defence annual report 2006–07 / volume two · equipment to support the adf—from fighter planes,...

� defence annual report 2006–07 / volume two

Section 1executive�summary

CHAPTER 1 The year in review

CHAPTER 2 The DMO overview

defence annual report 2006–07 / volume two

The DMO is Australia’s largest project management organisation. The DMO is also a service provider, risk manager, systems integrator, specialist engineering and technical support agent, contract manager, maintenance and support provider, procurement strategist and business adviser. Perhaps most importantly, the DMO is, and will continue to be, a major force multiplier to the Australian Defence Force (ADF), particularly in support of operations through rapid acquisition and sustainment. Our core business is equipping the men and women of the ADF while providing through-life support and significant upgrades to maximise the quality and life of that equipment.

The Government has increased the supply of goods and services through the DMO from $6.1b in 2003–04 to an expected $11.3b in 2009–10. Over the six years following implementation of the Kinnaird reforms,1 this represents growth of about 50 per cent in real terms (when adjusted for inflation).

In 2006–07, there were many success stories, particularly in our sustainment areas and in rapid acquisitions of new kit for deployed forces. Many of these successes are detailed in this report.

1. The Kinnaird reforms are detailed in the Defence Procurement Review, which can be found at www.defence.gov.au/publications/dpr180903.pdf.

The DMO achieved 92 per cent of its budget target for the Approved Major Capital Investment Program at a time of increased operational tempo for the ADF. Performance in terms of sustainment and through-life support projects was even better, achieving 99 per cent of the budget target. In terms of rapid acquisitions to support ADF units deploying on operations, the DMO achieved a 98 per cent demand satisfaction rate. These are impressive results for an organisation that continues to be challenged by ambitious investment plans and urgent operational demands.

Our commitment to supporting operational deployments is our number one priority. By careful prioritisation, this vital work will not be affected by skills or staff shortages within either the DMO or industry. The direct impact of any staff shortages typically shows up in delays to major projects. In 2006–07, it was evident that the increased workload and technical challenges took their toll on some areas of industry, both domestic and international.

The sharp growth in demand associated with a larger and more technologically advanced ADF will require additional staff resources in Defence and industry.

Chapter�1The year in review, by the Chief Executive Officer

� defence annual report 2006–07 / volume two4

The dedicated people in the DMO are meeting these demands through improved business practices, increased professionalisation of our skills base, and innovative solutions to challenges. Our key priorities for the next year reflect our commitment to continue to set the benchmarks for project and sustainment reform within Defence and industry.

The professionalism and dedication of the DMO’s staff continue to be the foundation of the DMO’s success. The ADF’s demands would not be met without the tireless efforts of over 6,800 DMO staff at our sites across Australia and overseas. They have been ably supported by more than 20,000 staff from over 500 contracted supply companies in industry. Together, they project manage and deliver over 210 current major projects and over 200 minor projects and sustain several hundred fleets of equipment.

I am keenly aware that in this business one cannot talk about the past without an eye on the future. The Kinnaird-inspired two-pass approval process has increased the quality of data provided to the Government as part of the decision-making process. Achieving risk reduction on a multi-billion dollar project and presenting quality information to the Government is a complex undertaking, considering that in one year we have had some $18b of project approvals by the Government. In the case of the Amphibious Deployment and Sustainment capability and the Air Warfare Destroyer Program, it is not an overstatement to claim that several hundreds of thousands of hours of DMO staff effort were consumed in the risk reduction, technical definition, and commercial structuring phases prior to second pass approval.

The Kinnaird reforms are working. One of the most pleasing elements of the Air Warfare Destroyer Program second pass approval ceremony was the Prime Minister’s acknowledgment that ‘the new [two-pass approval] process we have has proved to be very effective and very rigorous’. Projects that

commenced prior to the formation of the DMO (2000) and prior to the Kinnaird reforms (2003) continue to be managed intensively to mitigate the levels of risk.

The demands of the Defence Capability Plan 2006–162 will require a lift of over 20 per cent in constant dollar terms for the project work rate of the DMO and industry over the next five years. The DMO will manage acquisition and sustainment in the order of $100b over the next decade, with about 65–70 per cent to be spent in Australia. During 2007–08, the DMO is budgeted to spend over $4.8b on acquisition and over $4.6b on sustainment, which constitutes 43 per cent of the Defence budget.

