From The Source: Dr Stephen Gumley CEO of the Defence Materiel Organisation

While 2010 may have been a slightly quieter year in terms of acquisitions, the same will not be said for 2011. Sustainment reform continues apace at the DMO as the agency gears up for a massive year of contract signings while implementing a daunting reform program. CEO of the DMO Dr Stephen Gumley spoke to ADM Editor Katherine Ziesing at the end of 2010 about the year that was and what lies ahead for his agency and defence industry.

ADM: How is the DMO’s internal transformation program travelling at present?

Gumley: I think it’s going well. We seem to have a bipartisan approach from both the Government and the Opposition jointly wanting to see Force 2030 through. Of course the Strategic Reform Program (SRP) is one of the critical enablers to get the efficiency and the cash required to achieve Force 2030. The SRP achieved its goals in 2009/10. One of the areas that I’m working hard on is the smart sustainment area and we achieved our goal of $263 million of savings against the baseline which is calibrated in the 2007/8 year.
You might recall that DMO actually got a year’s start on the Smart Sustainment reforms. At the ADM Congress in February 2008, I put a challenge out to both DMO and to industry if we could find efficiencies in sustainment costs against the 2008 base year. In 2008/9 we achieved that; we got $230 million of savings and then the $263 million this year.
So we’ve put two years end on end and I’m very pleased with the cooperation with industry and how it’s gone.

ADM: How are we looking for 1st and 2nd Pass project approvals over the next 6-12 months?

Gumley: I’m expecting 2011 to be a very robust year. We’ve talked about this previously; the market for acquisitions is fairly lumpy; we have big years, then you do a lot of preparation work and then a few years later you have another big year. 2007 was an enormous $14 billion year with the Super Hornets, AWDs, LHDs and satellites and the other projects that were being approved.
2011, provided all the work gets done, could be a remarkable year also. As you know from the public DCP, there’s the truck projects and the naval helicopters and a range of other projects and it’d be interesting to actually add up the value of all the work that could go forward to Government for final approvals in 2011.

ADM: It’s been argued that the DMO takes a disproportionate share of the blame when projects encounter difficulties, but lacks the authority to preempt challenges and mitigate risks during the early stages of project development. Is that a fair call?

Gumley: With respect to DMO taking a disproportionate share, the whole purpose of the Kinnaird reforms was to reduce risk by the time the government has approved the project at 2nd Pass. One of the things we’ve noticed is that when the Kinnaird reforms are followed properly and precisely, we do get significantly better project outcomes for government at 2nd Pass. At times, when shortcuts are taken, you do leave residual risk. Sometimes government might have the appetite for that risk and they’ll take it on.

For example, if you were doing a highly technological project for an operational deployment, the balance of risk might be that it’s better to save some schedule time and get the equipment into the field earlier, even if you’re taking on more commercial and technical risk in doing so. But save for that, we find that de-risking a project after 2nd Pass is an absolutely crucial part of offering government options and solutions and have a much greater implementation success.

If we look at the projects that have gone through the true 2nd Pass process, we do notice that we still have scheduled delays. The new Major Projects Report was released recently and the report has shown that the cost blowout, which is a word the media likes to use, from the top 22 projects is zero when you correct for inflation, foreign exchange and authorised scope. You’ve often heard me talk about that, and it’s also for quantities – if you buy six Wedgetails instead of four Wedgetails, clearly you’ve bought more so you’d expect to pay more.
So when you make these corrections (and it’s all set out in the Major Projects Report), the projects are coming in to zero on average cost blowout. Now some projects have gone over; a lot more have gone under, but for a portfolio of projects you’re coming in at about zero. Now that’s a very surprising conclusion to many people because there’s this tendency out there to think that Defence project costs do blow out, but there’s a caveat in all this and that is that our data is measured from 2nd Pass approval onwards, or the equivalent.

