SENATE

COMMONWEALTH OF AUSTRALIA







Official Committee Hansard



SENATE

FOREIGN AFFAIRS, DEFENCE AND TRADE REFERENCES

COMMITTEE





Reference: Defence Materiel inquiry



FRIDAY, 15 NOVEMBER 2002

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SENATE

FOREIGN AFFAIRS, DEFENCE AND TRADE REFERENCES COMMITTEE

Friday, 15 November 2002



Members: Senator Cook (Chair), Senator Sandy Macdonald (Deputy Chair), Senators Hogg, Johnston,

Marshall and Ridgeway

Substitute members: Senator Bartlett to replace Senator Ridgeway for the committee’s Defence Materiel

inquiry

Participating members: Senators Abetz, Bartlett, Boswell, Brandis, Carr, Chapman, Coonan, Denman,

Eggleston, Chris Evans, Faulkner, Ferguson, Ferris, Forshaw, Harradine, Harris, Knowles, Lightfoot, Mason,

McGauran, Murphy, Nettle, Payne, Stott Despoja, Tchen, Tierney and Watson

Senators in attendance: Senators Cook, Johnston, Sandy Macdonald and Marshall



Terms of reference for the inquiry:

To inquire into and report on:

1. Whether the current materiel acquisition and management framework of the Department of Defence is effective

in meeting the organisation’s equipment requirements.

2. In considering this matter, the committee is to examine and report on the following issues:

(a) whether the current materiel acquisition and through-life support system is meeting, and will continue to

meet, the needs of Defence and Defence industries in a timely, cost-effective and qualitative manner;

(b) the impact of the Defence Materiel Organisation acquisition reform program on materiel acquisition and

management;

(c) the current status of major equipment projects in meeting the organisation’s requirements;

(d) the impact of the creation of decentralised System Program Offices on materiel acquisition and

management; and

(e) any other issues relevant to the effectiveness of the current acquisitions framework which arise in the

course of the inquiry.





WITNESSES



FITZGERALD, Mr John Thomas, Director-General, Contracting Policy and Operations,

Department of Defence .................................................................................................................................245



GRAY, Air Vice Marshal Norman Arthur, Head, Airborne Surveillance and Control Division,

Department of Defence .................................................................................................................................245



HADDAD, Major General Peter Francis, Commander, Joint Logistics, Department of Defence ........245



HOUSTON, Air Marshal Allan Grant (Angus), Chief of Air Force, Department of Defence ...............201



ISAACS, Ms Kim, Director-General, Materiel, People and Performance Branch, Defence

Materiel Organisation, Department of Defence .........................................................................................245



McKINNIE, Ms Shireane Kay, Head, Electronic Systems Division, Department of Defence................245



MOHARICH, Mr Joseph Vladimir, Group Managing Director, Helitech Industries Pty Ltd..............233



MONAGHAN, Air Vice Marshal John Gordon, Head, Aerospace Systems Division, Department

of Defence.......................................................................................................................................................245



SCARCE, Rear Admiral Kevin John, Acting Under Secretary, Defence Materiel Organisation,

Department of Defence .................................................................................................................................245

SHALDERS, Vice Admiral Russell (Russ) Edward, Vice Chief of the Defence Force, Department

of Defence ...................................................................................................................................................... 201



THORPE, Ms Ann Louise, Head, Materiel Finance Division, Department of Defence ......................... 245



TURNER, Mr Michael Rodney, National President; and President, Tasmanian Chapter,

Australian Industry and Defence Network................................................................................................. 222



WILLIAMS, Dr Ian Sidney, Head, Land Systems Division, Defence Materiel Organisation,

Department of Defence................................................................................................................................. 245

Friday, 15 November 2002 SENATE—References FAD&T 201





Committee met at 9.01 a.m.



HOUSTON, Air Marshal Allan Grant (Angus), Chief of Air Force, Department of Defence



SHALDERS, Vice Admiral Russell (Russ) Edward, Vice Chief of the Defence Force,

Department of Defence



CHAIR—I declare open this meeting of the Senate Foreign Affairs, Defence and Trade

References Committee. Today the committee commences its fifth public hearing into the

defence materiel acquisitions and management framework. The terms of reference set by the

Senate are available from the secretariat staff and copies have been placed near the entrance to

the room. Today’s hearing is open to the public. There will be a suspension of proceedings for

lunch at 12.15 p.m. and we will resume at one o’clock. The hearing will adjourn at

approximately 4 p.m.



Witnesses are reminded that evidence given to the committee is protected by parliamentary

privilege. It is important for witnesses to be aware that the giving of false or misleading

evidence to the committee may constitute a contempt of the Senate. If at any stage a witness

wishes to give part of their evidence in camera, they should make that request to me, as chair,

and the committee will consider the request. Should a witness expect to present evidence to the

committee that reflects adversely on a person, the witness should give consideration to that

evidence being given in camera. The committee is obliged to draw to the attention of a person

any evidence which, in the committee’s view, reflects adversely on that person and to offer that

person an opportunity to respond.



An officer of a department of the Commonwealth shall not be asked to give opinions on

matters of policy. However, officers may be asked to explain government policy, describe how

it differs from alternative policies and provide information on the process by which a particular

policy was arrived at. When witnesses are first called upon to answer a question, they should

state clearly their name and the capacity in which they appear. Witnesses will be invited to make

a brief opening statement to the committee before the committee embarks on its questions.



I welcome Vice Admiral Shalders and Air Marshal Houston. The DMO has lodged with us a

submission. I invite you now to address the committee on our terms of reference and on the

matters contained in that submission.



Vice Adm. Shalders—Mr Chairman and members of the committee, thank you for giving me

the opportunity to appear before this committee. I would like to make an initial opening

statement.



CHAIR—Please do.



Vice Adm. Shalders—As the Vice Chief of the Defence Force, I have a major role to play in

the capability development arena. It is this role which I expect you wish to explore in more

detail this morning. I am accompanied this morning by Air Marshal Angus Houston, Chief of

Air Force, who is available to respond to your questions regarding capability management.

There is a clear distinction, of course, between my role in the development of capability and the

service chiefs’ role in the management of that capability. We are both happy to explore those

distinctions and the differences between current and future capability, should you wish to do so.



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FAD&T 202 SENATE—References Friday, 15 November 2002





Before outlining briefly my role in capability development, the committee might find it useful

if I address in general terms some of the process reforms Defence is pursuing. I suggest I should

do that, because a robust capability development process is critical to successful acquisition. In

the past, before the acquisition projects began, capability requirements for some projects were

inadequately defined. When the capability requirement evolved subsequently, causing changes

in the scope of the project, the inevitable results were increased costs and delayed deliveries. In

other cases where the capability was defined at an early stage, it was sometimes done without

reference to the cost and risk drivers. This significantly increased the risk of cost and schedule

overruns. To overcome those problems, my capability staff work with the DMO staff to further

develop a revised capability development process.



As a matter of routine, capability requirements are now accompanied by operational and

support concepts. They articulate clearly how the equipment will be used and supported.

Function and performance specifications and test concept documents will also be developed at

this time. Improved capability definition before government approval is sought will help to

ensure that costs and risks are better understood. My particular role in capability development is

to drive that process—in particular, the requirements process—to support the government’s

ownership interests in Defence, balancing the interests of government as customer and owner

through advice on investment decisions necessary for defence capability development. An

essential feature of this work is making continual capability/cost schedule trade-off judgments

on the development options which might be available for current and future capability.



The primary forum for those sorts of decisions is the Defence Capability Committee, which I

chair and which meets monthly. Defence Capability Committee members represent all key

stakeholders, thereby enabling a joint and coherent approach to capability development.

Through the Defence Capability Committee, individual major capital investment proposals are

scrutinised to ensure, firstly, that there is consistency with the government endorsed strategic

requirements currently articulated in the Defence white paper and the Defence Capability Plan;

secondly, that the committee look at whole-of-life and whole-of-capability perspective—we are

trying to ensure an acceptable return on capital expenditure and we review every project to

ensure that there are no unmanageable strategic, technical, schedule or financial risks; and,

finally, that we provide a rigorous and independent scrutiny of capability, cost, schedule and

risk.



A recently introduced process guide called the Capability Systems Life Cycle Management

Manual provides the framework for this work. The manual details an end to end process for

managing defence capability from its inception, through the acquisition and in-service phases,

through to its eventual disposal. If it would help the committee, I am happy to provide an

updated version of that manual. I trust that these opening remarks will have assisted in setting

the scene. The Chief of Air Force and I look forward to answering your questions.



CHAIR—Thank you.



Air Marshal Houston—I will say a few words about my job as capability manager. The

ultimate customers of the DMO are the three service chiefs. We manage our respective service

outputs. In my case, I manage the Air Force capability output, and obviously I do that with the

support of the DMO and other service providers. Fundamentally, the DMO acquires for me the

equipment that I need to raise that capability. It then provides the through-life support for those

capabilities so that I can provide options for government whenever anything operational



FOREIGN AFFAIRS, DEFENCE AND TRADE

Friday, 15 November 2002 SENATE—References FAD&T 203





happens. The assets are then assigned for operational use under Commander Australian Theatre.

That is how the system works. I manage that capability. Essentially, I have a raise, train and

maintain capability function, as do my other colleagues in Army and Navy.



Senator JOHNSTON—Admiral Shalders, who is on the Defence Capability Committee?



Vice Adm. Shalders—As I have indicated, I chair that committee. The deputy chair is the

Deputy Secretary Strategy and Policy. The three service deputy chairs are on the committee and

represent the users. My head of capability systems, who is responsible for determining that

requirement activity, sits on the committee, as does a DMO representative at the two-star level.

In addition to those members—they essentially represent the users and providers—we also have

the Chief Defence Scientist, who provides scientific support to projects that we might be

looking at. The First Assistant Secretary Capability Investment Review is a member of the

committee; his staff provide the secretariat to the committee. We have an infrastructure

representative, again at the two-star level. Other members can be invited, depending on the

subject matter that we are looking at. For example, the Deputy Secretary Intelligence and

Security will sit on the committee, if we are looking at an intelligence project. Others are invited

as required, depending on the subject matter.



Senator JOHNSTON—It strikes me that the committee has very good operational expertise;

but, in terms of identifying potential cost drivers and other developmental problems, I am

concerned that the personnel are too heavily weighted on the operational side. How do you

respond to that?



Vice Adm. Shalders—No. I believe that the expertise you talk about is brought to the

committee in three ways. Firstly, the staff of the head of capability systems work very closely to

those sorts of issues; the capability and cost trade-off activity is their bread and butter. So that

level of review and research is represented to the committee through the head of capability

systems and through the papers that are put to the committee by that staff. In addition, the DMO

is represented on the committee and, again, these papers that are brought to the committee are

not solely done by the project staff. There is a very close engagement between the DMO staff

and the capability systems staff, as the requirement is developed and as the project is put

together. The third way is through the DSTO representative; the chief of Defence Science has

people working on these projects as they come forward. So I believe we do get a fairly balanced

view of the cost, risk and all the other issues that that high-level committee needs to take

account of.



Senator JOHNSTON—How long has the committee been operational in terms of our

strategic requirements?



Vice Adm. Shalders—This committee or its predecessors—it has had a number of different

names over the years—has really been part of the capability development process, to my certain

knowledge, since the early eighties, and I believe predecessors were probably around prior to

that. It is currently titled the Defence Capability Committee. It was previously, until July this

year, called the Defence Capability and Investment Committee. The change of title was driven

by a new committee that took the title of Defence Capability Investment Committee in July this

year. That new committee comprises the service chiefs, the CDF and the secretary and the

Under Secretary Defence Materiel. That is a higher level committee than the one that I chair. Its





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FAD&T 204 SENATE—References Friday, 15 November 2002





primary focus is to look at the balance of investment rather than the nitty-gritty detail that the

Defence Capability Committee needs to become involved in.



Senator JOHNSTON—How often does it meet?



Vice Adm. Shalders—The Defence Capability Committee meets monthly. The higher level

committee, the Defence Capability Investment Committee, is currently meeting monthly but, in

the fullness of time, I would expect it probably to revert to about every three months.



Senator JOHNSTON—Which committee member provides the committee with expertise in

cost management?



Vice Adm. Shalders—There are two primary inputs there. Firstly, the First Assistant

Secretary Capability Investment Review is a member of the chief finance officer’s group. He

and his staff are looking at both financial matters and programming matters. Advice such as

how the financial part of the project fits into the overall Defence financial program comes from

the First Assistant Secretary Capability Investment Review. The other area where advice is

provided to the committee is through the DMO representative. I should also say that I have

painted a picture of the DMO being in one box and the capability systems staff being in another.

In actual fact, the two are working very closely together, even at that requirements development

stage, which is the bit that I am primarily responsible for. So it is not one body providing one bit

of information; hopefully, it is a team approach all the way through.



Senator JOHNSTON—Where do these capability ideas and concepts come from? What is

their genesis before they come to the committee for deliberation and formulation of a response?



Vice Adm. Shalders—Normally the genesis of a project is driven by a need to provide some

capability. Capability analysis looks at what we can achieve now, what we need to achieve in

the future, what therefore is the gap between what we have now and what we might need in the

future, what risks that gap might create and what the options are for reducing that gap in

capability between now and the future. Primarily, that analysis is affected by the capability

system staff who work for me. That really is the genesis of most new projects.