The increased focus on reliance on industry was highlighted in the Government’s release of the Defence and Industry Policy Statement in March 2007.3 The DMO is getting on with implementation of the recommendations, and successes are already being achieved.

In 2007–08, defence-related industry in Australia will grow by 8–10 per cent in real terms. This equates to a requirement for an additional 1,850 new positions. In response to these challenges, in 2004–05 the Government launched the Skilling Australia’s Defence Industry program.4 The aim of the program is to provide financial assistance to aid the growth of the defence industry skills base. This investment by Defence and industry will generate 159 new positions or training places for apprentices, as well as work experience opportunities. It will increase the skills of over 2,400 employees, including 150 postgraduate professional engineers.

2. The Defence Capability Plan can be found at www.defence.gov.au/dmo/id/dcp/dcp.cfm.

3. A complete copy of the Defence and Industry Policy Statement 2007, key strategies and implementation plan can be found at www.defence.gov.au/dmo/id/dips/DIPR_Policy_Statement_2007.pdf.

4. More information can be found at www.defence.gov.au/dmo/id/sadi/index.cfm.


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the year in review :�chapter�1

http://www.defence.gov.au/dmo/id/dips/DIPR_Policy_Statement_2007.pdf

http://www.defence.gov.au/dmo/id/sadi/index.cfm

Most defence companies in Australia are now at or near full capacity, so extra production will depend heavily on improvements to productivity. The Skilling Australia’s Defence Industry program continues to be a significant enabler of industry productivity, directly affecting some 8,000 workers throughout Australia.

At the same time, the DMO is working to drive internal productivity and skilling gains. The increased emphasis on training and professionalising initiatives, driven by internal DMO Councils (Materiel Logistics, Engineering, Project Management, and Procurement) has started to deliver tangible improvements.

The DMO has enjoyed excellent support from former Secretary of Defence Mr Ric Smith and his successor, Mr Nick Warner, and from the Chief of the Defence Force, Air Chief Marshal Angus Houston. Without their wise counsel, and the valuable assistance of the Service Chiefs and Deputy Secretaries in Defence, the DMO could not have achieved its goals. The partnership with Lieutenant General David Hurley, Chief of the Capability Development Group, and his team has also been fundamental to the DMO being able to deliver acquisitions to the ADF. I thank them

all for their efforts and their collegiate approach, with both acquisition projects and sustainment products and particularly with rapid acquisitions in support of operational deployments.

The report of the Defence Management Review was handed down in 2006–07 and, while the DMO was outside the terms of reference, it was pleasing to see that some of the DMO’s reform themes are being taken up more broadly across Defence.

In the coming year there will be even greater expectations of the DMO, but I am certain the DMO will become better and better. I am proud to lead the people in the DMO.

�Dr�Stephen�J�GumleyChief Executive OfficerDefence Materiel Organisation

� defence annual report 2006–07 / volume two

chapter�1�: the year in review

6

The DMO is Australia’s largest project management organisation. Its mission is to acquire and sustain equipment to support the ADF—from fighter planes, submarines and satellites to tents, medical supplies and rations. This is a role for which the DMO is ideally suited and one it takes very seriously.

SuppOrt tO OperatIOnS

The DMO provides strong and effective support to ADF operations through the acquisition of equipment and supplies, sustainment of ADF capabilities and deployment of specialist staff.

Structural, management and cultural change over the past two years has seen the DMO become a more performance and outcome driven organisation. This has provided the flexibility and adaptability to enable the DMO to respond to requests for support—often at very short notice and within very tight timeframes—and these efforts have been appreciated by customers.

To best provide this support, the traditional acquisition and sustainment approaches are increasingly complemented by the Rapid Acquisition Program, introduced in Defence in 2001 as a method of quickly overcoming operational deficiencies in order to meet immediate security challenges. Equipment—including Bushmaster infantry mobility vehicles, unmanned aerial vehicles, ballistic protection upgrades to helicopters, fixed-wing aircraft and land vehicles, extreme cold weather clothing, specific weapons and communications equipment—has been subject to accelerated or rapid acquisition to ensure that the best equipment available is provided to Australian troops when, and where, they need it.

Chapter�2The DMO Overview

Bushmaster fitted with protected weapon

station in Iraq.


