3.9In September2016, Defence decided to expand SPMS to cover acquisition. In Australia, see also Pat Barrett AM, Auditor-General for Australia, Some issues in contract management in the public sector, presentation to Australian Corporate Lawyers Association/Australian Institute of Administrative Law conference on outsourcing, Canberra, 26 July 2000. In May2016, the Sustainment Gate Review for the program found that the commercial incentive in the contract was insufficient to obtain the desired rate improvement. Defence has engaged industry expertise to guide and help it with the First Principles reforms relating to acquisition and sustainment, including $107million with a single company where the contract for services is not performance-based. A target expenditure cut of five per cent of sustainment costs over a financial year was set by the Chief Executive Officer of the DMO in February2008. 68The Defence qualification was that The amount and type of LCC [life cycle costing] information presented to committees will vary according to the issues being considered and only pertinent information should be included. 100Defence, First Principles Review, p. 14. Its goal was to deliver projects and sustainment on time, on budget and to the required capability, safety and quality. consolidation and review of Systems Program Offices; any further development of Defences approach to asset management. 109Defence, Helmsman Sustainment Complexity Review, July 2010, p. 5. Collateral impact will be transferred to Sustainment Efficiency (expedient choice making) and Materiel Availability (poor supply chain or maintenance output). The Capability Acquisition and Sustainment Group (CASG) is an organisation within the Australian Department of Defence, responsible for acquisition, supply chain management, and sustainment of military equipment and materiel including aircraft, ships, vehicles, electronic systems, weapons, ordnance, uniforms and rations for the Australian Defence Force. The effectiveness of these reviews could be increased if the lessons obtained from gate reviews were routinely incorporated into management reporting on sustainment and if gate reviews were extended to contribute to the proposed quality assurance mechanism for Quarterly Performance Reports. They include: 2.21The review is examined in more detail in Chapter 5 of this audit report, while the transparency of internal costs is examined in Chapter 3. A smart buyer also retains the requisite capabilities and technical knowledge to lead and conduct teaming activities, accurately define the technical services needed, recognize value during the acquisition of such technical services, and evaluate the quality of services ultimately provided. This was to focus more holistically on benefits realised to the organisation through reform, rather than only acquitting financial targets. This is a risk in light of the systemic issue identified by Defence in its work towards reforming Systems Program Offices: SPO staff have limited experience, skills, and competencies needed to effectively establish, govern, and assure industry delivery of capability (see Box 3, p.23 of this audit report). However, it was not: complete; consolidated in one easy to locate area; prepared in a manner which permitted the comparison of actual expenditure against estimates; or consistent in its presentation of clear reasons for full year variances. The term contract for availability is a term used in British military circles but is equivalent to performance-based contracting. The capability management role needs to be resourced appropriately to be able to take the lead roles of the asset owner and the sustainment customer. 3.68For each Service, comparing the amounts presented in the first and last years of this analysis yields an average annual (compound) rate of growth in the estimates.97, Table 3.1:Increases in sustainment estimates by service, 200607 to 202021 ($m), Annual rate of growth (compound) from 200607 to 202021. Defence requires that the first sustainment gate review be held within 12months of the review held before final operational capability is reached.57 Thereafter, further such reviews are to be undertaken periodically (every one, two or three years) with the exact timing determined on a risk basis. Defence analysed these targets and developed overall targets to finalise the Defence White Paper and design of the Strategic Reform Program. See Defence Portfolio Budget Statements 201718, Table 68: Top 30 Sustainment Products by End of Financial Year Outcome 201718, pp. Parliamentary committees have frequently stated an interest in Defences reporting of its sustainment performance and, in particular, obtaining greater insight into that performance. 204The Rizzo Review of naval sustainment was triggered by early decommissioning of HMAS Manoora, the extended unavailability of HMAS Kanimbla and the temporary unavailability of HMAS Tobruk. This information is presented in multiple tables and sections of the PBS and an explanation of the variation between tables is not provided.90 Further, some of the descriptive information about sustainment activity is not always expressed in clear language, which detracts from its usefulness. 5.21The report found that the lack of Systems Program Office commonality added complexity, blurred accountability and confounded the ability to build enterprise solutions for common services. However, in 2013, a further report by external consultants stated that Defence needed an integrated, whole-of-life approach to sustainment and that Defence could realise significant benefits by modelling the management of their assets on the approach taken by commercial organisationsan asset management approach. 198Defence, Going to the Next Level, the report of the Defence Procurement and Sustainment Review [Mortimer Review], 2008, p. 46. 4.3The CEO wrote to all Systems Program Office directors seeking their help. 71 11
