The DMO must balance providing independent advice on commercial matters with the needs of Defence, through the effective and cost-efficient acquisition and support of military equipment. The following recommendations are proposed to enable DMO to better inform and support decision-making on defence procurement.
Recommendation 5.1 – DMO should become an Executive Agency under the Public Service Act 1999, and retain its Prescribed Agency status under the Financial Management and Accountability Act 1997.
Recommendation 5.3 – It should be mandated that the Chief Executive Officer of DMO must have significant private sector and commercial experience.
Recommendation 5.4 – Acquisition funding should be directly appropriated to DMO on the basis of a budget submission from DMO outlining anticipated major capital equipment project expenditure.
Recommendation 5.5 – Sustainment funding should continue to be provided through Defence to DMO, but Service Fee Funding should be appropriated directly to DMO.
The Minister for Defence, Joel Fitzgibbon, has indicated that the Government “...is committed to putting in place a program of reforms prior to the release of the [Defence] White Paper in order to ensure we have the best procurement systems to deliver the capability our future ADF needs”.
The Minister for Defence’s media release is available here.
A copy of the report is available here.