The Bushmaster vehicle is operating effectively in Iraq and Afghanistan and is highly regarded by Australia’s troops and allies. The DMO also supports Australian light armoured vehicles (ASLAV), up-armoured Unimog and Mack trucks, and a range of other equipment. The threat from improvised explosive devices has also become significant during the period, and the DMO has worked closely with Australian industry and overseas suppliers to ensure that world-class equipment is provided to ADF personnel moving into harm’s way.

OrGanISatIOnal framewOrk

The DMO became a prescribed agency under the Financial Management and Accountability Act 1997 on 1 July 2005. As a result, the CEO DMO has statutory responsibilities and authority under that Act. However, he also has joint responsibilities to the Secretary and the Chief of the Defence Force under section 9A of the Defence Act 1903 and is provided with significant delegation powers from the Secretary to manage and allocate staff resources under the Public Service Act 1999.

The CEO DMO serves on Defence senior committees, including the Defence Committee. The relationship with Defence Groups is strong, and there is a collegiate approach to direction and strategy that is embraced by the DMO senior leadership.

The DMO’s close relationship with Defence is formalised through a suite of agreements covering acquisition, sustainment, the military workforce and shared services. During 2006–07, significant progress was made in maturing these agreements and strengthening both organisations’ understanding of how the agreements contribute to better performance outcomes. The coming year will see further work on the various agreements, to improve the communication of customer requirements and the understanding of pricing of services (including service fee structure).

buSIneSS ImprOvement

The DMO has adopted six key themes to ensure that it achieves its vision of becoming the premier program management and engineering services organisation in Australia and, as a result, provides the support required by Australia’s troops in operations. These themes are:

professionalise staff

reprioritise work

standardise corporate systems and work practices

benchmark against national and international best practice

improve industry relationships and industry performance

lead reform and embrace change as a way of life.

The themes are also the mechanism for continuing to effect cultural change to become more business-like and to improve the efficiency and effectiveness of the DMO. They provide a positive framework for the DMO to continue to improve its acquisition and sustainment core business, ensuring the effective implementation of improvements to business practices and systems and continuing the reform program.

The DMO has considerably improved transparency and accountability to Defence, and to the Government, through agreements for delivering outputs and enhanced performance reporting.

Significant progress has been made in professionalising, recognising the competencies of and raising the skills of DMO people—a stronger focus on attracting, developing and retaining the critical skills the DMO needs.

Chapter 5 provides more detail about the DMO’s achievements against these initiatives.

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the dmo overview :�chapter�2

buSIneSS envIrOnment

The DMO’s business of acquiring, modifying and sustaining high-technology capabilities within a, high-risk environment is inherently complex. It requires innovation and focused work at the leading edge of technology development and highly complex systems integration.

In order to maximise the effectiveness of its investment in Defence, the Government expects that the DMO will deliver and sustain the required capability at optimum cost and to tight schedules.

The DMO operates Australia-wide and in many overseas locations, so its business is affected by the actions and decisions of domestic and international companies and governments. Being so exposed, the DMO or industry may not at times fully meet Defence’s plans and targets. The DMO’s task is to minimise the impact of such shortfalls and effectively manage risk-related issues as they arise. At every level, the DMO must be responsive to these risks and deliver its support services within this environment. The DMO is committed to this formidable challenge.

SOme recent SucceSSeS

The work the DMO has put into becoming more business-like and increasingly professionalised resulted in some significant successes during 2006–07.

In June 2007, the Prime Minister and the Minister for Defence announced that the preferred tenderers for the Air Warfare Destroyer and amphibious ships were F100 and Tenix/Navantia respectively. These two projects—SEA 4000 Air Warfare Destroyer and JP 2048 Amphibious Ships—are setting the benchmark for future project decision making. During that announcement, the Prime Minister remarked on the decision-making process:

‘It was one of the best discussions in which I have been involved for some time in relation to the purchase of defence equipment. They are difficult decisions, there is always debate about the competing merits and that is why you have a rigorous process and I think the new process we have has proved to be very effective and very rigorous and I am very satisfied with the decision’.

Another success was the implementation of a logistics supply and support framework in time for the arrival of the first new C-17 Globemaster III heavy lift aircraft in December 2006.