Air Marshal Houston—I would add that we in Air Force have just identified a requirement,

and it relates to the fact that we need to have an air training capability for the future. At this

stage that requirement resides in Air Force. We are working up a study on pilot training and,

once it has been published, I expect it will become the basis for the way we go in the future with

pilot training. At this stage we do not have any fixed solution. We are looking at all the options.

Clearly, we need to have some form of platform as part of that system, but we want to leverage

off the synthetic environment that everybody uses these days. The other side of it is whether we

ourselves will provide this training or get industry to provide it and, if we do get industry to

provide it, what our involvement in it will be and so forth. Those are the sorts of things being

looked at in this study. I expect that the study will come up with some conclusions. Then, at that

point or some point in the future, we will define an Air Force requirement which we will pass to

the VCDF and his capability staff. They will then take and develop our broad concepts into a

capability requirement that can be defined precisely with costings and so on. That is how it is

working in this particular case.







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Friday, 15 November 2002 SENATE—References FAD&T 205





Senator JOHNSTON—I can understand exactly why a significant motivation exists for

flight training systems that do not involve stress on airframes and all that sort of thing. After

having visited Edinburgh, I can see the huge benefits that flow from that. But I come back to the

selection of platforms, accessories and all those sorts of things. Let us take helicopters, for

instance. There are two options: one is to buy off the shelf and the other is to completely modify

and come up with a set of unique requirements. Where is the genesis for that assessment? How

do we go through that process at the very beginning, identifying where it will lead?



Vice Adm. Shalders—I also should have added to my earlier answer that I think in many

cases we are talking about a capability that exists currently which will fall off the end of the

earth. The life of type will expire and the capability will expire and, therefore, it will need to be

replaced. So it is not all ‘blue sky’ thinking, which perhaps I gave the impression of in my first

answer. In many cases there will be a need to replace a capability, and that does tend to drive

many of the projects that we are looking at. I am not sure whether that impacts on the question

you have just asked me.



Senator JOHNSTON—Not really. I want to know why, in the face of other countries that are

happy with a particular type of product, we seem to want to go down a more complex path that

engages us in significant delays and substantial cost without getting the operational benefit.

Where does the idea come from? Is it your capability section that says, ‘Here’s a helicopter on

the shelf that we can have tomorrow; we now want to change it in this degree’? Away we go,

and we are two years behind schedule and substantially cost damaged.



Air Marshal Houston—Perhaps I can give another example. The VCDF has a project on the

books at the moment, which is Air 7000. That is looking at the future of the maritime patrol and

response capability, which is essentially to replace the AP3C. As you probably heard at

Edinburgh last week, the AP3C airframe runs out of life in about 2015, and we then have to

decide what we will have do to replace or provide for that capability that the P3 has provided us

with for many years.



There are a number of options. If you start at the top, obviously we are moving into a new era

where we might be able to leverage off uninhabited air vehicles. Uninhabited air vehicles will

provide a very good surveillance capability, and so we need to look at that. But the P3 also

provides a number of war-fighting roles in support of the Navy and its prime role is probably

antisubmarine warfare. As a UAV will not be able to provide that capability, we will probably

have to have some sort of manned platform to do it. In terms of the manned platforms that

might be available, at present the staff are looking at everything from a brand-new turboprop

aircraft to taking the AP3C, scrapping most of it and then rebuilding it as a P3. Obviously there

are costs associated with all of those options, and there are quite a few options.



That process has already started and I was briefed on it yesterday. We know already that a

brand new turboprop aircraft that the US Navy will probably develop will be prohibitively

expensive, and so we are also looking at options in terms of refurbishing the P3. Ultimately, all

of this is analysed over a number of years. It goes through our committee systems and we

eventually come up with a number of options. We then pick a preferred option, and that is

usually the option that will go forward. But at this stage we do not have any fixed views about

how we will solve that particular problem. That is just one example.







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FAD&T 206 SENATE—References Friday, 15 November 2002





We are not locked into new equipment. We are not locked into an Australian orphan. In fact,

the feeling in the department at the moment is that, wherever possible, we want something that

is the same as other people operate so that we can reduce the logistic burden associated with it.

We have got far too many orphans in our system at the moment, and we need to get smarter in

the way we acquire equipment and maintain it.



Senator JOHNSTON—Tell me about the people who are doing the evaluation and the

scrutinising of the various options and coming up with a recommended plan. Who are they,

what experience do they have and are you happy with the resources that they have at their

disposal?



Vice Adm. Shalders—Those people reside within my staff at that early stage of the

process—that is, the capability systems people. Yes, they have expertise within their own group

of people, but they are also able to tap expertise throughout the department and, importantly,

under our current processes, also in industry. Perhaps a good example of that would be Air

9000, which is a project which is attempting to rationalise the number of types of helicopters

that we have. That project is some years away from reaching its eventual completion, but the

people who are looking at Air 9000, both within the DMO and within my staff, have sufficient

expertise within their resident staff but they also tap very much into industry and, in this case,

into DSTO and other overseas agencies.



Could I also make another point, which I think you might have been leading to, Senator. In

utopia, we would probably not wish to customise any product. If we could buy it off the shelf,

we would. We know through bitter experiences, as the committee has heard, that every time you

customise something, it is going to cost you more. But I think the point we should make is that

Australia’s requirements are very often different from others who might have a product to sell.

It would be negligent of us not to take account of those differences where they occur. An

example I could give you there would be that a helicopter that might work quite capably and

quite well off the back of a ship in the North Atlantic might not do the same thing off north

Australia. So we have to take account of those differences. Those differences should drive any

customisation that we might need to make, and I think the principle is that we would try to

avoid customising where we could, but sometimes we just have to.



Senator JOHNSTON—So are you currently happy with the level of articulation of your

capability section to the DMO, such that they have a clear plan to go forward with?



Vice Adm. Shalders—I think we could do better, and I think—



Senator JOHNSTON—Let us pause there. In what regard can we do better? Give us the

benefit of your wish list of what you would like to see, because we have had a number of major

problems and we have to front up to them and try to learn from these issues.



Vice Adm. Shalders—I think if we can specify in as much detail as possible what the

ultimate capability requirement is going to be, it will allow DMO to satisfy that requirement

better. Money spent up front is money that you save tenfold further down the acquisition track.

So if we can define the requirement in sufficient detail for the DMO to then try to meet that

requirement, that will assist them in the future. The other thing I would say is that we need to

ensure that we have this teaming approach between my side—the requirements development





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Friday, 15 November 2002 SENATE—References FAD&T 207





people—and the DMO. I think the committee has taken evidence on this particular subject from

others prior to this. I think Mr White had something to say about this issue.



Senator JOHNSTON—Mr White is the next question.



Vice Adm. Shalders—So those two areas are probably critical. We need to define the

requirement sufficient for DMO to be able to try and meet it, and then we need to work very

closely with DMO and with others in a teaming approach. I think our current two-pass approval

process does assist in driving us towards meeting both of those aims.



Senator JOHNSTON—Could you just take us through that two-pass approval process in

detail again, if you would be so kind.



Vice Adm. Shalders—The first pass is basically seeking broad approval based on an

operational concept, broad indicators of capability, broad options that might meet that capability

and broad figures of cost. Under the process that we now use, that broad indication goes

forward through to the National Security Committee of cabinet, and we are given approval to

continue investigating. So at that first pass, it is all fairly broad figures. The second pass is

where we come back to government with a firm idea of what the capability is going to look like,

what it is going to cost, what the schedule risks might be and what the cost risks might be. After

that second-pass approval—again, taken by cabinet—we can go to contract. So the point I am

trying to make is that it is a matter of detail.



Senator SANDY MACDONALD—You talked about defining the detail of capability. Does

that detail change? I take the example of the AEW&C. Because there was a delay by either the

capability committee or the government—I am not quite sure which—the capability changed

from needing X number of aircraft to having Y number of aircraft and the cost escalated to more

than the original contract. You said you talk about defining the detail, but did the definition of

detail and the capability requirement change there?



Vice Adm. Shalders—I will give you a general answer to the question, and then come back

to the AEW&C example and ask the Chief of Air Force to comment. The general response is

that yes, the detail will obviously become more precise as we go through to the second pass. We

should not be surprised by that, because of course the more research you are able to bring to

bear the more fidelity to detail. If that did not occur we would obviously not be doing the right

thing. As to the specifics of AEW&C and how they changed, I believe Air Marshal Houston

was involved in that.



Air Marshal Houston—No, I was not involved in it, but I think there were concerns about

the project in the first instance. Essentially, it was reconsidered for a while and then resurrected.

I am not across the detail of that; we can perhaps come back to you on notice if you would like

us to do that.



Vice Adm. Shalders—Air Vice Marshal Gray will be here this afternoon and he can answer

on the specific detail of that.



Senator SANDY MACDONALD—Do you think the capability changed?







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Air Marshal Houston—No, I do not. In fact, I think if you have a look at the AEW&C you

will see that it is the new way of doing business. From the time we stood up the project within

the DMO it has been a model for how we should do business in the future. Currently, it is ahead

of schedule—



Senator SANDY MACDONALD—The capability did not change but the cost did?



Air Marshal Houston—No, the capability did not change; in fact—



Senator SANDY MACDONALD—No; the capability did not change but the cost did.



Air Marshal Houston—I think that is true; yes. I am not across the detail of that. If you ask

Air Vice Marshal Gray this afternoon he will be able to give you the background. Just taking the

subject of the definition of the operational concept—the concept for operation—in the Air Force

Capability Management Board yesterday we reviewed the AEW&C and the latest version of the

concept of operations. It is much more developed now than it was when the project was

approved. The reasons for that are that we are learning much more about the capability that is to

be provided and we are doing a lot more work in terms of how we might employ that new

capability when it is brought into service.



Senator SANDY MACDONALD—Is it an off-the-shelf purchase?



Air Marshal Houston—No, it is not. In fact, there is not really an off-the-shelf option when

you are buying an AEW&C. The current state-of-the-art option would be the Boeing 737

Wedgetail we are buying, and a number of other nations are looking at buying the equipment we

have signed up for. We are essentially the launch customer for this form of AEW&C.

Obviously, we looked at other options that might be available, but the AEW&Cs fielded by the

Americans and the British are essentially Boeing 707 derivatives. They are not a practical

proposition at this time. They would not have met our needs and, furthermore, I think they

would probably have been more expensive than what we are buying now.



Vice Adm. Shalders—Mr Chairman, I want to add to the answer that I gave a few moments

ago. There are three other members of the Defence Capability Committee I unfortunately

forgot: the chief finance officer is there, the head of defence personnel is also a member and the

head of knowledge systems. It is a group of about 12 people.



Senator JOHNSTON—I want to come back to the two-pass system: how long have we had

it in place?



Vice Adm. Shalders—I believe it is only about 12 months but, again, I will take advice from

the DMO on that. It is relatively new.



Senator JOHNSTON—Do we have the capacity to go back and reconcile the original

prospectus for each of the major 20 projects that we have on the go now? Can we reconcile

what we know today as to the costs and the capability success? Not in that order—let us talk

about capability success first. Do we survey what we first thought was going to be our

capability success with this project as to what we actually achieve over an historical period?







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Friday, 15 November 2002 SENATE—References FAD&T 209





Vice Adm. Shalders—I do not want to duck that question but it is probably a question that

Admiral Scarce would be better able to answer than I can. I only say that because you are

looking backwards at the end of what can be a very extended process.



Senator JOHNSTON—You know what I am looking at: I am looking at how successfully

you get it right at the front end.



Vice Adm. Shalders—The requirements phase?



Senator JOHNSTON—You are telling us how much it is going to cost and how well it is

going to perform. I want to know whether you are looking down the line to see, ‘When we said

that, how do we measure up in reality?’



Vice Adm. Shalders—Again, I can give you an example from my own service and I am sure

the Chief of Air Force can give you an Air Force example. In the Navy, we go through an

acceptance process both from the acquisition organisation, DMO, and the Navy separately. The

capability manager goes through an acceptance process. So at the end of a ship build—I will use

the example of the minehunter, coastal—the DMO will accept from the builder that this

minehunter meets the contracted requirement. In addition to that, the Chief of Navy will go

through his process, which is called acceptance into naval service, and he will say, ‘Yes, as the

capability manager I’m comfortable to accept this ship from you, DMO, the acquirer.’ As to

whether the capability that was set out, in this case some seven years ago, has been met at the

cost that we thought that we were going to achieve seven years ago, DMO would be able to give

you that sort of audit statement. Admiral Scarce, I am sure, can answer that question in some

detail, should you need him to. That is a Navy example; I am sure there are similar Air Force

examples.



Air Marshal Houston—I believe you were extensively briefed on the AP3C when you were

Edinburgh last week. That aircraft was accepted by the DMO from the contractor and then

following that, some time later, that aircraft was accepted into Air Force service. As part of that

process, there is an operational test and evaluation phase where we look at all aspects of the

capability that is to be delivered and we compare it against what was expected to be delivered.