So where do cost increases tend to happen most? Well practically they happen from entry into the DCP to after 1st  Pass and then from 1st Pass to 2nd Pass. The fact that we are not getting cost blowouts after 2nd pass does indicate that most of the projects have been de-risked to an appropriate level.
The area where we’ve identified as a problem though is schedule. For the 22 projects in this year’s Major Projects Report there is, on average, a 30 per cent schedule delay with projects [that is a 30 per cent average delay on the time taken to deliver projects, as opposed to 30 per cent of projects experiencing delays].
That clearly has an impact of not getting the new or upgraded equipment out to the warfighters on time, but there are multiple causes for schedule being delayed. A lot of it is still, frankly, industry capacity; the ability for them to mobilise the skilled workforce, the people that they need. And I’ve been talking about skilling for some time.

One thing I can say in hindsight is thank goodness we did the Skilling Australia’s Defence Industry (SADI) program  back in 2005 because whatever our skilling difficulties are now, they would have been much, much worse if we hadn’t done the SADI program over the last four or five years.  Schedule remains my biggest concern.

ADM: Can you elaborate on the initiative you have introduced concerned with reducing industry costs of tendering?

Gumley: Yes, that’s progressing pretty well. Harry Dunstall is doing an excellent job for the DMO, first as Senior Counsel, and now as General Manager Commercial. Harry and his team are devising new templates to make the contracting templates fit the complexity of the work. In other words, for example, now we’ve got a low level support template.
For example, for fairly simple work we have a much simpler template of just a fraction of a number of pages compared to the difficult ones where you might be designing a war ship and so on. We’re also moving to a system where we’re only asking for corporate information once a year, annual updates, instead of having to add it to every tender. That alone saves hundreds of pages of documentation on every tender.
We’re asking for less information at the Request for Information (RFI) stage and more information in the Request for Tender (RFT), which means that the companies that don’t make the shortlist aren’t unnecessarily burdened with excessive documentation at the very first stage of the tendering process. But we have to have the information at the final stage when you’re down to the last two or three bidders, as you’ve got to have a deeper understanding of whether the company is capable of doing the work.  That includes their financial capability, people capability, technological capability, intellectual property and so on.

There’s also a useful meeting of the minds on long festering areas of concern. For example, liabilities, insurances, what’s allowable cost and what’s not, and to get everybody into the same set of rules on those has been very important.
The other thing we’re attempting to do, and it’s having early signs of success, is better engagement with industry pre-tender; a lot more briefings. Companies can then make a decision on whether they want to bid for work with more knowledge. What can happen without proper pre-tender briefings is you can end up with companies spending a lot of resources bidding for something they really haven’t got a hope of winning.

ADM: How is that engagement process working at a practical level?

Gumley: The Project Manager will call a forum and take prospective suppliers through the scope of what’s going to be required for the procurement.  At that stage companies can usually work out whether they’re competitive for the type of work that’s being tendered, or for part of it. It helps them also work out whether they’d be better off going as prime or teaming with somebody else as a joint venture or becoming a subcontractor.  It helps them make those critical choices that makes that whole tendering process more efficient.

ADM: You’ve got a DCP which calls for industry growth and the SRP which aims to reduce ADF spending – how do you help industry to reconcile these objectives?

Gumley: We have an ambitious long-term capital equipment plan that’s got to be delivered in the context of a capped budget. You know there’s a significant net growth from the government in total expenditure.  Defence is on a 3 per cent real growth on average with a 2.5 per cent inflation rate out to 2018/19 and 2.2 per cent thereafter. We have a capped budget. It’s absolutely clear to us, it’s been made clear by the government that there’s no more money and so if we’re going to fund anything in Defence beyond the 3 per cent real growth we have to do it out of internal savings and efficiencies.
Let’s just compare this with some other countries at the moment. The British have had just recently an 8 per cent real cut in their budget for defence. If you start polling through France and Germany, they’ve all taken significant cuts to their budgets. Secretary Gates in America has indicated that he’s looking for more efficiency.

If you look at the worldwide industry, the 3 per cent in real growth that we’re getting here in Australia is actually quite attractive because it’s been designed against the proper national security goals as discussed in the White Paper.  But we are very conscious that every project is cost capped and DCP as a whole is cost capped. If we don’t deliver the SRP we won’t be able to deliver Force 2030.

ADM: I notice from the budget statements though that the Defence workforce is due to grow year on year every year and industry has been contracting in terms of workforce, anecdotally, because they’re not getting projects.