Will future rises in fuel prices be subtracted from savings? (The Cost of Defence: ASPI Defence Budget Brief 201213, 2012, p. 138). Notwithstanding these concerns, Defence adopted the term Systems Program Office where Systems Program Offices perform both functions. TheCASG Cost Principlesapply to all procurements. 145According to AusTender records, the cost of the review and resulting report was $613 000. Accounting standards IAS 18 require a company to recognize revenue only when the amount is measurable and cash flows are probable. The Australian National Audit Office (ANAO) is a specialist public sector practice providing a range of audit and assurance services to the Parliament and Commonwealth entities. The idea is to establish a managed resource pool that provides skilled personnel for CASG activities. As a result: service providers may have been contracted to provide services for which Defence has previously determined they were not suitable to deliver, and/or charge higher rates than previously negotiated with Defence; and there is a risk that the documentation required to support the procurement decision may not be adequate. The Defence Science and Technology Group had been helping individual Systems Program Offices with asset management but believed its real potential was at the enterprise level. 3.49In October2016, Defences Chief Finance Officer stated that, under current proposals, actual costs will be reported in Defences central financial management system and that system will be consistent with the total cost of ownership model. Defence advised that the new Business Framework will take many years to fully implement.162 Between February2016 and February2017, Defence entered into contracts with the International Centre for Complex Project Management (ICCPM) worth a total of $2.94million for work described as relating to the development and implementation of the business framework. The year-end spend performance indicator is blank. 138Pappas describes lean as a way of working that focuses on (among other goals), the continual reduction of seven forms of waste By eliminating waste substantial productivity improvements are made: quality is improved, available time is increased, and cost is reduced. This can result in bad news remaining at lower levels in the organisation, increasing enterprise risk and only becoming apparent when recovery is expensive, difficult or even impossible.56, 3.23Defence commenced sustainment gate reviews in December2015. The Pappas review had observed that sustainment was an area with significant opportunities for efficiencies.105. Minister Smith also said that he had asked Defence to review the effectiveness of its management of major projects. Defences devolved and fragmented leadership approach to the program meant that Defence had no holistic vision of what the reform program was setting out to achieve, and therefore no logical program of work designed to support it. 47Defence, First Principles Review, p. 17. 144The First Principles Review (p. 36) states: We consider that it would be possible to rationalise and reduce the Systems Program Office structure and staffing levels as more sophisticated contracting models are established and their individual support functions are consolidated as part of the service delivery reform. achieving a clearer line of sight between planning and reporting documentsfor both expenditure and descriptive information at the corporate and project levels; and. Can the Department assure the Government of the day and the Australian taxpayer that the resourcesthe people, processes and toolsused to create that output are being utilised in the most efficient way? In general, reporting has included: a description of sustainment activity; estimated expenditure; actual expenditure; the variation between estimated and the actual expenditure; and some explanation of the variation between estimates in the PBS and PAES. While the Systems Program Office was generally meeting targets for availability, the number of aircraft able to be flown was markedly lower. A Defence Central Contracts Register facility commenced operation in January2016.b This enables efficient collection of data for new Defence contracts: it does not include existing contracts, which can be added only by a separate stream of work. In other cases it may be appropriate to outsource sustainment and partner with industry for the acquisition phase.120. The term includes small and large businesses and is used interchangeably with "for-profit organization." Define and endorse an Asset Management Plan. 5.37Defence undertook substantial work in 2009 and 2010 to explore greater use of the technique so as to enhance Defences ability to meet capability preparedness requirements, and reduce the total cost of ownership.152 DMO advised industry CEOs at a meeting in July2009 that For greenfield sustainment and other new contracts there will be a greater focus on contracting for availability.153 Defence established a Performance-Based Contracting Centre of Excellence at that time and produced a new Defence contracting template with performance-based contracting integrated into it.154 Defence has claimed that almost all projects since 2011 have used a performance-based contracting template for materiel support services and have enjoyed the support of the Performance-Based Contracting Centre of Excellence.155 It has not been able to substantiate this claim (Box 6). 