The CEO of the DMO, Dr Stephen Gumley (left, blue shirt, hatless), and the Vice Chief of the Defence Force, Lieutenant General Ken Gillespie (centre, back to camera), talk to ADF members and civilian contractors about the preparations of Al Muthanna Task Group personnel and equipment during the No. 1 Brigade Mission Rehearsal Exercise in Darwin.


chapter�2�: the dmo overview

In working to improve relationships with industry and promote improved industry performance, there was closer engagement with the defence industry through the Skilling Australia’s Defence Industry program, ethics letters, an industry portal, company profiles and enhanced company scorecards.

In addition, the relationship with industry in procuring military platforms and systems was recognised in the Defence and Industry Policy Statement 2007. Released by the Government on 1 March 2007, this important statement details nine key strategies to ensure cost-effective delivery of equipment and support to the ADF in line with Australia’s strategic circumstances.

The new policy uses Defence procurement to deliver both strategic and commercial outcomes. From a strategic perspective, the policy addresses Australia’s military self-reliance and national security needs by ensuring that essential industrial capabilities are identified, established and sustained, at appropriate levels, within Australia’s defence industry base. From a commercial perspective, it establishes a competition framework to provide every opportunity to Australian industry to compete for and win work in an open and transparent environment based on best value-for-money procurement principles.

The DMO played an important role in the extensive consultation period leading to the development and release of the Defence and Industry Policy Statement, and is well advanced with the implementation plan. The majority of the policy initiatives will be enacted by the end of 2007.

peOple

The people in the DMO are the key to the organisation’s past successes and its ability to continue to deliver in the future.

The continuing challenge of developing and retaining a skilled workforce required the DMO to develop a strategy to attract and retain people, promoting:

the quality, complexity, scale and diversity of work opportunities in the DMO

competitive remuneration and conditions of service—including financial and lifestyle factors

opportunities for involvement in very large projects of national and strategic significance

access and exposure to senior political, commercial and bureaucratic levels

development, training and diversification of skills in a variety of work environments

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The first RAAF C-17 flying over Canberra.


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work mobility—including interstate and overseas postings and secondments

a long-term, rewarding career.

The strategy has been highly successful, with a four per cent growth in people numbers, creation of a DMO Institute in partnership with DeakinPrime5 to continue developing the skills and professional standing of DMO people, and an increased focus on business-like practices.

The military members in the DMO continue to provide understanding of the operational environment and the specialist military skills that are vital to the delivery of appropriate capability to the ADF. The increased operational demands on the ADF have affected the availability of military people for the DMO. The DMO has worked closely with the Services to ensure ADF needs continue to be met with fewer military members embedded in the DMO.

Details about people management and development are provided in Chapter 4.

rISk

The work the DMO performs is not without risk. To best understand the scope and complexity of what the DMO does, it is necessary to have an insight into, and appreciation of, the risk management role the DMO plays for the Government to ensure that the best possible support is provided to Australia’s troops.

The Government and Defence expect the DMO to manage a high level of risk—prudent, not reckless, risk. The DMO must meet the Government’s policy requirement of maintaining requisite support and a technology edge for the ADF within the risk framework. Risks must be accepted only after calculated and sensible assessments, mitigated where practicable and, in all cases, carefully monitored and intensively managed.

5. DeakinPrime is the commercial arm of Deakin University. More information can be found at www.deakinprime.com.

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Risk areas

GOvernmenT deCisiOns On new equipmenT

The DMO is reliant on Defence, the central agencies and the Government agreeing on the equipment to be purchased before it can enter production. The timing of this agreement can put in-service dates for new equipment at risk and also affect the DMO’s ability to achieve budget targets.

esTimaTes risks

The DMO is at risk because of the difficulty of estimating the cost of acquiring and supporting highly complex and evolving military equipment, much of it at the forefront of new technology. Cost is a highly problematic, but important, consideration when assessing capability options. All capability enhancements are delivered in an environment of budget constraints, and robust costings allow informed choices to be made between different capability options. Robust costings that cover whole-of-life costs are difficult to achieve, not least because of uncertainty arising from long lead times for key decision points, changes in technology and changes in the strategic environment.

supplier delivery sChedules

The DMO’s main risk in achieving its budgeted level of acquisition and sustainment activity lies in the ability of its suppliers to deliver on schedule.