Gumley: I think you need to be careful how you use the yellow portfolio budget statement (PBS) book. For example, in that they’ve got DMO’s workforce at 7,800 or some similiar number. We’re running just a touch higher than 7,000 at the moment. I’m very conscious that DMO cannot grow at a rate that is in any way different from the amount of work available. So we should treat the PBS data as a cap, not as what you need to run an efficient organisation. For example, at the moment DMO is running about 500 people below its authorised level. Why? Because I’m looking for efficiencies internally and I’m not putting more people on where they’re not needed just because we can.  We’re running it like a business, matching the number of people with the amount of work available. I have no intention of taking DMO up to its full headcount.

ADM: In terms of PICs and SICs – is there enough work in the DCP and the ongoing sustainment to sustain and grow these economically? How are they being supported by action on the government side?

Gumley: If you were to go to Chapter 16 of the White Paper you’ll see a few paragraphs in there about what happens if a particular area of industry is particularly unhealthy and needs support. Essentially it means that we have to do the analysis, take submissions to government and it is for government to make decisions about levels of support that might be appropriate for national security reasons. There is a process there but it does require, first of all, an assessment that we have a defence or national security problem by not having that particular capability, and then secondly a submission to government about what we might do about it.

ADM: Have you had any approaches from industry along those lines?

Gumley: I haven’t seen any across my desk.

ADM: What sectors of Australia’s defence market hold greatest potential for sustained growth? Land? Maritime?

Gumley: We’ve been doing some staffing graphs going out 10 years, of each of the sectors: the land, sea, air, electronics and so on, and I hope to be able to put them up at the ADM Congress in 2011 to show what the 10-year plan looks like sector by sector. I’ve measured it in number of people rather than dollars and when you see that you’ll see that the air sector is fairly flat – and that’s not surprising as a number of the big acquisitions are already well underway, the air to air refuelling tanker and the Wedgetails and so on. Our workforce retires with the F-111 retiring and so you see that the forward view for the aerospace sector is fairly flat.

The two that seem to be growing the most are the land and maritime sectors, clearly with the ship projects in mind. We do acknowledge that there’ll be a bit of a fall away in about 2016/17, perhaps about 500 people, but we’ve got a long way to go before that and there might be a bit of shuffling that goes on of workload during those couple of years. Of course it then grows enormously at the end of the decade again as the Future Submarine program takes off, and then you’ve got the plan to replace the Anzac ships later after that. So the maritime sector, after a bit of dip in 2016, actually has quite a substantial amount of growth.
The land sector also has growth, driven as much as anything by Land 400, which will be a very substantial project where deliveries will first start happening in about eight or nine years, and the design work which will start about 2014/15.

ADM: It was disclosed recently that BAE Systems had problems on one of the AWD hull blocks. But it’s been several years since the company fabricated blocks on such a scale – is there a lesson here for the maritime projects in the DCP in as much as industry needs continuity of demand and work to maintain essential skills and proficiency?

Gumley: I don’t think it’s demand cycles that cause issues like this. I think it’s more the way that the work is organised and the way it’s supervised. It’s been very pleasing to see the way that the AWD Alliance has put all the management talent of Raytheon, ASC and the Commonwealth employees together to work out ways to overcome these difficulties to get the project back on track again.

ADM: How could this in itself fairly minor issue shape the Future Submarine, Future Frigate and Offshore Combatant Vessel programs? We’re building roughly 136,000 tonnes worth of ships in the next 10 years.

Gumley: The maritime sector is going to have to grow quite significantly. I see the AWD project and to a lesser extent the LHD project as very good enablers for where the industry’s got to go next. We’ve got to work out a plan for Collins to make sure that Collins maintains its quite awesome military capability through to when the new submarines are available.  There’ll continue to be workforce needs to maintain Collins, and as you’re aware from the DCP program, there’s quite a few Collins upgrade projects coming. The Future Submarine has several major parts to it; one is obviously the pressure hull, the other is the machinery that goes inside it and the drive train; it has the sensor suites, it has the combat system, it has its weapons. Over the next couple of years Defence will put to government a variety of options and alternatives for government to make a decision about each of those sub-parts of the project to make sure that we do in Australia what we can do and do well.  We’ve also got to stay interoperable with our key allies. So there’s a series of decisions for government to make over the next couple of years which I think will very much set the future of the maritime sector in Australia for the next decade or two.

