Mark Bishop (WA, Australian Labor Party) Share this | Link to this | Hansard source

When I last spoke on defence procurement, in August, I addressed a wide range of contextual matters that currently shape the debate about improved performance. One of those matters was the governance and organisational model derived from a number of reviews, especially the Mortimer and Kinnaird reviews. Today I will make a few observations on the organisation of defence procurement, recognising the history and changes taking place. I will also make some suggestions about the need for a fresh focus on management structures and a more accountable procurement organisation.

Change is an enormous challenge. More often than not, in Defence, it entails tinkering only at the edges. Defence is an enormous organisation with 14 separate silos. These include the traditional bastions of Army, Navy and what some say are three Air Forces. That is not to say that specialisation between land, sea and air is not justified, but each service has its own traditions and structures. Needless to say, like in any large, longstanding organisation of this kind, these fiefdoms are entrenched.

That is not to say that efforts made so far to unify the forces into what we may call one ADF have not been successful; in fact, the progress has been quite good. The introduction of an overarching defence strategy, joint operational command and network technology is proving successful. The same can be said of procurement. In most cases, costs have been contained—although not timeliness, which I suggest is a big test of organisational effectiveness. As we know, lost time in delivery of materiel means lost capability.

A simple management response to a better coordination of a large number of specialised silos is to centralise common functions. New layers of management are supposed to reduce the costs of duplication and enhance specialisation. This includes shared services, which, for all well-paid consultants, are considered low-hanging fruit. There is obviously no easy alternative to that model, but it does require clear role definition, good communication and clear lines of accountability.

Hence, in Defence, rather than leave procurement to each of the services, we have the Defence Materiel Organisation, the DMO. This organisation is responsible for procurement once decisions are made. However, maintenance is also considered to be common, so that too was made the responsibility of the DMO. To coordinate this, the Capability Development Group, the CDG, exists, first to shape the defence capability program. The CDG undertakes the product specification for government decision. Those specifications are based on input from the services; industry; the DMO, with respect to commercial considerations; and of course the DSTO. To achieve better efficiency and productivity, outsourcing of functions has been undertaken, presumably with savings to budget.

This all sounds sensible, but the question in retrospect is how well it has worked. Let us look at the evidence. Clearly the record on costs of recent purchases is there to be seen. This is especially true in recent times thanks to significant off-the-shelf products. Recent examples include high-cost aircraft from assembly lines of proven non-developmental products and a second-hand ship. Likewise for timeliness on such product.

The record on timeliness for other purchases, however, is not yet supported by the evidence, so we should not be misled into thinking that the system has been fixed—far from it. There is a legacy of older projects that we are encouraged to forgive because they started prior to 2008 under a previous management regime. In fact, the real test will be the naval construction program, which has already stumbled in one instance, and with submarines to come.

I do acknowledge that much has been done to get projects off the concerns list and to put new checks and disciplines in place. The evidence on sustainment, however, is damning, especially for Navy. The combination of outsourcing through the centralised agency DMO seems to have been a disaster. The Rizzo review and the ANAO report Acceptance into service of Navy capability tell us so in great detail. The essence of this is acknowledged as being the disempowerment of the Chief of Navy. At the same time, there has been a massive deskilling and hollowing out of Navy's technical competence. While moves are underway to correct these circumstances by returning some authority to the Chief of Navy, questions still remain. Why, for example, didn't the same phenomenon apply to the RAAF?

This brings me to the efficacy of the matrix model by which defence procurement is managed. As I have already argued, the coordination of the disparate interests of the three services in Defence is essential and unavoidable. Built into this matrix model is the principle of jointness—that each element retains certain specialisations to contribute to the whole. Each of these elements is independent of the others, with their own resources and separate skill bases supplemented by service personnel. Throughout all of this, industry is supposed to be consulted. There is evidence this consultation is ineffective, and I will address that at another time. The central question, however, is whether this matrix model works. From an accountability perspective, I am not convinced. I am also perplexed that, on the one hand, it is now said that authority is being handed back to the service chiefs but, by their own admission, CDG regards itself as being in charge. Yet, once contracts are signed with the agreement of service chiefs, DMO gets the money and is responsible for delivery to the clients. That delivery includes full knowledge and acceptance of all downstream maintenance.

The acid test is what happens when something goes wrong. To date, failure is most common with cost, though now it has morphed into time. A common shortcoming is specification failure, made worse by excess of optimism, unrealistic expectations of industry capability and overpromising. The question remains here: who is accountable? Who is responsible? The recent failure with amphibious ships says it all. Did DMO, Chief of Navy or CDG fail? Apparently not. For example, in the event that there are time or cost overruns with the construction of a ship, where will the relevant minister go for an explanation? I will bet Chief of Navy will not wear it—likewise DMO or CDG. What I anticipate is a lot of finger-pointing and the failure of the matrix model to account—that is, the system. Of course it is the system at fault. The answer is to fix the system.

Some from industry have expressed the view that, to simplify things, DMO should be pruned; it should become an organisation of contracting expertise only on behalf of the client service. The implication of this would be that, once a contract is signed with service chief endorsement, the service chief, as the client, should see it through. This scenario, of course, assumes the particular service has the technical competence. At present one could be confident that the RAAF might already work this way, but for Navy it is currently not possible. So would this be a better model for accountability? It would certainly require a different definition and enforcement of roles from what currently is the case, despite what the manuals say. The role and function of the CDG would presumably shrink to one of overall coordination and monitoring once government decisions were made. More importantly, it is also about the technical competence of Defence, as technical expertise is spread unevenly and dissipated between the services, CDG, DSTO and DMO. That expertise is often on an impermanent basis or rotation, including for projects that might span more than a decade. There is also an environment where skills are in desperately short supply.

That, of course, brings me back to where I started. It seems to me that, while there are changes in Defence, little of it is focused on inter- or indeed intra-organisational effectiveness and almost none on achieving better accountability. It is like a blancmange: if it is poked, it shifts position momentarily and then quickly returns to rest. The remedies are often extra layers of supervision, addressing symptoms but avoiding causes. Some believe the defence procurement system has become constipated partly due to increasing organisational complexity. Production is becoming overwhelmed with process in the face of failure to focus on existing organisational roles and responsibilities, yet there is a continuing failure to heed prescribed process. The principles of flatter structures and simplification seem to have been lost. In the meantime, scarce resources are being gobbled up. I find it hard to believe that, with the resources available, some simplification of roles, the removal of duplication and streamlining of real accountability are not possible.

Senate adjourned at 22:40