134Defence, Strategy& [sic] (formerly Booz & Company), Right Sizing the DMOUsing a capability-driven approach: same outcomes, fewer staff, Canberra, March 2013, p. 2. Defence has clear and long-standing arrangements for managing the sustainment of specialist military equipment. This recommendation, which was also made in the 2003 Kinnaird Review, was not implemented by the Howard government. Defences asset management project is also examined. Contracts with the principal provider are not performance-based. Introducing performance-based contracting into Defence sustainment has been underway for over a decade. 5.27The First Principles Review recommended that each Systems Program Office be examined and analysed to determine: 5.28The First Principles Review also saw outsourcing as an important element of the reform of Systems Program Offices.143 Under the First Principles Review reforms, Defence expects to reduce the number of Systems Program Offices and, from 2015 levels, the number of staff directly undertaking sustainment activity, though no estimates have been made known and no targets have been set.144. 3.58Since 200708 Defence has reported financial and descriptive information for the Top 20 or Top 30 sustainment products (Top 20 to 201213 and Top 30 from 201314). 9Executive Minute on Joint Committee of Public Accounts and Audit Report No. For example, those sources state: The 2016 Houston Review also found that the full potential of the Australian Tiger program, when reached, will not be adequate to provide the robust, reliable and sustainable aviation reconnaissance and attack capability that Army requires. This method produces a rough order-of-magnitude estimate, and is generally used early in the life cycle of a new asset/system when technical definition is immature and insufficient cost data is available. This followed a joint speech by the Secretary of Defence and Chief of the Defence Force stating that improving Defence productivity was a priority. Instead, it would usually be done as several separate calculations, as we showed in the first 4 steps of the derivation. Defence has clear and long-standing governance and organisational arrangements for managing the sustainment of specialist military equipment. MRS and, to an increasing extent, SPMS, are now used to populate a Quarterly Performance Report on both acquisition and sustainment (see paragraph 3.11 forward). 5.13Senior Bechtel representatives met with Defence officials again in December2015 and subsequently presented a new paper Delivering CASG Transformation. Defence would benefit from evaluating future major change programs. Note d:In late 2016, Defence estimated that the Collins Class submarine sustainment program would achieve international benchmarks for cost per materiel ready day by 202223. xref
Develop cost baselines, models, and supporting processes for sustainment program. reliance on a mix of public and private equipment and facilities for sustainment activity. Table A.3:Navy Materiel Sustainment Agreement Performance Framework - Core Key Health Indicators. The gross centralisation, while simple to operate, is inconsistent with the principles of value for money, competition, or any rational industry policy. The Dashboard area of Comodo Antispam Gateway ( CASG) allows administrators to take overall control of domain, account and customer management.The interface is divided into three areas - Domain Management, Account Management and Customer Management. 168See, for example, Deputy Secretary, CASG, address to Australian Defence Magazine, 16 February 2017. Reviews of Defence over the last two decades have identified many opportunities for improvement in Defence sustainment practice. The Canberra Times reported that its 'senior public service sources' believe she is the highest-ranking Australian Commonwealth public servant to ever have been dismissed for underperformance. 5.56Appendix 6 of this audit report summarises proposals between 2008 and 2011 to introduce a Defence Sustainment Efficiency Office and a Sustainment Business Model. Defence materiel sustainment is about the maintenance and support of Defences fleets of specialist military equipment: the provision of in-service support for naval, military and air platforms, fleets and systems operated by Defence. difficulties in the introduction of equipment into full service. 180Defence engaged a consulting firm to carry out a high level Asset Management maturity assessment of the CASG policy and guidance documentation against the requirements of the Asset Management Standards. Other reforms flowing from the First Principles Review remain underway: 30. The Government agreed to the recommendation. 5.29In September2015, Defence engaged a consulting firm to review and develop an optimal design for one of its Systems Program Offices. At the time DMO developed MRS it was noted internally that DMO currently spends around 3billion dollars per year on sustainment activities and at this stage has no system that can adequately report on the effectiveness or efficiency of these activities.29 Work began in September2005 to introduce sustainment reporting capacity into MRS. 3.3Several major reports have criticised sustainment reporting over the last decade, including Mortimer (2008) and Rizzo (2011).30 Rizzo was highly critical of existing performance indicators: Each current [MSA] Product Schedule has inadequate Key Performance Indicators They only include a small subset of the contractual measures that should be placed on each party and there are no consequences associated with noncompliance. 