ADM: Do you think we’ll have the capacity in country to cope with all those parallel programs?

Gumley: There’s no doubt there are going to be technical challenges. We’ve got to make sure we’ve got enough skilled people in all of the disciplines I just mentioned. You need electronic engineers, you need communications engineers, you need people who are very good with turbo machinery, you need high quality welding to do the pressure hull. So there’s a lot of skill sets we’ve got to maintain and grow to make this submarine project a success.

ADM: What have been the highlights for the year and what are you looking forward to in 2011?

Gumley: One of the things that’s really pleasing is the way that so many of the assets are now turning up for the ADF. We’ve had the Wedgetail aircraft arrive this year; we will have the tankers early next year; Vigilare is extremely close to being finished; the High Frequency modernisation project is nearly finished; the Super Hornets – 11 here now, 14 by the time we get to the end of the year. Gradually the entire picture is coming together from what was envisaged about 10 years ago. So it does indicate that Defence is a long-term business and that’s why I’ve got high hopes that Force 2030 is going to happen.

A heck of a lot of hard work goes in now for deliveries, perhaps 10 years out from now, and we could be having this conversation in 10 years’ time. By then the AWDs will be there, the LHDs will be delivered, the helicopter acquisitions will be delivered, the trucks will be delivered. And so although Defence has a long-term planning outlook we’ve also got to give industry credit for what we’ve achieved in the last five years in making most of these assets turn up.

ADM: Can you describe how Rapid Acquisition proposals — in the absence of a 2nd Pass business case — are tested to ensure the requirement is accurately defined and costed, and project risk mitigated, in the very short and demanding time frames that go with this type of acquisition?

Gumley: The Rapid Acquisition process for urgent operational requirements is two sort of separate streams, but each of them – in order to get reliable cost and schedule information – depend on the project being genuinely, and I repeat the word genuinely, a military off the shelf (MOTS) product.
It’s very difficult to do a rapid acquisition of a developmental project. Inevitably when you do all the risk gets transferred back to government and it almost always becomes problematic. So I’m quite confident about doing rapids when you virtually have a fixed price, like an FMS case from America, for something that is genuinely off the shelf.
The reason I’m emphasising genuinely is quite often people with the best intent claim something is MOTS when it’s not. Now we’ve been bedevilled by ‘Australianisations’ over many years; people have written much about it; Kinnaird wrote much about it and once you ‘Australianise’ a MOTS product, it’s no longer MOTS because you almost always introduce risk at that stage.

So the rapid acquisitions work well on cost and schedule and you can get good information, you can get almost precise capability information; you’ve got a good understanding of both technical and commercial risk when you do genuine MOTS. Anything else has to be presented to government as: “government, here are some alternatives for you to consider and this is the risk profile which you might consider accepting”.

ADM: How would you describe the implementation of all the recommendations from Mortimer and Kinnaird? Are they filtering through the organisation?

Gumley: Yes, they are filtering through the organisation. One of the impacts of Mortimer is it’s all about accountability; who holds the accountability for different parts of the process and the trade-off or the hand-offs if you like from one part of the organisation to another. You can do them in several ways.
You can have large committee structures but that leaves no one accountable for the outcomes. Alternatively you can have a system where everyone knows who’s accountable at each stage of the process and both Kinnaird and Mortimer are designed to get us down that latter path. You need committees, of course, to help you resolve differences, to help you sort out boundary issues but most important is who is accountable at each stage of the process. That’s what Mortimer is designed to get us to.

ADM: Are you there yet?

Gumley: No, Mortimer’s still being implemented. I reckon there’s about another 12 months before we’ve fully implemented all the recommendations. You’ve got to be careful, we may have implemented them in terms of a new or enhanced process, but are they having a visible effect? There is a difference. A lot of the Mortimer recommendations have pretty much been implemented, but we won’t see real results for perhaps another 12-24 months.