Comment

COMMENT

In forgetting the Defence Materiel Organisation, are we about to become unwise buyers?

The goal should not be to please contractors but to deliver equipment on time and on budget.

The new Minister for Defence Materiel, Dan Tehan, has the opportunity to salvage one of the poorer calls made by the Abbott government. The summary axing of the Defence Materiel Organisation is a good example of what Laura Tingle describes in her recent Quarterly Essay as government failing to take into account "knowledge of what has worked, or not worked, in the past, or even by conscious analysis of what might have changed since the issue was last considered".

The appointments in 2004 of two pragmatic, no-nonsense outsiders – Steve Gumley and Warren King – to run DMO were responsible and effective choices. By the end of their tenure, projects were brought in on average at 95 per cent of budget; in respect of capability, 96 per cent are delivered with the requisite capability; and in respect of schedule, the average time overrun was reduced substantially from a decade earlier. These are metrics recognised as not only world class for the defence sector but also for the private sector in general.

Minister for Defence Materiel Dan Tehan has an opportunity to salvage the efficiencies created by the DMO.
Minister for Defence Materiel Dan Tehan has an opportunity to salvage the efficiencies created by the DMO.  

In January this year, the Australian National Audit Office acknowledged these improvements, noting "that 73 per cent of the total schedule slippage across the major projects relates to projects approved prior to DMO's demerger from Defence in 2005".

Crucially, Gumley and King made significant investments in lifting the level and quality of project management capability within DMO. They recognised that sustained investment was needed to build up the organisation's specialist project-management tradecraft.

Burdened with many "projects of concern", DMO methodically reduced the number of listed projects. Designed by then minister Greg Combet, DMO and the ANAO, the projects of concern list was a systematic way to bring problems to light and allocate resources to fix a problem early. It also proved effective in mobilising defence primes to apply the requisite resources to fix the problem.

Despite DMO's record of delivery and improvement, the Abbott government subsumed the organisation with the intent of outsourcing functions under a "smart buyer" banner. This reflected British thinking, where, over a decade or more, a number of different "contestable" models were considered.

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In 2013, Britain rejected a government-owned, contractor-operated model, in part because weapon-buying was seen as a function of the state. There was also recognition that, commercially, there is one thing worse than a government monopoly buyer and that's a private monopoly buyer, especially where projects were too big to fail. The sweet spot is an accountable public buyer with best-practice performance formed through skills and the application of competitive methodologies and practices.

The recent and ongoing departure from defence of dozens of experienced project managers, engineers, scientists and technology professionals suggests their expertise is no longer needed, at least inside government. Decisions have yet to be finalised on the future procurement model.

While some firms may find advantage in a less rigorous buying organisation, the cost to all parties is timely accountability. DMO ultimately did away with soft-touch treatment of contract variations, overruns and poor delivery. The playing field was levelled and marketing promises were tested, contracted, regulated and monitored. Such management didn't necessarily please all contractors all the time but it did serve the Defence Department, the Parliament and taxpayers' interests.

The current hiatus does not bode well for major defence acquisitions such as the submarine replacement or for dozens of existing acquisition projects. What many are yet to grasp are the implications of a less prepared and less public procurement system. For the taxpayer, it may mean our dollars and ADF personnel are put at increased risk.

Good public policy requires more than the application of sharp ideological reform glossed with rhetoric such as "smart buyer" and "contestability agenda". The government may well argue that merging the old capability development group with parts of DMO will achieve efficiencies. In practice, however, project discipline, and thereby efficiency, comes from the separation of responsibility for what is bought versus how it is bought.

The expectation is the 2016 white paper will set a new procurement paradigm and structures. Past experience shows that introducing a new business model can take a decade or more to embed. In all likelihood, much of what DMO finally achieved in terms of professional project management tradecraft will need to be replicated. If not, it'll have to be relearnt. The measure of success here is not plaudits from defence contractors but rather the delivery of materiel on time, on budget and according to specification.

Martin Callinan and Alan Gray wrote Defence science and innovation: an affordable strategic advantage, a special report for the Australian Strategic Policy Institute.