62Until the implementation of the full system, project performance review data will continue to be captured using spreadsheets. 125Defences current plans for systems development envisage the department implementing support for earned value management in late 2019. It is now too late to revisit these events; nonetheless, Defence could benefit from evaluating future major change programs. HWrH+z S, ?~#|~!hI&Y{/.>ae0KQ $$ 3,B(3ot=zh6+EZ(Z=\(]/EY&bm>KD_;$8Gb The real growth rate for the then recommended force structure option was 4.2 per cent. Nevertheless, the consultants considered the program was failing because of shortcomings in governance, program management, and Defences approach to reform described by a major vendor as minor reform, driven by piecemeal, top down budget pressure. That modelling indicated cost of ownership of between $240million and $360million per year (October2012 prices), or $5.1million to $7.7million per aircraft per year. 3.27The ANAO recommends that Defence institutes a risk-based quality assurance process to ensure the accuracy, completeness and relevance of the information included in the Defence Quarterly Performance Report. Ruth L. Kirschstein National Research Service Awards, Cost Considerations-Allocation of Costs and Closely Related Work, Cost Considerations-Allowability of Costs/Activities. 4.1Sustainment practices have been subject to numerous reform initiatives over the last decade, especially since the Mortimer Review (2008).99 In 2015, the First Principles Review concluded that the change programs associated with previous reviews have resulted in only incremental change.100 This remark explicitly included all phases of the capability lifecycle, including sustainment. The PBS also contains broader commitments on sustainment management for example, the DMO will continue the implementation of a more standardised Sustainment Model to promote better and more consistent practice. 4.2In February2008, the Chief Executive Officer (CEO) of DMO announced a target of reducing by five per cent in real terms, in 200809, the sustainment cost of each of the 100 or so fleets of equipment then sustained by DMO.101 The CEO announced this measure as an ongoing reform program that aims to identify efficiencies within the DMO and reduce the cost of ownership to the Commonwealth in the operation of sustainment fleets.102 This, he wrote, was to satisfy a key priority of the government to reduce inefficiencies across the public sector. Source:Defence, Portfolio Budget Statements and Additional Estimates Statements, 200506 to 201718. Cash management involves: reducing excessive amount of cash in hand utilizing cash effectively maintaining optimum balance of cash to meet planned and unexpected expenditures managing cash flows - that is cash disbursements and receipts at all times Thus, cash management helps to manage your business' working capital efficiently. The report also acknowledged that contract amendments were made to introduce a revised performance management regime. Defence notes the findings of the ANAO, and agrees to both recommendations. 199In its 200809 Annual Report, Defence stated that to implement this recommendation, it had created the Sustainment Reinvestment Office to co-ordinate DMOs role in achieving the $5.5 billion in savings expected from Smart Sustainment under the Strategic Reform Program. Figure 3.5:Cumulative estimates of Defence sustainment costs, by year, 200607 to 202021. The objective of the audit was to assess whether Defence has a fit-for-purpose framework for the management of materiel sustainment. 5.36Performance-based contracting was described in a chapter on managing sustainment in the DMOs 2007 Acquisition and Sustainment Manual, but not made a requirement or a priority.151 In 2008, a Defence internal audit evaluating the effectiveness of Defences use of performance-based contracting found that: the maturity of management systems for such contracts varied, there was inadequate central oversight and support, inconsistent contracting arrangements, and less effective outcomes in many cases. 3.62In summary, the ANAOs review of public reporting on sustainment activity indicates that: 3.63Defence has not published program level estimate data on a consistent basis over time, and no time series analysis is published by Defence to assist with external scrutiny of sustainment expenditure. Defence advised the ANAO that it would have been difficult to implement the contract as a performance-based contract: Unlike standard Defence capability projects, Bechtel has been contracted to develop Defences capacity and capability to deliver rather than for Bechtel to deliver itself. Note b:These figures include Australian Public Service and Australian Defence Force staff. The review recommended that the Defence Materiel Organisation should be disbanded and the transfer of its core responsibilities in relation to capability delivery to a new Capability Acquisition and Sustainment Group,[1] which took effect from 1 July 2015.[10]. The management of sustainment arises mainly in the discussion leading to First Principles Review Key Recommendation 2: Establish a single end-to-end capability development function within the department to maximise the efficient, effective and professional delivery of military capability.122. 114Defence, Final Audit Report, Audit Task: 12-041, SRP Savings and Performance Reporting, Audit and Fraud Control Division, August 2012. 189Defence Portfolio Budget Statements 201516, Table 21: Army Deliverables (Rate of Effort Flying Hours), p. 43, available from
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