In answer to your question: yes, we do that, and I think the materiel to check on the top 20

projects, the last 20 that have been delivered, would be on the record somewhere. If we have a

look at the AP3C, we have a project that has been delivered on cost. It was delivered 3½ years

late because of software integration problems, but what we have got now is arguably the best

maritime patrol aircraft in the world. As far as I am concerned, as the Chief of Air force, I am

very happy with the solution to the requirement that we had to upgrade the old PC3 aircraft to

give us an effective maritime patrol capability to take us into the middle of the next decade.



Senator JOHNSTON—I was anticipating you saying that the capability does measure up

well—that certainly is what we have come to understand—but the problem seems to lie,

historically and recurrently, with the cost and developmental understanding at the capability

assessment front end, if I can use very rough layman’s terms. We do achieve high capability

very well, but there are usually major cost and time delays along the way. Am I right in that?



Air Marshal Houston—If I could come back to that, because there is something I would

draw your attention to. Perhaps you would like to do a comparison between our experience with

the P3 upgrade and the experience of the UK MOD with the upgrade of the Nimrod aircraft.



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Essentially, they are in a lot more trouble than we are. Our upgrade was a very challenging

upgrade with some very demanding, reasonably high-risk, software integration. We have

achieved that and we have achieved it on cost. I would invite you to have a look at what is

happening at the moment with the Nimrod in the UK.



Senator JOHNSTON—I actually did not think that we were in any trouble with that upgrade

of the P3.



Air Marshal Houston—No, not at all, but it was late. We are still learning an awful lot about

software integration. It is a high-priority area within the DMO. All of their executives are being

trained in the perils of software integration, and we are addressing the challenge of software

integration because it is a relatively new thing that we are dealing with. Projects that have a high

level of software integration usually are late because of the difficulties associated with that

activity.



Vice Adm. Shalders—Senator Johnston, I would like to return to a comment that you made

which I do not agree with. I think you said that ‘usually’ we have cost and schedule delays.



Senator JOHNSTON—I am talking about the 20 top projects.



Vice Adm. Shalders—I think that we are improving there, and the DMO will undoubtedly

talk to you about those things this afternoon. But projects come to my mind and we have talked

about one of them this morning—the AEW&C project, which is a complex project. We have

rolled out the first aircraft on time, on schedule and on cost. Air 87 also is on time at this stage.

It is a very complex project with a long way to go. Those are some of the major projects and

DMO will be able to give you more examples. I believe we are improving, so I do not think it is

fair to say that usually we have cost and schedule slippage.



Senator JOHNSTON—Let me clarify that. We are improving but the glitches, the delays—

ever so short sometimes—and the potential capability issues seem to flow from a failure at the

front end to anticipate little things like the foreign exchange risk, for instance, that cost a lot of

money. These things concern me. We have not even broached that issue at the capability end.

Historically, I would really like to see a reconciliation of these major projects in terms of what

we set out to achieve, particularly on the cost side of the equation and the time frame. The

capability is very satisfactory but the time and the cost seem to be the problems, from the point

of view of an educated observer of this process that we are engaged in. Do not get me wrong; I

am not full of negativity on this. Can I take you to the issue that you mentioned in relation to Mr

White. At the top of page 65 of the Hansard transcript of the hearings of the Foreign Affairs,

Defence and Trade References Committee on 27 September, where we discussed capability and

front-end project management, Mr White said:



I think the best way to improve that interaction would be to move a lot more of the source selection process into the

capability development end of the structure. In a sense I should declare my own origins ...



To put that into context, he is suggesting there that a lot more of the DMO cost expertise be

moved into your capability section. We have been discussing enhancing the DMO’s capability

cost analysis expertise, and he is saying, ‘No, shift them closer to the operational end.’ What

comments do you have on that? You can take it on notice, if you like.







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Vice Adm. Shalders—No, I am happy to talk to it, because I am aware that another witness

in the inquiry, Dr Williams—who I think is also going to be here this afternoon—had a quite

contrary view to Hugh White’s.



Senator JOHNSTON—Yes, he did.



Vice Adm. Shalders—I would like to give our current arrangements a chance to work. As I

said to you before, I am very keen that the teaming approach be forced to work. I do not think

we are too far off the mark in our current structures, provided both sides of that very

complicated activity are working together as well as they should. I do not think that Mr White’s

proposal is necessarily the way to go. I fall down on Dr Williams’s view, which is: let us leave it

where it is. The reason that I take that point of view is that Dr Williams has worked on both

sides of the equation. As Hugh White has indicated, he has only worked at one end of it. Dr

Williams is here this afternoon. I believe. and you might want to poll him a little more on that.

He has worked on both sides. My personal point of view is that I think we are okay, provided

the teaming arrangement—the partnership activity—works as well as it should.



Air Marshal Houston—If I could add to that, I think if you go back about 20 years our

approach was very much where the source selection was done at the capability development

end. Looking at some of the equipment we bought, we bought a lot of customised equipment

when perhaps we would have been better off buying something that was more off the shelf or

something that was common with other operators. I think the way we are doing it now is much

more sophisticated. I would strongly support what the Vice Chief of the Defence Force has just

said, in that the teaming approach is really the key to it all. I think the last thing we need is to

make the decision in isolation in some part of the organisation. What is important is that we

work together in a very cooperative way as a team and make a corporate and collegiate

decision.



Senator JOHNSTON—Following on from that comment, how do we measure our success?

What infrastructure benchmarks have we got in this very important area to determine how well

we measure up—that is, knowing what we want, knowing what we are getting and getting what

we want?



Air Marshal Houston—In Air Force we have an operational test and evaluation plan that

looks at the capability that is being delivered against the capability that was defined at the front

end and, whilst we do not have a set formal process that we use time and time again, we do that

with every platform that we deliver.



Senator JOHNSTON—Is cost and time an element of that evaluation?



Air Marshal Houston—Clearly, cost and time is. We know AP3C was on budget and was 44

months late. I could give you other examples, but we always make that measurement.



Vice Adm. Shalders—The only thing I would add to that is: yes, we do measure it and we do

report it. We report it to this committee, amongst other Senate committees, and it is reported of

course in the annual report, both in terms of cost and schedule. In regard to the metrics that are

used by the DMO, which I think is where you may be heading, I am sure they would be happy

to describe those metrics in some detail.





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Senator JOHNSTON—What is the turnover of personnel in your CS?



Vice Adm. Shalders—The CS division is largely military and, in general terms, the people in

that organisation turn over every two to three years.



Senator JOHNSTON—Is that a problem?



Vice Adm. Shalders—It would be better if we had more continuity in the section because, as

you could imagine, there is a fairly steep learning curve. I know the committee has taken

evidence on this at other hearings. Yes, of course it would be better if we had more continuity

but there are career development activities that impinge on that.



Senator JOHNSTON—Sorry; there are what activities?



Vice Adm. Shalders—Career development which, in general terms, forces the turnover.



Senator JOHNSTON—How do we deal with those issues? I would like to see, speaking

quite dispassionately, the career options for service personnel—service men and women—

enhanced as much as they can be on this side, because when the mistakes are made they are

beauties. These are very important issues and we have got to have service men and women

telling us what we need. It concerns me that the turnover in these areas is throwing away a lot of

good experience.



Vice Adm. Shalders—That has been recognised in particular in Army, which is the example

I will talk to, but it applies across the three services. We have recognised, not just in project

management but in areas such as personnel, that this rapid turnover or this two- or three-year

turnover is not good for our business. So with respect to this example, we are looking at

streaming people into project management, such that, if you were to follow the project

management stream, you might go through staff college and your first appointment post staff

college might be in the DMO at the acquisition end of this cycle. Following that, you could

come back into capability systems to work on the requirements end. In the ideal world, you

would go back to perhaps the systems program office. That sort of career structure is being

worked on and is available for some; similarly in other fields—personnel springs to mind. We

recognise that there is a problem there. We are trying to build career streaming such that we can

overcome that problem.



CHAIR—I will start with a bit of light relief this morning by going to the Bulletin of 21

August, in which the feature cover story was entitled ‘A Rocket for Defence’. The introductory,

heavy typeface, teaser reads:



Australia’s military is governed by a financially inept, bureaucratically overloaded and politically trespassed Defence

Department.



It goes on to quote a paper—‘Farewell to Arms’—which was circulated upon the retirement of

Des Mueller. I am sure you are familiar with this article in which Mueller gives Defence a fairly

scathing review as he exits that organisation. It states:



Mueller reserves some of his more cutting remarks for the two-year overhaul by Defence to modernise management

practices to rid itself of its spendthrift image on new equipment. This, says Mueller, can occasionally “dissolve into a

form of organisational theatre”.





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In this article, he makes a fairly heavy attack on the ‘balanced scorecard’ and makes a number

of other points. An anonymous source—designated an ‘insider’—dismisses some of these

criticisms by simply saying, ‘It’s vintage Des.’ The article goes on to say:



Financial management, or lack of it, is Defence’s single largest problem—not strategic thinking.



I am bound to read out this colourful quote, Vice Admiral, so please appreciate it:



Some of Mueller’s most trenchant comments concern the executive effectiveness of his own VCDF role. “Much of what I

did, and often what I had to do because of my appointment, added little or no value,” is his frank assessment. “A

significant amount of time was consumed being a performing seal, which meant balancing the organisational beach ball

on my nose, clapping my flippers and catching fish thrown by the spectators.”



Perhaps the closing paragraph of this article is the most important, though, in many respects—

apart from the comments about Mueller’s style. It reads:



Defence has some new leadership with Cosgrove and ministerial oversight by Robert Hill. They could do worse than ask

Mueller to submit formal recommendations. A performing-seal-turned-corporate-shark might be just what Russell Hill

needs.



We are not a corporate shark in this committee, but we do have an oversight responsibility.

Some of the things colourfully raised in this article are things that we are avidly concerned with

and the basis of your submission and the discussion entered into this morning. Let me say that,

in the world of journalism, some points are presented more colourfully than they might actually

be in real life to attract attention. I am familiar with that. It has also been said on occasions that

politicians exaggerate to make a point. I am not sure that that is true, but people believe it so let

me register it.



I want to give you gentlemen a few minutes to comment, if you would, because this is a

contemporary article—August—it is about contemporary circumstances and it quotes a ranking

officer, an officer who, I think, thinks it is inappropriate to appear before this committee

because recently retired officers ought to vacate the field. Yes, but the field has been left with a

fairly heavy critique. Are there some comments that you would care to make about these

propositions, which go to the financial management, the lack of a business culture or a business

capability in assessing things and the problems with organisational structure? The balanced

scorecard got a bit of a panning.



Vice Adm. Shalders—I would like to make two brief comments, in neither of which will I

try to comment on what General Mueller said. He is obviously well able to comment for

himself. I would say, though, that in two areas I think he understates—



CHAIR—It is a question of how much notice we take of it, really. This is in the public

domain.



Vice Adm. Shalders—Exactly. If I could say that I believe he understates his contribution to

this area. He said that he did not achieve much. In fact, the document that I have offered the

committee this morning, the Capability Systems Life Cycle Management Manual 2002, is his

work. This describes the process that we are now using. It describes, in large part, what your

committee’s terms of reference are attempting to achieve.







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CHAIR—Can it therefore be seen that these are the comments of an extremely competent

senior officer who had the vision but is frustrated about the take-up of the vision and the

application of the changes that he wanted to make?



Vice Adm. Shalders—It would appear that he was frustrated. The point that I am trying to

make is that he put in place a number of changes to a process that he saw as being flawed.

Those changes are still working their way through the system. This manual that I am quoting

from and speaking about was driven by General Mueller, and I applaud him for that. I also

believe that he understates his role in terms of the way the DMO is now working. General

Mueller, before he became VCDF, brought together the support side of what is now the DMO.

His contribution there was equally significant. So I believe his comment about not being able to

contribute too much is probably Aussie understatement at its extreme; he did a lot.



CHAIR—I accept what you are saying, but in a way it strengthens the argument he is

putting, doesn’t it? If it is true, here is a man who has achieved quite a lot, who has been quite

an important figure in evolving the management structure in Defence and who has, as you say,

been successful, saying these things at the conclusion of his career. Does that suggest that the

problem is genuinely intractable or that he has got the story right, but making the changes in an

organisation where people, not just structures, have to change is, in terms of cultural change,

extremely difficult if not impossible?



Air Marshal Houston—I think we have to set the context for these remarks. The Defence

organisation has gone through an incredible amount of change over the last three or four

years—in fact, over the last 10 years. My own service has gone from a force of 23,000, to just

over 13,000—13,196. There has been a lot of organisational change, there has been a lot of

operational change and there has been a lot of cultural change. The effect of all that change is

that we now have more capability than we had 13 years ago. A lot of our support functions

have, obviously, been outsourced. Some of the things that are mentioned in that article are a

consequence of the reform program. In Air Force we talk about gaining a soft landing from the

effects of the reform program.



We have now got some problems with our systems. One of the biggest problems we have is

that our financial management systems are inadequate for the task at hand. We are addressing

all of those shortcomings in terms of those systems. You would be aware from the work that

you have done already that we have some major problems, major shortcomings, with the

standard defence supply system. That system came in 10 years ago when we had three single

services and the three single services essentially customised the system to their own

requirements. At the moment we are doing an awful lot of work to upgrade that system. Once

we have achieved the upgrade of that system I think there will be a marked improvement in the

way we manage costs, inventories and finances within the Department of Defence. I think we

are headed in the right direction. The article suggests there is a fair bit of frustration, but we are

all frustrated that we cannot get the financial management systems in in the short term. But to

bring in financial systems to support the very complex processes that we are involved in—with

acquisition, with through-life support and indeed with the management of probably the most

complex business in Australia—takes time. We are addressing those issues and I think there will

be a good solution around the corner.