Industry skill shortages can limit both DMO’s ability and that of suppliers to deliver expected outcomes. Strong economic growth and expansion in industries that compete for skilled engineering and contract management staff, materials and supplies are causing a shortage in these commodities. These limits on supply can cause delays in completion of projects and also put upward pressure on costs in both acquisition projects and sustainment activities.



FOreiGn exChanGe

The DMO has limited financial risks in respect of international acquisitions. It operates in a ‘no-win no-loss’ foreign exchange environment because the Government manages foreign exchange fluctuations centrally.6

Apart from the DMO’s direct appropriation for Output 1.3 (Provision of policy advice and management services), all price and exchange adjustments are managed in Defence’s appropriations. This ensures that the DMO adjustments are reflected in the same way in Defence’s budget estimates and the DMO’s budget estimates; it also ensures that all capital approvals are fully adjusted for price and exchange movements according to the formula supplied by the Government.

Risk management

Risk management is integral to the DMO governance framework. During 2006–07, the DMO strengthened its risk management framework through a series of initiatives, including:

six-monthly reports to the DMO Executive and the Materiel Audit Committee on implementation of the DMO Enterprise Risk Management Plan

completion of subordinate risk plans for each division in the DMO

revision of the Chief Executive Instruction and creation of Defence Materiel Instructions on Risk Management.

The DMO will continue to strengthen its risk management framework in 2007–08 by supporting a risk management culture within the DMO, which will embed risk-management principles and practices in all planning, management and decision making.

Details about the DMO’s governance framework are provided in Chapter 6.

6. To assist General Government Sector entities in managing foreign exchange risk, the Department of Finance and Administration has published the Australian Government Foreign Exchange Risk Management Guidelines. More information can be found at www.finance.gov.au/finframework/foreign_exchange.html.

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cOmmOnwealtH buDGet framewOrk

As a prescribed agency within Defence, the DMO operates within the Commonwealth budget framework.

Defence’s budgeting system aligns with the Commonwealth’s budget estimates framework. Defence is required to submit annual budget and forward estimates proposals for consideration by Cabinet. In order to sustain the program of developing Australia’s armed forces and supporting capabilities, Defence funding increased by $500m in 2001–02 and by $1b in 2002–03 as outlined in the Defence White Paper, Defence 2000—Our Future Defence Force.� The White Paper foreshadowed further real growth and directed Defence to plan for an average real growth in spending of about three per cent per annum over the decade to 2012–13.

The Defence Management and Finance Plan8 is mandated by the Government as an integral part of the budget process to provide a comprehensive 10-year view of Defence’s policy direction and linking this to budget requirements. This is the vehicle used by the Expenditure Review Committee of the Cabinet9 to consider the Defence budget. The DMO’s budget requirement goes forward to the Government as a separate chapter in the plan and is included in the Defence portfolio budget submission. The DMO’s budget requirement is separately identified to Parliament in the Portfolio Budget Statements and, as adjusted, in Portfolio Additional Estimates Statements.10

7. The Defence White Paper, can be found at www.defence.gov.au/whitepaper.

8. Although the Defence Management and Finance Plan is a classified document, the underlying detail, including Defence’s proposed 10-year budget, is articulated in the Portfolio Budget Statements.

9. The major ministerial committee responsible for examining all expenditure proposals in light of the Government’s overall fiscal strategy, advising Cabinet on budget spending priorities and initiating reviews of expenditure under individual ongoing programs. It usually includes the Prime Minister, the Treasurer, the Minister for Finance and Administration, and relevant portfolio Ministers.

10. Available for both Defence and the DMO at www.defence.gov.au/budget/index.htm.


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http://www.finance.gov.au/finframework/foreign_exchange.html

Figure 2.1—Summary of outcome and output groups: budget and actual expenses [1] [2][3]

Notes1. Actual total expenses by output are as shown in the DMO financial statements.2. Actual total expenses include $41.9m of resources received free of charge, which has been attributed across the three outputs.3. Budget figures are the estimated actual as shown in the Portfolio Budget Statements 2007–08.

OutcOme anD Output Structure

The DMO’s outcome describes the results the Government seeks from the DMO. The outcome for the reporting year was achieved through the successful delivery of outputs to the standards set in the Portfolio Budget Statements 2006–07 and, where applicable, revised in the Portfolio Additional Estimates Statements 2006–07. The DMO has a single outcome and three outputs, as shown in Table 2.1.

