In early 2011, the entire Royal Australian Navy (RAN) amphibious fleet (1 x Landing Ship Heavy and 2 x Landing Platform Amphibious) were unexpectedly unavailable on the eve of a cyclone hitting the northeast coast of Australia, much to the alarm of the government and public. A subsequent review identified systemic failing in the oversight of ship readiness and the relationship between the RAN and DMO. Confused accountabilities and blurred lines of communication meant the state of the vessels had been allowed to deteriorate to an unacceptable level without senior parts of the RAN, Defence or DMO being aware. Several other factors were at play, including an absence of technical oversight and a low priority accorded to both sustainment and non-combatant vessels. At least as important was the failure to establish a robust customer-supplier relationship between the operators of the vessels (RAN) and the maintainers of the vessels (DMO). Subsequent reforms have seen the oversight of vessel seaworthiness improved and the relationship between DMO and the RAN put on a clearer and less ambiguous standing.
Also in early 2011, an unfortunate incident of personal misbehaviour at the Australian Defence Force Academy morphed into a scandal that stressed civil-military relations at the highest level and raised serious questions about misconduct and sexual harassment in the defence force. There followed a series of ‘cultural reviews’ that examined everything from the roles of social media and alcohol in the military to the treatment and career
management of female service-members. The end result was a package of reforms designed to prevent misconduct and ensure a safe and respectful environment for all personnel.
Notwithstanding the demise of the SRP, reform continues on multiple fronts in Defence.
Those two areas stand out as being important from the perspective of achieving efficiency and assuring capability. Specifically, reforms to shared services under the Chief Operating Officer (COO) and materiel sustainment under DMO are ongoing. Although the reforms now underway in both areas first arose under the 2009 SRP, they’re effectively bedding down the organisational structure created back in 1997 by the DRP. In each case, the latest reforms are correcting problems that developed at the interface between the designated internal suppliers and their customers elsewhere in Defence and in particular with the military (in economic jargon, the problems reflect principal-agent issues between internal Defence suppliers and customers).
In the case of non-materiel shared services (personnel, IT, non-materiel purchasing, finance) the problem was that many areas either refused to fully surrender responsibility to central providers or else duplicated activities that were supposed to be done centrally. This phenomenon was most acute in the case of personnel. The root cause was a lack of trust in the central service providers.
The opposite malady emerged in the case of materiel sustainment. Because of the scale and expense of repair and maintenance activities, the military had no choice but to transfer the activities in full to DMO. Having done so, it initially took insufficient interest in the cost of what it consumed and instead focused on service standards—but then only in part because responsibility for failure could always be put back onto DMO, as the failure of the
amphibious fleet in 2011 demonstrated.
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The 2009 SRP anticipated substantial savings (around $140 million a year) from reforms to the delivery of non-materiel shared services, including; personnel policy and administration, base support, non-materiel procurement and finance. A further $190 million was anticipated from reforms to information technology and communications. In 2011, McKinsey and Company reviewed the delivery of shared services in Defence and identified possible efficiency measures. Impetus for reform grew in 2012 when the government imposed a cut of 1,000 civilian positions (from a workforce of around 21,000). This came on top of a 2011 decision to cancel planned growth of 1,000 additional civilian positions. The creation of the powerful COO position in 2011-12 was probably an important enabling step on the path to subsequent shared services reform. In any case, reforms begun under the SRP have accelerated significantly over the past two years.
Although reforms vary from sector to sector, the basic underlying approach has been to consolidate activities and then streamline processes and systems. The benefits are twofold.
First, consolidation reduces duplication and generates economies of scale and scope—in some cases explicitly involving the creation of centres of expertise. There are also benefits for the individuals involved, including opportunities for greater specialisation and more promising career paths. Second, consolidated service delivery provides higher levels of transparency (for senior management) and the opportunity to maintain consistent policies and service standards across Defence. Consolidated services also facilitates Defence-wide system rationalisation and the introduction of web-based business interfaces.