CHAIR—One of the areas he raises here of particular concern is financial management. This

is the point you finished on. What I understood you to say—and this is why I want to be



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particular about it—is that there are problems classically, as we know, in the financial

management structure and they are being brought under control. Why should we feel

confident—if we should—that it will successfully be brought under control?



Air Marshal Houston—One of the other things about the context that I should mention is

that we have gone from a strictly cash based accounting system to an accrual based financial

accounting system. In a complex organisation like Defence that is a very big transition. All of

our systems were customised for a cash system. We now have to take on board the challenge of

the accrual system. The chief finance officer within the department has been in the job for a

short time. He has been recruited from the business sector. He and his team are working up a

new business model and they are addressing all of the areas where we have deficiencies. I think

they have done a magnificent job over the last two years.



Some of the problems with inventory management relate to the fact that we have had items

on stock for many years. I do not know how many items are in our inventory but it is in the

millions. Do we need to basically account for every legacy item that we have on stock to take

account of the new accrual requirements? It is a tremendous challenge and it would cost a huge

amount of money to do a 100 per cent inventory of all those items. We have some challenges

but, in my view, the way we run finances in the department is better than it was five or 10 years

ago—much better.



CHAIR—I understand the revolutionary change that accrual accounting has brought, not just

in Defence but in the wider Public Service as well. I must say—this is a heresy because it runs

against the ruling orthodoxy—that I am still not sure whether the accrual accounting outcomes

are better than the previous system. But you have to work the system that you have and make it

work effectively for you, and I guess it is for others to decide what the overall accounting

system will be. The image I am getting in trying to form an image about how we measure these

changes, evaluate their effectiveness and feel confident in signing off if we can is that, in this

particular inquiry, the DMO is running as efficiently as it can and contributing as efficiently as it

may to the overall Defence effort, and public dollars are not being wasted. The problem is that

there is almost a constancy of change. There is not much of an opportunity to say, ‘This was the

system before; here is the system now. How have things changed? How do you quantify

improvement? How do you tie down efficiencies so that you can pinpoint what they were and

be relatively confident that the outcome is better?’ It is just that so many things that have

happened interact and cross each other. Maybe the problem is that there needs to be no more

change in structures for a time to give the organisation a chance to acquire the culture necessary

to make the changes that have been structurally put in place effective.



Air Marshal Houston—The DMO has been in existence for only a little bit over 18 months.

The consultant that looked at the DMO in the first instance said that it would take five years to

bed it down. We are only 18 months into that process. Yet, when you look at the projects that

have been started since the DMO started—the Vice Chief of the Defence Force just mentioned a

couple of them: AEW&C, Eurocopter, Air 87—they are all going very well. They are on time

and they are also on cost. So the outlook is a very positive one. Most of the problems that we

have in the DMO are with projects that started many years ago. The ones that have been started

since the DMO started, if you look at them, are all going well. I think there is quite often a lot of

unfair criticism of the DMO when, in fact, those projects were started years ago—back in the

mid-nineties or earlier. I think the outlook is a very positive one and that, in terms of financial

management, the work we are doing in the Defence committee means we are heading in the



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right direction. There has been a lot of achievement in the financial management area. There is

still a little way to go but it is much better than it was, say, three years ago, because we are

coming to grips with the accrual accounting system. I think we are performing effectively as

managers of the department. The proof is in the pudding. Look at how we are performing

operationally. We have met all the government’s requirements in terms of operations and, again,

we have done that effectively.



Vice Adm. Shalders—Could I make a comment on the pace of change, on should we have

an operational pause. That would be nice, but if I take you back to the utopia where we did not

customise anything, I do not think that is possible. We need to understand that change will

continue, and we need to work within it. Whether it is in the finance world or the capability

requirements definition area, change is just part of our life. In terms of the terms of reference

that you are looking at, there has been major change and, yes, it would be nice to have a period

of stability to let it work its way through, but I do not think we will ever get to a stage where we

do not have any change at all in this area.



CHAIR—No, I am talking about structurally changing something as massive as the

accounting system or as massive as introducing the DMO structure. Certainly, those things

evolve and, if they did not, you would ossify and die. But once you have got those structural

changes in place—and my experience is with change in industry—you need to give long, strong

signals, it seems to me, that, ‘These are the structures within which we work,’ and then, if their

culture is different to the goals of those structures, you need to encourage human beings to

achieve the cultural change to make those structures work. Half the thing is the structure and the

other half is the people who operate within that, and if their culture is different to the structural

objectives, then you will never achieve it.



Air Marshal Houston—We have put an awful lot of effort into cultural change. I think one

of the great achievements in the last three years—and, to be fair, to give Dr Hawke his credit—

is that we now have got a leadership, values based culture within Defence that was never there

before. If I go back 20 years, the whole environment in Defence was one of tribal infighting, a

lack of cooperation, hidden agendas and so on.



CHAIR—It sounds like a political party.



Air Marshal Houston—Fortunately, if you go across the lake now and have a look at the

way we work, you will see that we have strong leadership and we all fall in behind that

leadership and work as a team. There is no tribal infighting. I have not seen any service rivalry

like we used to have, say, back in the mid-eighties when we were fighting over scarce resources.

We now recognise that resources are scarce and we work very well together. At the highest

level, we take collegiate decisions and decisions that are in the national interest, not in the

interests of individual services or individual groups within the organisation. So we have got

away from that bureaucratic, tribal culture that we used to have and have moved to a much more

positive culture of leadership, cooperation and a focus on people and on results, and I think it is

a huge step in the right direction.



I would support your view that we need to give the DMO time to bed in. It is working very

well at the highest level, and it is working wonderfully well down at the force element group

level. My force element groups are getting fantastic support from the systems program officers.

It is not perfect but, as I think as you saw when you were at Edinburgh the other day, it works



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wonderfully well and I am sure you found a very happy customer in Air Commodore Phil

Byrne. So I would support what you say, Chair, in terms of perhaps allowing the DMO time to

bed down because, sure, there is still a lot of work to be done, particularly in the systems area

and the logistics process areas at the higher level, but we are well on the way. Give us the time

and I am sure that, at the end of five years, you will see a model organisation which is world’s

best practice.



CHAIR—Senator Marshall has some questions on this point before I go on to my next set of

questions.



Senator MARSHALL—In respect of what was a fairly glowing appraisal of the DMO since

it has been created, I just want to take you to Australian National Audit Office report No. 13

1999-2000. I do not expect you to know the detail of it. It effectively said that the latest Defence

risk management strategy indicates:



... that the risk of failure of Defence’s major capital equipment acquisition is very high—



and that the risk will continue for several years. That is a bit of a concern, given that you have

said effectively that all new projects have gone very well and it is only the old ones that have

not. The Audit Office then scheduled a full performance audit to assess the status of major

acquisition projects and the validity of project status reports provided to the government. The

DMO then asked for a deferral of that for up to two years.



We have been going through a reform process for two years. You are saying it is going well

for the projects it has handled. Why do you think it was necessary for the DMO to ask for a

deferral, for up to two years, of an independent review of how that is going? Were you aware of

that request to defer? Are you supportive of that? I am just wondering why we would want to

avoid the Audit Office actually having a look at what is going on for that period of time.



Vice Adm. Shalders—I can give you an answer but Acting Under Secretary Defence

Materiel will give you a more fulsome answer this afternoon, I am sure.



Senator MARSHALL—I am going to pursue that with him this afternoon.



Vice Adm. Shalders—My sense is that it comes to this issue of change that we have just

been talking about. We have been through such a massive period of change in the DMO that I

think the under secretary probably felt that an audit at the point when all those changes were

still bedding down two years after creation might have been distracting. That is my sense of

why he requested that deferral. I will make another comment on risk management within

projects, and again the DMO staff can give you far more detail on this. Every project now is

required to conduct risk management as part of its project management. The more important the

project is, of course, the more detail that risk management plan goes into. A final comment in

terms of monitoring and watching the top 20 projects, for example: each month the Defence

committee takes a report from the under secretary on where those top 20 projects are, plus any

other projects of interest or significance. So at the Defence committee level, the highest

committee we have, there is constant monitoring of where the DMO is going with their most

important projects. As to the detail of risk management, I am sure Admiral Scarce can give you

more on that this afternoon.





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Senator MARSHALL—It has also been said that the DMO loses a lot of expertise—they are

unable to retain that—and that people running projects lack a depth of expertise on the range of

technical, operational and market issues that is required to deal with the cost/capability trade-off

issue. How do you see that running? Do you see that as a real problem? I wonder how that then

relates back to what the Audit Office say about projects maintaining a high risk for several years

into the future.



Air Marshal Houston—I think you could get a lot more specific detail from the people from

the DMO but, from where I sit in Air Force, one of the things I have done with Mr Roche, the

under secretary, is agree that people in key positions in the DMO—my aeronautical engineers,

logisticians—will stay in those key positions for periods of up to five years. We picked five

years because that seemed like a reasonable time and there are other considerations in terms of

career for those individuals.



Senator MARSHALL—Does that five years coincide with the starting and finishing of

projects, though, or is that just a five-year window? If projects are overlapping that, we are still

going to have people moving mid-term through these projects.



Air Marshal Houston—Let me deal just with two projects initially and then I will mention

another position. If you have a look at the AEW&C, we have Air Vice Marshal Gray in position

for five years. At the end of five years we will almost be at the delivery point of the first aircraft

here in Australia, so it was a five-year period that was struck. It was not related to any particular

milestone of the project, but the initial part of the project and the part up to almost first aircraft

delivery here in Australia will be under his stewardship. At the end of five years, will Air Vice

Marshal Gray continue in that position? I would not like to speculate on that because we need to

worry about his career as well, but that is one of the options.



If we look at the new air combat capability, a project has been set up there. Just to back up

what VCDF said earlier on, that project team is a team that represents the vice chief, me and Mr

Roche. It is a multidisciplinary team. The officer heading that up is Air Commodore John

Harvey and, at this point, his appointment will be for five years. With the joint strike fighter, if

we go five years from now, we are talking about 2007 or thereabouts. He will get through the

first contract signature for the first batch of aircraft, and we will then have to review whether he

continues in the job beyond that. Again, there are career considerations that we need to take

account of with military people.



Vice Adm. Shalders—I would like to make a comment on personnel within the DMO and

how they are managed. Again, this afternoon the Director General Materiel, People and

Performance Branch can take this in more detail. My comment is that, prior to assuming my

current position, I was the head of Defence personnel where we were responsible for HR

policies in the broad. My experience in working with the DMO, part of that whole puzzle, was a

very positive one. DMO has some outstandingly good training programs and general HR

policies which attempt to get around the problems that you have raised—the possible lack of

expertise, lack of depth and continuity. Some of the HR policies that are being pursued within

the DMO are leading edge things that we, in the wider part of Defence, could learn from. I am

sure Ms Isaacs would be happy to take you through some of those if you want more detail.



CHAIR—Could I just come in here on that point. We have a lot of evidence that supports

what you have just said, but one of the problems that also seems to come through in the



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evidence that we have obtained is that, particularly where technical skill is required and that

technical skill has been built up in association with a particular project—what people call

domain expertise—the level of remuneration available to people in the public sector is less than

to people in the private sector. That domain expertise is really a very tradeable good on the jobs

market, and there is a tendency for headhunting or you lose it out the back door because people,

at the end of the day, have to be concerned about the welfare of their own family and so forth.

No criticism attaches to them, but it is a function of differing remuneration levels. That gives

rise to the background thought: would the DMO be better off if it were cut loose and made an

agency operating on commercial principles rather than being knitted into the department as it is

now? Do you have any comment on that?



Air Vice Marshal Houston—I do not think that a commercial agency operating outside the

department would necessarily work as well as the current arrangement. One of the advantages

of the current arrangement is that we have a nice blend between military and civilian people

who provide a great service to the services. The main customers are obviously Army, Air Force

and Navy. It is important that people within that materiel organisation have an understanding of

what is done at the sharp end. If you had a commercial agency that, essentially, worked outside

the department, there is no guarantee that we would have that sort of operational appreciation

and that sort of operational understanding. Another thing that is probably important for you to

realise is that I have airworthiness responsibilities. I am the ADF airworthiness authority. I have

to exercise that responsibility through military, aeronautical and other specialist engineers

within Air Force. I think a function like that would be much harder to perform if you had a

commercial organisation basically doing all the work.



CHAIR—We do expect a lot of our service personnel. If the argument then is to retain the

structure as it is, is a cost that ought to be recognised for doing that a loss of domain expertise, a

loss of technical skill or a high turnover in that area as a constant, which we just have to live

with? Or is there some way in which that can be dealt with within the current structure?



Air Marshal Houston—We do have a turnover in certain areas, but the cost of the personnel,

particularly in the senior positions, is probably cheaper than it would be if we had a commercial

organisation. I think that the Air Force people I have in the DMO are some of our best people.

Given the level of remuneration they receive, the nation is getting a pretty good deal for the

skills, expertise and experience that they bring to the table.