Details of the DMO’s outcome performance are provided in Chapter 3.

The relationship between the activities of the DMO and its outcome is summarised in Figure 2.1, in terms of accrual based prices rather than cash received from Defence and the Government.

Table 2.1—The DMO outcome and outputs

Outcome Description Outputs

Defence capabilities are supported through efficient and effective acquisition and through-life support of materiel.

This outcome encapsulates the entire business of the DMO: the activities it undertakes for Defence in acquisition and sustainment of materiel and the advice it provides on contracting policy and industry policy.

Output�1.1—Management of capability acquisitionOutput�1.2—Management of capability sustainmentOutput�1.3—Provision of policy advice and management services

Defence Materiel OrganisationTotal price of outputs

Budget $8,682m Actual $8,089m

OutcomeDefence capabilities are supported through efficient and effective

acquisition and through-life support of materiel Budget $8,682m Actual $8,089m

Output 1.1 Management of capability acquisition Budget $4,546m Actual $3,961m

Output 1.2 Management of capability sustainment Budget $4,077m Actual $4,079m

Output 1.3 Provision of policy advice and management services Budget $59m Actual $49m



frauD cOntrOl meaSureS

The DMO complies with section 45 of the Financial Management and Accountability Act and has in place appropriate fraud control plans, risk assessments, and prevention, detection, investigation and reporting procedures. These comply with the Commonwealth Fraud Control Guidelines 2002. Detection and investigation services are provided to the DMO by Defence under a shared services agreement.

aDvISOry arranGementS

The Defence Procurement Advisory Board is the primary external advice body to the DMO. The Board consists of four private sector members (one of which is the chair), the CEO DMO, the Secretaries of Defence, Finance and Treasury, and the Chief of the Defence Force. A senior representative from the Department of the Prime Minister and Cabinet is a permanently invited member, as is the Chief Capability Development Group.

The Advisory Board is accountable to the Ministers for Defence and Finance and Administration and reports to the Government on the implementation of all Defence Procurement Review recommendations. The Board has been a very positive influence, acting as a strategic sounding board of enormous value to the DMO in leading reform and cultural change.

The DMO Executive is the primary internal support body to the CEO DMO. Its members are the CEO DMO and all Senior Executive Service Band 2 and ADF two-star officers within the DMO. The ADF two-star Commander Joint Logistics was a permanently invited member during 2006–07.

The DMO Executive provides management advice to assist the CEO DMO in discharging his responsibilities in relation to the achievement of the Minister’s Directive. During 2006–07 the DMO Executive met 11 times.

Figure 2.2 shows the organisational structure at 2 July 2007 and is different to that reported in the Portfolio Budget Statements 2006–07 and revised in the Portfolio Additional Estimates Statements 2006–07. The three General Manager positions were created during the reporting period, with officers filling these positions on 2 July 2007. For further details about senior executive changes within the DMO, see Chapter 6.


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Figure 2.2—Organisational structure as at 2 July 2007

Defence Materiel Organisation

** – Military 2 star position ^^ – Civilian SES Band 2 position ^^^ Civilian SES Band 3 Position

Chief Executive OfficerDr S Gumley

General ManagerProgramsMr W King

^^

Airborne EarlyWarning and Control

AVM C Deeble**

New Air CombatCapability

AVM J Harvey**

General ManagerSystems

Mr K Gillis^^^

Aerospace SystemsAVM C Rossiter

**AEROSPACE

Electronic and Weapon Systems

Ms S McKinnie^^

ELECTRONIC

Maritime Systems RADM T Ruting

**MARITIME

Land SystemsMr C Sharp

^^LAND

Helicopter SystemsMAJGEN T Fraser

**HELICOPTER

Industry DivisionMr K Clarke

^^

General Manager CorporateMs J Wolfe

^^^

Chief Finance OfficerDMO

Mr T Youngberry^^

Chief Operating OfficerMr F Lewincamp

^^

General CounselMs G Marks

^^

Major Programs

Systems(Previously referred to as Domains in the PBS

2006–07)

Corporate(Previously referred to as Operations

in the PBS 2006–07)



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