An important step in the consolidation of shared services has been finding ways to assure service delivery to customers. This has been achieved by having some staff pooled within the delivery agency, some situated within the delivery agency but assigned to specific parts of Defence, and some embedded within the part of Defence they serve. The approach adopted varies from activity to activity, depending on the needs of the customer. To support the move to greater reliance on shared services, considerable effort was put into change management, including wide consultation and a deliberate communications strategy involving newsletters, speaking points and web-based resources.
Reform in the personnel and finance areas is advancing with the introduction of continuous improvement programs. In the finance sector, a system of Group Chief Finance Officers (GCFO) has been established, with GCFO reporting to both their respective group head and the Chief Finance Officer (CFO). (Unlike most shared services reform where the COO has the lead, the CFO has taken the lead in the finance sector.) Financial services that have been consolidated include; general transactions and accounting, budgeting and financial reporting, financial policy, governance and audit coordination, treasury, banking and tax, and project finance. In the personnel sector, a large number of functions have been consolidated (though some aspects of military personnel management remain within the individual military services). Key developments include; establishing a ‘business partner’
capability to provide strategic HR advice to executives in groups, implementing a regional people service model to support supervisors and individuals across Defence, creating a new personnel website on the Defence intranet and commencing a web-form redesign program
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with electronic signature and work-flow capability, and eliminating duplication in case management, establishment management, graduate recruitment and workforce planning.
Smart Sustainment Reform
The military Services rely on DMO to repair and maintain their equipment and platforms and provide munitions and other consumables such as petrol, oils and lubricants. In recent years, materiel sustainment has accounted for around $5.6 billion of the $25 billion annual Defence budget. When arrangements were originally put in place, the three Services effectively received sustainment as a ‘free good’, with the sustainment budget going directly to DMO.
Arrangements between the Services and DMO are set out in Materiel Sustainment Agreements. In the latter half of the last decade, the sustainment budget began to be reported against the individual Service budgets. At first this was a nominal accounting change, but over time the Services have become much more involved in decisions about performance levels and cost-capability trade-offs.
At the heart of recent and ongoing reforms to materiel sustainment is the shift to a situation where the military Services are exposed to the opportunity cost of the decisions they make regarding sustainment of their capabilities. Or to put it another way, the Services now have the ability to reallocate savings achieved in sustainment to other ends, eg prevent reduction in capability. Naturally, the move from receiving ‘free goods’ to being exposed to
‘opportunity costs’ has driven cost-conscious behaviour.
There’s now a six-year campaign to drive efficiencies across the 100 or more fleets of assets under management. When ‘smart sustainment’ was first rolled out in Defence in 2009, the focus was on astute contracting and process improvement, but as the military Services have become more involved, the emphasis has shifted to demand management and process simplification. At the same time, DMO has sharpened its contracting and business analysis skills (including simulation and modelling) to become a centre of expertise for sustainment services. As with non-materiel shared services, the consolidation of skills allows for greater specialisation and more viable career paths.
Engagement between DMO and its customers in the Services is ongoing and maturing.
There’s a six-month senior level performance management (fleet screening) schedule that reviews how business is being done in separate sustainment areas. This process is
underpinned by more frequent performance reviews at lower levels between DMO and the Services. One of the key factors has been greater precision in the definition of demand. By being clearer about what’s required, DMO can plan better and suppliers can optimise their capacity and not charge a risk premium to cover unanticipated demands. Of course,
contracts include surge provisions that can be activated in the event of foreseeable demand range and military contingency.
Specific measures to cut the cost of sustainment include; contracting for outcomes such as platform availability rather than sustainment activities, progressive adoption of e-business for purchasing, streamlined simple procurement for routine goods and services, greater use of panel arrangements for procurement, consolidated purchasing of common items and transferring inventory management to suppliers in the context of performance-based contracts.
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The next step in sustainment reform will be to move more towards a whole-of-life asset management perspective that ensures the cost-effective delivery of capability across both acquisition and sustainment.