Senator SANDY MACDONALD—It goes without saying that a stable project management

requires stable personnel. It has been put to us on a number of occasions that this is something

that the DMO is aware of and is addressing. It seems that, historically, projects that have gone

well have gone well because of that stable personnel. One of the things that came out of the

article that the chair mentioned was the comparison of the Seasprite between New Zealand and

Australia. I acknowledge what you say about the requirement for unique Australian capability,

but that is an example. Why is the New Zealand capability so different from the Australian

capability, and why do they have their aircraft doing whatever they are required to do and so

differently from Australia’s aircraft? I acknowledge that there were problems with the

contractor. That is another problem. I want to focus on the capability. What differences do they

have in capability requirement?



Vice Adm. Shalders—Our aircraft will be far more capable than the New Zealand aircraft.

That does not excuse the delay, of course. That is caused by another—



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Senator SANDY MACDONALD—I am not asking so much about the delay. I am asking

about value for money and getting a product which will do almost everything we want without

every bell and whistle on it. This comes up again and again. This is something that I have seen a

couple of times: we spend an awful lot of money on a battlefield computer system when a visit

to Dick Smith might have done the job. I know that that is a very poor example, because you are

dealing with such enormous amounts of money in Defence, and I know that the question of

capability acknowledges the possible risk assessment, the life of the equipment and all those

sorts of things but, when you get a specific example like the New Zealand helicopter, why is its

capability so different from ours?



Vice Adm. Shalders—I was just advised that the DMO is prepared to answer the detail of

where we have got to with Seasprite. My comment is that the aircraft that the New Zealand

Navy are operating from their ships is a very different aircraft from the one that we will

ultimately operate from our ships. The systems fitted to our Seasprite will be far more capable

than the New Zealand platform.



I guess a more general point I would make is that we need to be very sure that the

requirements we are trying to satisfy are the requirements that fill the capability gap we might

have identified. The effort spent up front or in the early stages in defining your requirement will

pay off in the long run. I know I keep coming back to this, but it is the requirements definition

that is so very important in any project. That is an area I am responsible for and it is an area that

some of the process improvements I have talked about are homing in on. I cannot emphasise

strongly enough how important it is to get that part right. I am not saying we did not get it right

in this particular project, but it does illustrate the point of getting it right up front—as close as

you can to a point that is going to satisfy the capability gap you might have identified.



Senator SANDY MACDONALD—In your opening statement, Vice Admiral, you talked

about the desire to buy products that are increasingly interoperable—with the US defence

forces, probably. Has that always been the case or do you think it is an increasing desire now? It

seems to me that, in terms of value for money, questions of capability must increasingly relate

to something that is almost completely interoperable with our major defence supplier and major

defence partner.



Vice Adm. Shalders—I believe we have always had a requirement to be interoperable where

we can. Also, I would say there is increasing emphasis on interoperability, particularly with our

major alliance partner. In fact, the recent Australian-US ministerial talks took a paper on that

very subject, so we are progressing and moving even more towards trying to become

interoperable wherever we can. The only other comment I would make on interoperability is

that, of course, you pay a premium when you try to keep up with those who are leading the

field, particularly in terms of technology. The question that has to be answered, of course, is

whether the premium is appropriate—whether you can afford it—and those are the sorts of cost-

capability trade-off decisions we have to make all the time.



Senator SANDY MACDONALD—Who decides whether the premium is worth paying?



Vice Adm. Shalders—That is a decision that is taken right through the capability

development cycle, starting off back in the services. For example, I am sure the Chief of Air

Force would love to have Stealth fighters; can he afford to have Stealth fighters? That sort of

trade-off decision is exercising his mind, his staff’s minds and my staff’s minds all the way



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Friday, 15 November 2002 SENATE—References FAD&T 221





through to final government approval. Whatever the size of the premium might be, in terms of

whatever the acquisition might be, needs to be debated all the way through the process.



Senator JOHNSTON—Do we have total asset visibility? If we do not, what impact does that

have on our capability?



Vice Adm. Shalders—Do you mean assets in terms of—



Senator JOHNSTON—Right across the board: supplies, stocks, parts, spares—the whole

bit.



Vice Adm. Shalders—Yes, we have visibility of all our assets; they are on our systems. If

you pursue that question with the experts from the DMO they will be able to give you a full run-

down on that. But it is something we worry about all the time. Asset management is an area that

we need to do more work on, but I am sure the experts can help you with that later.



CHAIR—I have a couple of further questions, but I wonder if you would not mind taking

them on notice. I might ask one now, at the risk of straining friendships too far. Perhaps you can

take us to the break by answering it, Air Marshal. It concerns the Audit Office’s Audit report

No. 30 2001-02: Test and evaluation of major defence equipment acquisitions. It made a

number of recommendations with which Defence disagreed. They included the establishment of

an independent office to have oversight of operational test and evaluation; the use of test and

evaluation master plans to improve risk management and safety; and that all staff responsible

for acquisition, maintenance and test and evaluation have ‘training and skills adequate to their

responsibilities’. This is what the Audit Office came up with. That all seems perfectly proper,

especially because test and evaluation seems to be fundamental to providing the feedback

necessary to ensure that projects are progressing properly. Can you explain to us why Defence

declined the recommendations?



Air Marshal Houston—I am sorry; I am not across the detail of that so I would prefer to

take it on notice, if that is okay.



CHAIR—Okay. Thank you very much. It has been a very productive morning.



Proceedings suspended from 10.35 a.m. to 10.49 a.m.









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TURNER, Mr Michael Rodney, National President; and President, Tasmanian Chapter,

Australian Industry and Defence Network



CHAIR—We will now hear from the Australian Industry and Defence Network. Mr Mike

Turner, the national president, will join us by way of telephone conference. Welcome. Witnesses

giving evidence before our committee operate under parliamentary privilege. Therefore, it is

important that their evidence be accurate. Any false or misleading evidence to a committee may

constitute a contempt of the Senate. However, evidence can be given in camera. If you wish to

give such evidence, please make that request of us and we will consider it. Should a witness

expect to present evidence that may adversely reflect on another person, they should consider

doing so in camera. If such evidence is given in public, the committee is obliged to draw to the

attention of such a person who may have been adversely reflected upon the nature of those

comments and give them an opportunity to respond. At this point, having said those routine

things, it is over to you, Mr Turner.



Mr Turner—Good morning. Thank you for the opportunity to make this submission to your

hearing. As national president of the Australian Industry and Defence Network, I am domiciled

in, and am speaking from, Tasmania—although the headquarters for AIDN are in Ashburton,

Victoria. In my role I primarily represent Australian SMEs. We have on our database some

1,300 such SMEs, which have the ability to provide defence orientated products and services.

These SMEs individually display a degree of agility and responsiveness as well as an

entrepreneurial spirit that is ideal to meet the demands of transformational warfare that, with

international events today, I fear we are in the process of moving towards.



If you have any questions or queries during my submission, please stop me and I will respond

to them. Initially, I would like to respond to a comment made by Senator Hogg as acting chair

of the Wednesday, 9 October meeting in Melbourne. He said he wanted to place on record:



... the committee’s regret that there will not be an appearance today, as expected, by officials of the Victorian government

nor by representatives of the Australian Defence and Industry Network. The views of state governments and defence

industry representatives are important in enabling the committee to fulfil its obligations to the parliament, to investigate

comprehensively the current state of affairs with respect to defence materiel procurement and management. We will be

hearing from their counterparts in other states.



Concerning that notation from Hansard, I advise that I am the national president of the

Australian Industry and Defence Network, not the ‘Australian Defence and Industry Network’.

Secondly, with respect to that hearing, the invitation to AIDN members to attend on that day

was the fourth request this financial year to attend a hearing or a survey. We started in July with

the Australian National Audit Office survey on defence related industries, and that has been

followed at the rate of one such request per month. With these sorts of presentations, a problem

for SMEs is that there is a minimum preparation time of some two days to pull their evidence

together, and then there is the additional day to attend the hearing. That means that SMEs not

only lose three days from the management of their business but also bear the costs of such. It is

starting to become quite onerous for SMEs to respond to these sorts of requests, although it is of

critical importance that we provide the information requested, to enable the foundation of

reasonable results to obtain from the hearings.









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For SMEs, the unfortunate part of responding to such requests is that, as the management is

multiskilled, it goes to the essence of running their business. While overseeing marketing and

export, as well as quite often being hands-on in research and development, they can also be on

the shop floor. So SMEs are reasonably limited by their lack of resources. It is also unfortunate

in that usually the managing director is the person who responds to these sorts of requests, and

that is usually the guy who also does the marketing and may be away overseas. Many of the

inquiries that we get, especially from Defence, require us to do surveys. Generally each survey

is of an urgent nature and demands a response or input within 14 days. A classic example of this

is the PMSEIC working group on the science and security audit. On 12 September we received

a request that their questionnaire be sent out to all our members with responses to be made by

20 September. That gave us just eight days to comply.



This is very difficult for SMEs, especially if the managing director is away exporting or away

interstate marketing. There is just not the time frame within which to be able to respond.

Contrary to that, if we seek to obtain information or details or meet with upper Defence

personnel, their standing demand is that we give them a minimum of 90 days notice for any

diary purpose. Understandably, that diary commitment can be altered at their instigation because

of circumstances that may take greater precedence over SMEs.



Another issue that I have with respect to the hearings is that, unfortunately, you guys were not

able to get down here to Tasmania. In Tasmania we have a number of enterprises, probably in

the vicinity of 32, each with technical capabilities and all of which are exporting Defence

related products as a niche section of their business. Whilst these fellows have not been able to

respond or had the time to put pen to paper, they have each expressed a concern that, yet again,

a government operation—as we find especially with Austrade and sometimes even with

AusIndustry—has not made its way down here to Tasmania.



Aside from that, one of the things with SMEs is that they are primarily underrecognised as

being a strategic Defence resource, primarily due to their ability to meet what we call surge

demands. Surge demand is generally obtained when something like Timor arises and there is an

immediate requirement for assistance to Defence in order to resolve issues or problems. It

comes down to the SMEs to handle this type of issue. Because of the experience that SMEs

have with trends and with responding to orders both nationally and internationally, the SMEs

are very well placed to meet these surge demands. From a Defence point of view, this is most

worth while. With the majority of SMEs in Australia, Defence business is currently only a small

proportion of their business. They often find it very frustrating due to the itinerant nature of

Defence’s purchasing—the long-term nature of Defence’s ordering but with time frame

demands that are usually greater than those which are acceptable or are currently commercially

accepted practice. So there are some issues that SMEs would have with Defence.



There are two ways in which SMEs meet Defence. One is via the linking of the SME

underneath prime contractors to Defence, where the prime contractor is awarded a tender or a

contract from Defence and the SME then supports that prime contractor with the supply of

materials and/or components and/or technology to enable that prime contractor. Alternative to

that is the methodology whereby the SME has a capability or a product or a service which is

stand-alone sought by Defence. Because the SMEs have only a portion of their business with

Defence, they are not in a position to be able to survive entirely on Defence work. It is therefore

incumbent upon that SME to ensure that they have a good foundation with respect to civilian





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FAD&T 224 SENATE—References Friday, 15 November 2002





market orientation both in national and export markets and support those commercial

orientations.



A surprising number of Australian SMEs do not bother to register their research and

development projects with AusIndustry. The disappointing thing about that is that the ABS then

does not pick up the correct statistics with respect to SME research and development because

the SMEs perceive that there is a plethora of paperwork attached to it. Therefore, because they

do not have the time to do that, they miss out on the 175 per cent taxation benefit available

through AusIndustry and/or the possibility or the opportunity of working with AusIndustry for

research and development grants under R&D Start when it comes back on stream, ostensibly

next year.



The last 10 years of outsourcing has been a major driver with respect to enticing SMEs to

become involved with the provision of Defence materials, components and technology. It has

certainly been a major blessing to Australian industry. This is where we perceive that there is a

necessity for industry to be working very closely with Defence and vice versa, and this is

primarily where the Australian industry involvement policies became involved. AIDN is

working on behalf of SMEs nationally to negotiate with DSTO—you are familiar with the term

DSTO, I presume—



CHAIR—Yes.



Mr Turner—and the CSIRO to establish a mutually beneficial pathway to facilitate

cooperative R&D and technology advice. There is, generally, a commonality of research areas.

Where SMEs are looking to go down a pathway and they come across problems, we want to

instigate an ability for that SME to liaise with DSTO scientists who may well have come across

that problem previously and be able to offer a quick solution to and enhancement of the speed

of development of the research and development project. To that end, AIDN has got a meeting

with DSTO representatives on 12 December. From time to time we have tried to instigate this,

but it has not been successful due to one reason or another. We are especially trying to instigate

it today as, under the Prime Minister’s science request for details of research and development

projects from SMEs in respect of the mitigation of possible terrorist activities, we see it as being

of an urgent nature to enhance the ability of SMEs to extend and expedite their research

projects.



One of the issues of industry is the critical contribution to defence, with the factor that we are

able to provide as and when required. With this then comes about the necessity for ensuring or

assisting enterprises to maintain an economic stability in the rise and fall of demands in national

markets. This really behoves then a larger question as to the methodology and the way in which

Australia, in general, assists with export orientations, especially through the roles of

government avenues such as Austrade and also the Department of Foreign Affairs and Trade.

AIDN perceives that there is immense value to be gained through government partnering

concepts in conjunction with utilising all the resources available—which come down through

Austrade, DFAT and Defence—in looking at export orientation in order to expand the

capabilities of manufacturing and provide cash resources to facilitate further developments by

SMEs.



From the Defence white paper of 2000, there was certainly a recognition that a strong defence

industry is an inseparable component of defence capabilities. There was a clear understanding



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Friday, 15 November 2002 SENATE—References FAD&T 225





of the significant elements of defence capability now being provided by Australian industry and

the long-term benefits of evolving industry and capability, development, acquisition and

through-life support. This certainly has been borne out by the avenue of Defence in resourcing

Australian capabilities with the recent minehunter coastal vessel and the Anzac ship projects,

which gave a considerable boost to the Australian economy, industry at all levels and all

technology areas. As well, there was upskilling of labour. This, in turn, has provided Defence

with identifiable savings, which will be maintained through the life of the vessels.



In order to maintain currency with Defence operations, policies and directions, AIDN

members actually volunteer their time and, at their personal cost, incur travelling and

accommodation expenses to attend the Defence government committees and consultative

forums. There are 23 committees and consultative forums that meet on a regular basis

throughout Australia. So the SMEs are involved with Defence at a multiplicity of levels and we

are looking to continue that relationship.



In respect of the acquisition of materiel and the management of it, we perceive that there are a

number of difficulties associated with Defence in the way in which they initially write their

contracts and requirements which are above, beyond or outside current commercial operations.

This causes a lot of difficulties, especially for the DMO where the DMO have to go back and

discuss it with Defence and/or where Defence, during the term of that contract, alter or move

the guideposts in respect of the specifications and then leave it up to DMO to deal with the

enterprise which has the contract in order to ensure that it provides exactly what Defence is

looking for. There are a number of continuing anomalies in the arrangements whereby contracts

and specifications are promulgated.



We believe the industry sector plans and sectorial studies should produce sustainable alliances

between Defence and industry, but it certainly requires an international focus on targeted

exports and the maximum use and involvement of SMEs in respect of that. Unfortunately with

those sectorial studies, whilst there is a degree of input permitted from SMEs, we really do not

have much involvement in the finalisation and then the movement forward of those finalisations

in respect of policy. We see that as being a negative in the current circumstances.



Additionally, 12 months ago, I was involved in working with Defence policy in regard to the

handling of unsolicited proposals. One of the main issues in research and development for

SMEs is the ability for that SME to ascertain whether the project or the technology which they

have identified as being a possible research and development project has any future value to

Defence. We were looking to instigate with Defence a methodology or a pathway for

unsolicited proposals whereby Defence could say, ‘Yes, that has potential’ or, ‘No, it doesn’t’

prior to the SME expending considerable funds and assets in researching the capabilities for that

unit.



It is now some 12 months since Defence flagged the unsolicited proposals capability. They

have now been through three different Defence officers in that period and they are still

deliberating on the non-finalisation of IP issues over that. From this hearing, we would like to

see acceleration given by Defence to the finalisation of that and the opening up of a pathway for

unsolicited proposals. Certainly from the other side of it, and talking to Defence, there is a great

deal of deliberation on the quality of unsolicited proposals that fall to them. That can be

overcome by the promulgation of a formatted requirement for the submission, as well as the





FOREIGN AFFAIRS, DEFENCE AND TRADE

FAD&T 226 SENATE—References Friday, 15 November 2002





submission being required to include certain technical explanations to ensure that it has

potential viability from a commercial point of view.



Another issue for us is that we find the DMO, the Defence Material Organisation, is too much

under the umbrella of Defence. AIDN suggests that consideration be given to corporatisation of

that organisation on the basis that it would produce greater commercial reality and commercial

responsibility in respect of the provision of services to Defence under a contractual basis.

Therefore, the DMO would be able to cause Defence to move contractual arrangements more

into the commercial realm, whereas, unfortunately, now they are under the banner of having to

reside with Defence and take what Defence gives. This causes considerable concern for

Australian industry.



CHAIR—I do not want to interrupt you, but we are under some time constraints. Do you

have a lot more to cover? We have a few questions at our end.



Mr Turner—I am just about to make six recommendations and that will finalise my

submission.



CHAIR—Thank you, please proceed.



Mr Turner—My first recommendation is in respect of the corporatisation of the DMO. The

second recommendation is the urgent investigation of the unsolicited proposals protocol. The

third recommendation is the formatting of an easy access for DSTO and industry to facilitate

R&D. The fourth recommendation is the promulgation of points of contact for easy industry

identification of Defence personnel to act as reference points in respect of research and

development inquiries. The fifth recommendation is that the Defence recognised supplier

certification scheme be expanded—we see that scheme as being extremely good value. The

sixth recommendation is that Defence be supported in the establishment of a current SME

research and development project database, especially in light of current international

occurrences.



CHAIR—Okay. I missed your fourth recommendation. Could you repeat that?



Mr Turner—Certainly. My fourth recommendation was the promulgation of points of

contact, POCs, for easy industry identification of Defence personnel. The major problem there

is that Defence moves personnel every three years and/or during their term of secondment to the

position they can be foisted out of that position and another person move in unannounced.



CHAIR—All right. Does that conclude your remarks?



Mr Turner—It does, thank you.



CHAIR—I just want to ask you a few questions, and I would like to move through these

relatively quickly; almost like a ‘tick the box’ sort of thing.



Mr Turner—Certainly.









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Friday, 15 November 2002 SENATE—References FAD&T 227





CHAIR—The basis of my first group of questions is to try to get the characteristics of small

and medium sized enterprises that work in the defence sector clear in my mind. I am familiar

with SMEs overall; I just want to establish the nature of the SMEs in this sector. Roughly what

number of companies are we talking about here?



Mr Turner—Nationally?



CHAIR—Yes.



Mr Turner—We have on our database 1,300 SMEs. There are also SMEs which are

members of the Australian Industry Group and also Australian Business Ltd. So, using a

dartboard, I would hazard a guess that we are looking at in the vicinity of 3,000 nationwide.



CHAIR—About 3,000 overall?



Mr Turner—Yes, overall there are about 3,000 SMEs with a defence orientation. That does

not include those companies that make things such as buttons or belts; things like that which

would be peripheral to a defence operation in the case of a general mobilisation.



CHAIR—And whose main business is not in the area of defence.



Mr Turner—The majority of those SMEs’ main business is not in defence because there is

not the sustainability by defence of their capabilities.



CHAIR—Roughly, how do you divide these 3,000 companies? Are they companies

providing technical services? Are they consultants? Do they work exclusively in defence or do

some of them have contracts outside the defence field?



Mr Turner—No, the majority of them would only have a small proportion of their business

in defence orientation because there is just not the volume of work here in Australia for SMEs

to do that. Mind you, that is being syllogistic because there certainly are companies—especially

those in the weapons repair field or in the fields of mounts repairs, sights repair or electronics—

that are totally orientated towards defence. Then there are people with electronics, so far as

people manufacturing aerials, who have both a commercial and a defence regime. On average,

the majority of SMEs would probably have about one-third of their business orientated towards

defence. That is drawing a long bow, but that is indicative.



CHAIR—What sorts of companies are they? Are they mainly technical providers—that is,

they manufacture or do technical work—or are they consultant-type companies?



Mr Turner—No, the majority of them are manufacturers.



CHAIR—Do they export? Is that a feature of SMEs in this sector or are they too small for

that?



Mr Turner—No, most of them export.



CHAIR—So they are in the international marketplace?



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FAD&T 228 SENATE—References Friday, 15 November 2002





Mr Turner—Yes.



CHAIR—Looking at these companies, does there tend to be a high level of bankruptcy

among them or is the population relatively stable?



Mr Turner—They tend to be entrepreneurial and they tend to be reasonably stable. The

majority of these enterprises have been in business in excess of three years so they are beyond

that early fall-out stage; therefore, they have a reasonable degree of managerial skill contained

within the business.



CHAIR—In terms of employment, do they employ two, three or five people or 10 or 20

people? How do they shake out?



Mr Turner—The majority of them would probably have between 10 and 30 employees.



CHAIR—So they are at the bigger end; they are more like medium sized companies. They

have above 20 employees. They are certainly not the small, one-person operated companies.



Mr Turner—Generally not.



CHAIR—As companies, do they tend to grow in size? That is, do they come up the ladder

and migrate out of the SME category into more substantial companies?



Mr Turner—I have not witnessed that. Because of their expertise and their shareholding,

they tend to stay under the umbrella of SMEs—in other words, under, say, 50 employees.



CHAIR—I have a couple of other questions. What is the general view among these

companies of Defence’s commitment to helping SMEs develop? That is quite apart from what

Defence’s needs are. As a partner or as the main client, how do you evaluate Defence’s

commitment to SME development?



Mr Turner—Today, SMEs see Defence as a headache, because it is not easy to do business

with Defence. In the first instance, once you develop a rapport with a responsible officer in

Defence, you generally find that that person has been relocated due to the three-year tenure

concept. When a new person comes in, you have to go in and re-educate that person, and that

person may bring with them other contacts they have had previously. So you can be quite easily

dropped out of the circuit while that person picks up with his prior contacts.



CHAIR—So it is the turnover of staff on the Defence side rather than an attitude towards

SMEs that is the main inhibitor?



Mr Turner—It is the primary inhibitor, but the attitude towards dealing with SMEs is

probably the second inhibitor.



CHAIR—What of that attitude that you think is negative?



Mr Turner—It is probably the realisation that, if we do have the need for a general

mobilisation, Defence will really need the SMEs. From talking to Defence people, they see



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Friday, 15 November 2002 SENATE—References FAD&T 229





SMEs as primarily being of nuisance value. Again, being so logistical, Defence like to deal with

the primes because there is a small number of primes and it is very easy to contact those guys;

whereas, if they have to go out looking for a company that makes, if you like, antifatigue

matting, they have to rethink and reprocess.



CHAIR—Some of the recommendations you have made address that interface—that is, how

Defence regard SMEs. Is that the extent of what you think we should consider or are there other

issues in this area? One has to recognise that Defence’s purpose is not necessarily to play a key

role in industry development, although one of the purposes of Defence procurement surely must

be to build up industry capability in Australia so that we can be reliant on our own resources to

some extent in the event of difficulties. Are there any other things you would like to draw to our

attention that we should consider, apart from the recommendations you have made on this

question?



Mr Turner—It would depend on where Defence goes in the light of current developments

and the increase of the special operations capability within Defence. Speaking plainly, in the

advent of considerable terrorism operations within Australia, we would need the expertise of

high technology capabilities very quickly. The only way to obtain that would be through SMEs.

There is not currently the rapport between SMEs and Defence in order for that to be actuated.

Does that clarify the situation?



CHAIR—Yes. Does Defence have what might be described as an outreach program to SMEs

to alert them as to what opportunities may exist in the defence area?



Mr Turner—Partially, and that is primarily for the acquisition of major items. Generally

speaking, if I were making, say, antifatigue floor mats, I would find it difficult to find the person

to whom I should speak in Defence in relation to antifatigue floor mats. But, if I were going to

be making de-armers and disrupters for the de-arming and disrupting of explosive devices,

today I would probably need to go via the DSTO in order to talk to Defence.



CHAIR—Just on those companies that have a relationship with Defence, are you able to

make any remarks about how they see that relationship? How well do they regard that they are

valued as a partner with Defence? Is Defence open to new ideas and open to different ways of

doing things, or is it rigid about what it wants in regards that creative companies perhaps should

fall into line with Defence’s requirements? What is the iterative relationship at the point of

contact, where there are established relations?



Mr Turner—Where there is an established relationship, and there is the acceptance by

Defence of the capabilities of that organisation, it is very hard for you not to do business in that

area. Defence knows that it can rely upon you, (a), for quality and, (b), for technology. Where

you have technology which is in advance of that that Defence is currently purchasing, it is very

difficult for Defence because Defence specifications give technological specifications which

may be out of date. For them to turn around and pick up on the new technology, they then have

to justifiably go through the process of confirming the capability of the new technology. This is

where research and development, I perceive, is a major issue and it is not given the depth of

recognition that it really ought to have with Defence in order to keep Australia abreast or ahead

of the world technologically.







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FAD&T 230 SENATE—References Friday, 15 November 2002





CHAIR—This is my final question, because other members of the committee are entitled to

ask questions and I have been hogging the microphone. In the automotive industry, the major

car producers—and the best example in Australia is Toyota, because it is a Japanese derivative

with Japanese management technique—have a registered list of suppliers in whom they invest

regular training, regular briefings and from whom they insist on regular quality and productivity

outcomes. What is the arrangement with the Defence Force and SMEs? Is there such an

arrangement?



Mr Turner—No, there is not, disappointingly. That would be like utopia. If we could obtain

that with Defence, that would certainly put the Australian Defence Force in a different position

technologically worldwide.



Senator SANDY MACDONALD—Have you experienced a change in the relationship

between SMEs and Defence following the establishment of the DMO?



Mr Turner—Certainly, because the DMO has explicitly opened the doors to SMEs by

providing avenues of contact and then acting upon the questions asked by SMEs and

expeditiously returning with answers. That previously was not available.



Senator SANDY MACDONALD—When we have been travelling around, we have had the

opportunity to visit some of the SPOs. I was wondering how the decentralisation of the SPO

offices had impacted on opportunities to SMEs.



Mr Turner—Are you talking about DSTL or DMO?



Senator SANDY MACDONALD—No, special programs offices that have been

decentralised away from Canberra.



Mr Turner—In talking to SMEs, they find them to be a major advantage. But for me to talk

to the special projects officer from here in Tasmania, I have to talk to them in Victoria. We think

it is a good idea.



Senator SANDY MACDONALD—Do you have a view about a move away from purely

competitive procurement towards long-term partnering arrangements? In other words,

competitive tendering is okay for something that is off the shelf but, if it requires some

complexity or some innovative thought, is it better to have a special arrangement or an ongoing

arrangement with a particular SME?



Mr Turner—Yes, that is a complex issue. That depends upon the technology which is

involved. If the industry player has to research and develop a technology for a specific purpose,

and that purpose has no relevance to civilian marketability, then it would be of value for

Defence and for that industry player to enter into a long-term partnership arrangement because

that then ensures that the industry player is able to get a reasonable return on the investment

made in developing that technology for the express purpose.



Senator SANDY MACDONALD—It seems to me the SME relationship with DMO is much

more akin to the real commercial world. That is, it is not just the service that you supply; it is

the business contact that you have. People like to deal with people they know, so it must be





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Friday, 15 November 2002 SENATE—References FAD&T 231





extraordinarily difficult for you when personnel within DMO change. Do you have any

suggestions about how we might remedy that?



Mr Turner—We have found the personnel in DMO to reasonably remain in the one position,

unlike Defence, who reasonably change every three years. I am speaking from experience here

in dealing with the DMO in Victoria, whereby the director, Bev Lyttle, one of their officers,

Malcolm Best, and the other guys there have been there for a number of years. Therefore, the

rapport that they build up with industry is fantastic. They can pick up the telephone and call me

by my first name, and I them. That is very important in giving industry the feeling that they

have a direct route resource.



Senator SANDY MACDONALD—It is just that businesspeople like to deal with people

they know and people they like. It is very hard when you are a small supplier, perhaps, and the

people involved are no longer there or get moved. DMO acknowledge that, for sound project

management, they have to leave people in place for five years too. It seems to me that, when

projects go well, frequently it is because the project management is stable.



Mr Turner—There is continuity. That is sound commercial practice. In commerce, a person

gets into a project, and they are there for the term of the project. That is of vital importance to

the success and expedition of the project. The difficulty arises—especially with Defence, as I

have said before—when these guys get moved on in three years.



Senator SANDY MACDONALD—That is right. Have you or your group had any

experience with this new concept of alliance contracting?



Mr Turner—No, I have not. Members of AIDN have, and there have been some good and

bad reports in respect of it. On the positive side, I think it is a step forward. From what I can

see, standing on the sidelines, I think it has got merits and is worthy of pursuance into other

avenues.



Senator SANDY MACDONALD—Do you have any idea how our SMEs interact with

DMO in comparison to like-sized businesses in other parts of the world?



Mr Turner—From travelling overseas in the UK, Europe, North America and Japan, I would

suggest to you that Japan has probably got the most open accessibility into defence for industry

of any country. That is probably because of the networking relationships, the establishment of

contacts at an early age and the maintenance of those contracts as they rise through the ranks

within defence or the Japanese Self Defence Force. They are assured that industry players

continue to provide them with technological advancements as and when they become available.

Japanese defence guys have welcomed technological progress.



Because of the constraints placed upon the methodologies that we have here in Australia, we

certainly, via the DMO, have access into defence that is as good as that which they have in

North America—although, in America, up until recently it has been a cloistered outlook from

defence to industry. Now, after September 11, the American defence department has certainly

been expeditious in internationally seeking technological developments and research and

development projects outside of America to lower the costs of picking up that technology for

the American taxpayer.





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CHAIR—I am sorry, Mr Turner, we are going to have to break off, as we have all been called

to a division. Unfortunately, parliament is sitting while we are conducting this hearing—this is

one of the vicissitudes of parliamentary life. When I come back, we will give some

consideration to wrapping up your evidence and going on to the next witness.



Proceedings suspended from 11.30 a.m. to 11.39 a.m.

ACTING CHAIR (Senator SANDY MACDONALD)—Mr Turner, we are back from doing

our democratic responsibilities and voting, which I am sure you will be pleased about. We are

shortly due to come to the end of the time permitted for you, but Senator Johnston has one

question.



Senator JOHNSTON—I note you make a distinction between the DMO and Defence, and

you are very positive with respect to the DMO—am I reading that correctly?



Mr Turner—That is correct.



Senator JOHNSTON—Do your members who have contracts—and you may not know, and

do not speculate if you do not know—harbour any reluctance in appearing before a committee

such as this?



Mr Turner—No. The major difficulty was this: this is the fourth request in as many months

to attend a hearing or provide input to a survey. As I indicated in my submission, in order to

make a submission, it generally takes about two days to pull everything together, dot your i’s,

cross your t’s and make sure it is all factual. Then to have to go on the day you lose that day, (a),

in travelling and, (b), in attending. And so it becomes quite onerous for SMEs to continue to

provide. The other factor associated with it is that quite often we are asked to provide input at

very short notice.



Senator JOHNSTON—Why are you positively disposed to the DMO and why are you

negatively disposed—or it sounds like you are more negatively disposed—to Defence

generally? What distinctions are you drawing between the two?



Mr Turner—The DMO have acted as an interface between Defence and industry and DMO

have been very positive towards encouraging industry to liaise and develop relationships with

them. They have also acted as a resource to assist industry in identifying points of contact and

opportunities within Defence. Therefore, industries, especially SMEs, look very positively upon

the response that they get, and continue to get, from DMO. The difficulty that SMEs have with

Defence is the fact that when they approach Defence it is very difficult to initially find the right

person to talk to.



ACTING CHAIR—Mr Turner, thank you for your evidence; we enjoyed it.









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Friday, 15 November 2002 SENATE—References FAD&T 233









[11.43 a.m.]



MOHARICH, Mr Joseph Vladimir, Group Managing Director, Helitech Industries Pty

Ltd



ACTING CHAIR—Welcome, Mr Moharich. I think you were here earlier, but I might just

remind you of a couple of aspects when appearing before a Senate committee. Firstly, with

regard to the question of privilege, witnesses are reminded that the evidence given to the

committee is protected by parliamentary privilege. It is important for witnesses to be aware that

the giving of false or misleading evidence to the committee may constitute a contempt of the

Senate. Secondly, if at any stage a witness wishes to give part of their evidence in camera, they

should make that request to me, as chair, and the committee will consider that request. Should

the witness expect to present evidence to the committee that reflects adversely on a person, the

witness should give consideration to that evidence being given in camera. The committee is

obliged to draw to the attention of a person any evidence which in the committee’s view reflects

adversely on that person and to offer that person the opportunity to respond. I do not think there

are any other matters that I should bring to your attention. We have your submission; thank you.

Would you like to make an opening statement before we ask you some questions?



Mr Moharich—I welcome the opportunity to make this verbal submission to the Senate

committee. I did provide some dot points earlier, but I would like to expand on those. By way of

background, I have been involved in the supply and the support of Defence equipment since

1965, when Defence purchasing and support services was done by the Department of Supply,

serving the departments of Army, Navy and Air Force—each of those four having had their own

minister. Since 1972 I have been the chief executive of the company representing Bell

Helicopter Textron in Australia and New Zealand. Between 1970 and 1986 that company was

known as Bell Helicopter Australia, a subsidiary of the American parent company. In 1986, as

the result of a management buy-out, that enterprise became Helitech Pty Ltd, a wholly

Australian owned and controlled company which still represents Bell Helicopter Textron. I am a

substantial shareholder in that company.



I am not making this submission as a statement of company policy; it is a personal view

which I have formed over some three decades of working with the defence department. The

Helitech industries group, of which I am the managing director, employs approximately 200

people in Australia plus some 130 employees in wholly or partially owned subsidiaries in the

US, Canada, the United Kingdom, Singapore, Brazil and New Zealand.



Our business is the supply, repair and overhaul of helicopters and the marketing of military

products and services, including the marketing of technology which has been developed by the

DSTO. We have had some success in the selling of technology commonly known as boron

patching to the United States Air Force. Our business is split evenly: about 50 per cent military

and 50 per cent commercial. We support some 350 commercial helicopters in Australia. I will

add that the investment that we have made in major facilities in Brisbane and elsewhere is all

company investment; there is no government funding involved or government equipment on

loan to us.







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FAD&T 234 SENATE—References Friday, 15 November 2002





In each of the various locations I mentioned we provide goods and services to the defence

forces of those countries as well as to commercial helicopter operators. In Australia, we hold a

number of Defence contracts. We supply 96 helicopter maintenance personnel and 10 instructor

pilots to the Army Aviation Centre at Oakey in Queensland. We provide repair and overhaul

services, supply spare parts for the Army’s Iroquois and Kiowa helicopters, and repair rotor

blades for the Royal Australian Navy and the Army as well as the United States Navy, which

sends us work from Japan.



Despite having had some of these contracts for many years, I can with some justification be

classified—as I have been by the DMO—as a disgruntled losing contractor. I might add that I

have been counselled by some colleagues to be wary about giving evidence to this committee—

that I am sticking my head up and will incur the wrath of some DMO personnel. Be that as it

may. Helitech was Bell Helicopter Textron’s partner in the unsuccessful tender for Project Air

87, the supply of armed reconnaissance helicopters. I will do my best to avoid basing all my

remarks on Project Air 87 alone, although some aspects of DMO’s handling of that project will

be used to illustrate the points I wish to make.



I might say that I was surprised at some of the evidence I heard this morning about how well

Project Air 87 is going. To the best of my knowledge, which is limited because of the secretive

nature of the project, there have been no deliverables available yet, and industry sources—and

industry does tend to leak—quite markedly tell us that things are not as bright as some of the

reports may have indicated.



First, I will mention the DMO’s tendering process. I believe that in recent tenders the DMO

has failed to adequately inform tenderers of what value or weighting is to be put on specific

aspects of a tender. In Project Air 87, the technical aspects were well classified—and clearly

classified—as ‘essential’, ‘highly desirable’ or ‘desirable’, but it was impossible for us to get an

understanding as to what value was to be assigned to important factors like the Australian

industry involvement plan or what penalty would apply for the nonperformance of the

Australian industry involvement undertaking.



The winning tenderer’s much-lauded Australian industry involvement proposal to

manufacture 50 commercial helicopters per year in Brisbane for the local market and the export

market is, frankly, totally hollow—despite the fact that the then Minister for Defence, Mr Peter

Reith, repeatedly told the media that the Eurocopter AII helicopter manufacturing plant was a

major discriminator in their favour. Recent media releases and my own knowledge of the

industry indicate that, depending on the market, the Air 87 winner will reassemble—and I say

reassemble, not manufacture—20 helicopters per year, and that is in a good year, in Brisbane,

starting about mid-2003. There is absolutely no technology transfer in that assembly. The

reassembly, kitting and configuration of commercial helicopters which were manufactured and

test flown overseas is something my company has been doing in Australia since before the

seventies. About a month ago, Brigadier Mark Patch told me that, notwithstanding Minister

Reith’s statement, Eurocopter has no contractual obligation to manufacture or assemble

commercial helicopters in Australia.



Moving to off-the-shelf purchasing: government and Defence supply’s supposed policy is to

buy off-the-shelf products for Defence wherever possible. Yet, in project Air 87, the Tiger

helicopter that has been selected will differ from the off-the-shelf Franco-German product in a

limited, but absolutely major, number of ways. The primary weapons system will be different—



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Friday, 15 November 2002 SENATE—References FAD&T 235





it will be the American Hellfire system—and it will require software integration and a major

modification to the sight. The engine will be upgraded, the communications suite will be

different and the very vital data link system will be unique. It seems to me that we will once

again have an Orphan Annie. One would expect that the current command Seasprite software

problems would have made DMO wary of such major software development requirements. To

me as an outsider, the DMO seem to be non-accountable. There seems to be no mechanism to

require DMO to justify the decisions that they make. The Defence submission to this committee

dated June 2002 states:



To this end, project governance boards have been established to review the technical, financial, contractual, risk, and

schedule performance of projects. The boards provide independent advice to delegated decision makers ...



I would suggest the committee might inquire as follows: who appoints the members to the

board, who are the members of these boards, how independent are they and, really, how can

they be independent if they are insiders to the DMO? The National Audit Office can

comment—and, I believe, should comment—and investigate Defence contracting and existing

Defence contracts, but it seems to me they are able or willing to do so only after major project

problems have become apparent.



In the case of project Air 87, I believe the DMO changed the rules throughout the tender

evaluation process. Obviously, it was quite legal for them to do what they did, because the way

the tender is written, the DMO have absolute power to do as they wish. They write the rules.

The tender evaluation plan called for a short list of two tenderers to go forward to contract

negotiations. But the DMO went immediately to a short list of just one tenderer to negotiate

with, with Bell Helicopter being kept in reserve, whatever that meant. The statement was made

by DMO that one offer was ‘so superior that, in DMO’s opinion, there was no point in engaging

with a second placed tenderer’. There has been no disclosure as to how one offer was so

superior as to warrant a major change in the tender evaluation process. It seems to me that there

was an undue urgency to get the matter on contract. The secrecy in respect of Air 87 was

outstanding, so it is impossible for me to actually quote facts. However, there was an industry

leak which said that the intellectual property portion—a vital portion of the contract—was dealt

with in just half a day’s discussion in a hotel room. I say I have no evidence of that; it is just

hearsay.



While the DMO may and often does claim to act like a major commercial enterprise to arrive

at prompt decision, the commercial way is not necessarily appropriate where taxpayers’ dollars

are involved. The expenditure of public moneys demands greater care and probity. In a

commercial environment, I can choose to be an investor in an enterprise. If I do not like the way

the company is being run, I can sell my shares or vote to change the board or both. However,

much as I may disagree with the way my tax dollars are spent, and as much as I may wish to opt

out of the tax system, I am unable to do so. I remain a captive taxpayer. The lack of

transparency in and the total secrecy, in effect, of the way the DMO conducts its business can

and does give rise to allegations of poor judgment and at times incompetence, and it could also

raise doubts about probity. I hasten to add that I personally have no doubts about the integrity of

Defence personnel or the probity of the DMO people. I can state honestly that, in 30-plus years

experience, I know of no incidents which I would describe as involving a lack of probity.



To overcome doubts and suspicions and to encourage the DMO personnel to exercise the

highest level of judgment, I believe that a condition of every tender should be that the price and

the terms and the conditions of the contract flowing from that tender should be disclosed to the

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FAD&T 236 SENATE—References Friday, 15 November 2002





bona fide unsuccessful tenderers. Ideally, the responsible project office should provide a brief

explanation as to why a particular tender was the successful one. Such transparency would

effectively remove any question about fairness and probity and would effectively prevent DMO

from negotiating terms and conditions and from bringing in specification changes from what

was called up in the original tender document. Under the present system, there is no way of

knowing whether what is being contracted for following the contract negotiations is, in fact,

what was called out in the tender document. I expect the DMO would oppose any such

requirement because it would open their decisions to public and industry scrutiny. Tenderers

may object on the basis that their pricing structure would be revealed to competitors, but I say

so what. When public moneys are being spent, the expenditure should be open to public

scrutiny.



There is a widely held perception in industry that Defence is most reluctant to exercise its

right to enforce contract terms. It seems that Defence would rather renegotiate price and

schedule. On the rare occasion when penalty clauses are incorporated in a contract, the amount

of the penalty amounts to a potential slap on the wrist rather than any real financial pain. It is

the prospect of real financial pain which would deter contractors from bidding unrealistically

low prices in the knowledge of being able to negotiate high prices when they judge the project

has progressed beyond the point of no return. For example, with respect to Project Air 87, in a

parliamentary report it was stated that the cap on liquidated damages of that $1.4 billion plus

contract was something less than five per cent of the contract value; most likely a lot less than

the expected escalation.



I now turn to partnering. The currently favoured defence industry partnering concept

involving the tier 1 defence contractors and Defence is, I believe, fundamentally flawed. An

essential factor in any partnership is that there be a common primary objective. In industry,

obviously the primary objective—and the boss’s job depends on it—is to maximise shareholder

income and shareholder wealth. The Department of Defence’s objective is—or rather it should

be—to obtain the best value for the taxpayers’ dollars in developing the country’s defence

systems, so the objectives are markedly different.



I believe that partnering will most certainly lead to cost-plus contracting with Defence having

no insight into the contractor’s real costs. How could one expect Defence cost investigators to

really understand contractors’ accounts—we heard this morning that Defence has trouble

managing its own accounts—when highly trained and paid public company auditors tasked with

reviewing accounts can miss critical information? In the current HIH situation, a public

authority was specifically tasked to monitor the financial matters of insurance companies and it

showed itself unable to do so. I put it to you that I think it would be very hard for Defence to get

a good insight into tier 1 companies’ financial and cost structure.



Partnering and expecting the tier 1 companies to consistently subcontract to SMEs is

unrealistic. Experience has shown that in any downturn in workload the tier 1 companies bring

work back in house. It is a most common practice in the US. The other way to go about it is if

the subcontractors are making good money, buy out the subcontractors and retain the monopoly.

Partnering can eliminate competition and dampen innovation. Major capital equipment

development is financially out of reach of SMEs, but the SMEs have proven themselves very

innovative in developing cost-effective repairs and support procedures. Here I can give an

example where we have developed a repair procedure to repair rotor blades in-country instead

of sending them to the United States. We have done away with one of the repair processes



FOREIGN AFFAIRS, DEFENCE AND TRADE

Friday, 15 November 2002 SENATE—References FAD&T 237





called ‘whirling’, and I believe that just in Australia we have saved the Commonwealth about

$2.4 million in a 2½-year period by not having to send it out. The manufacture still says that

you need to go through the whirl process, but even the US Army now sees it our way.



The final point I would like to make is that the common practice of Defence personnel, both

civil and military, jumping directly out of the Department of Defence and taking up

employment with civil contractors immediately on resignation should be stopped. Such moves

give rise to questions of probity and something akin to insider trading. Invariably the question

asked privately rather than publicly is, ‘Is it a reward for past services or is it a case of buying

inside knowledge?’ Defence on the whole and DMO in particular refuse to fully address the

issue. We had one issue; we complained to DMO rather than Defence on that. We got a very

cursory answer. We went to the inspector-general; he referred it back to the chap in DMO whom

we complained about. So we dropped it. Again, because public moneys are involved there must

be an appearance of probity as well as the complete fact of probity. I emphasise that I have no

evidence of any lack of probity; I am talking about appearance.



ACTING CHAIR—Thank you. All of us were very interested in what you had to say. There

are so many things I would like to take up with you but I am just going to have to look at the

transcript of what you said and come back to you. But there is one thing. Obviously you favour

purely competitive procurement over long-term partnering arrangements. Do you include in

long-time partnering the alliance type program?



Mr Moharich—Yes, I do. There is a tendency in DMO, and they have made it known, to

partner with only tier 1 companies. In the short term that may be right but it does tend to

eliminate competition and innovation and it becomes cost-plus contracting. There may be a

middle road; I do not know it. Currently the debate in the UK is exactly the same—BAE

Systems has lobbied very strongly to the government saying, ‘Hey, partner with us; we’ll build

you an aircraft carrier. Look after us and we will keep it in house.’ This has been rejected.



ACTING CHAIR—Obviously, in an ideal world you have competitive tendering for

everything. In Defence you have tendering for a product that is not off the shelf; there must be

some innovative ways of handling it because with very complex projects, for instance,

incremental tendering must be an option.



Mr Moharich—I agree.



ACTING CHAIR—It is exceptionally difficult to find one size fitting all. I should have

taken this up with the capability people this morning. I am interested in the tendering for the

patrol boats. It seems to me that Defence was nearly saying, ‘You tell us what capability we

need to have,’ and then it would supply the number of vessels that would do the job. We were

talking about it in Adelaide last week and it seemed to me then that somehow the responsibility

for the capability and the supply of the actual platforms that were going to do the job was being

taken away from Defence and DMO. You smile.



Mr Moharich—I also witnessed that in Project Air 87. We were told, ‘This is the task. You

tell us how many helicopters we will need.’ The fact of the matter is that, within the project

office, they knew exactly what they wanted and we had to try and guess whether what we said

was needed met with what the project director thought was the appropriate number. So I suggest





FOREIGN AFFAIRS, DEFENCE AND TRADE

FAD&T 238 SENATE—References Friday, 15 November 2002





that there is something in mind but it is a case of, ‘You guys tell us and we’ll see if we agree

with what you’ve put up.’



ACTING CHAIR—Have you seen any change in the process with the creation of DMO?

Has there been any improvement?



Mr Moharich—Nothing I could really perceive. We have had a very good relationship with

the Department of Defence over the years.



ACTING CHAIR—Clearly, you have, Mr Moharich. That is why I think that the evidence

that you give is particularly pertinent. We value especially that you have an ongoing

relationship with them and that you have provided a service over many years. A number of your

colleagues—people in medium sized businesses—have been reluctant to come before the

committee and, in fact, are reluctant to say terribly much from the point of view that their future

relationship might be prejudiced. So we especially value what you have had to say.



Mr Moharich—One comment I would make is that I have reservations about the concept of

DMO looking after the through-life support system. It is obvious that procurement, particularly

of major weapons systems, is very visible and noteworthy. It gets the attention of parliament

and the media, so it is our bane. Again, anecdotally, we hear from the support people—the

SPOs—that the support funds tend to be starved for funding down the line because all the

attention and the resources are going into the acquisition side. There is a difference of opinion

about what money is available for support and update, and whether funding is available for

spare parts. The squeaky wheel gets the best knowledge and the squeakiest wheel is the one on

the procurement side.



ACTING CHAIR—Do you have view about the cost of tendering? Has DMO improved in

telling people they are not in with a chance and, therefore, not to proceed any further?



Mr Moharich—No, I disagree with that. I think this is often a way of short circuiting the

thing. The tenderers go in knowing that it is going to be expensive to tender and that we have

the right to withdraw at any time.



ACTING CHAIR—The only thing I am suggesting is: is there is a better way of doing it? If

you take the cost of tendering for major projects—maybe two per cent or three per cent—that is

maybe $200 million or $300 million a year which might be spent somewhere else if people

knew earlier that they were not in with a chance.



Mr Moharich—I think the tenderers go in knowing that it is going to be expensive to tender,

and if they do not have a chance they will pull out. That would be our opinion. Some tenderers

say, ‘We don’t have the product or the services to offer and we won’t respond to the tender.’



ACTING CHAIR—How do you feel, as a medium sized business, about dealing with the

people in DMO? The last witness we had pointed out how important it was to build that

relationship with the people involved—the project managers—and, after having built that

relationship, suddenly those people have moved on and you have to start again. Do you find that

a problem?



Mr Moharich—No, not really. It is not a problem. I have been there for so many years.



FOREIGN AFFAIRS, DEFENCE AND TRADE

Friday, 15 November 2002 SENATE—References FAD&T 239





ACTING CHAIR—You are probably providing a larger service and a more integral service

than that of the last witness.



Mr Moharich—We find DMO quite accessible. Although this might be a bit of a divergence,

I would like to compliment—as far as Defence goes—the activities of the DSTO. We have

found them a wonderful organisation: they are commercially oriented and helpful and they want

to work with us. I would like to think that project officers take more note of advice given by

DSTO than sometimes they do.



ACTING CHAIR—I would like to return to one of your comments where you talked about

‘orphan Annie’. I know you did not wish to talk about Air 87, and let’s keep away from that.

But it is a concern that I have too. I am very much about buying products that are off the shelf,

if it is possible to do so. What do you think causes the desire within Defence to make these

purchases more complex than necessary?



Mr Moharich—Very often I think that it is personal prejudices on the basis that the project

director has some very strong views. I disagree with some of this delegation and I question the

concept of accountability. If we look at the LPH program for example, the officer who bought

those long ago retired. He was held accountable. What happened? He got a gong and he left

with his pension, so what really is accountability?



ACTING CHAIR—They are wonderful vessels of course.



Mr Moharich—They are, absolutely. They cost a little more than we thought.



ACTING CHAIR—Maybe. But maybe less than if we had bought new ones.



Mr Moharich—Absolutely. What I am asking is: what really is the accountability that we

hear about? When there is a mess-up in a project, the worst that I have seen happen is that

people get moved aside. What we find, as I have referred to, is the perception that Defence will

always renegotiate a contract rather than give the tenderer a big whack over the knuckles and

say, ‘We’re cancelling.’ The justification is: ‘Gee, it’s better to give him more money than to re-

tender.’ I have tried to look into how many contracts have been cancelled or how many penalty

clauses have been invoked. I have heard about one for some ambulances and a contract in

Western Australia for the maintenance of the PC9 but that was changed before it really got

under way. But I know of no other contracts that have been—



ACTING CHAIR—But you know in business that—as my legal friend on my right says—if

you have to scurry back to the fine print, the game is nearly over unless you have got that

relationship which makes things work. If you get the two partners getting back into their

contract—like maybe in the Collins class submarine contract; there has been a lot of looking at

the fine print in contracts there—that is not the way to run any business. Surely, relying on the

fine print is not the way to run a major defence procurement program?



Mr Moharich—Where does one draw the line if it is not in the contract? If we look at

commercial contracts—say, a building contract, which I know is much simpler because there is

no development—wealthy contractors and very large contracting companies have been known

to lose money on a contract, and that can set the example to the others: ‘Don’t underbid.’ I think

in the short term there may be pain and it may be undesirable but I suggest that, even in the case



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of our own company, DMO should say, ‘Hey, you contracted to supply this at this price.’

Particularly in an off-the-shelf area where there is no development cost.



ACTING CHAIR—I have no problem with that at all and I agree with you there.



Mr Moharich—If you contract to supply that for that price, the fact that you cannot do it is

tough luck. That is why we contract with major companies because they do have deep pockets

and they can carry the cost penalties.



Senator JOHNSTON—With respect to tender weighting, do you want to see what emphasis

the DMO is going to attribute to the individual benefits in each aspect of the tender?



Mr Moharich—I am talking about the major aspect of tenders and, going back to the Air 87

project, it is quite marked. I keep saying I do not want to talk about it but that is only because it

is current. I might digress here. I was interested to hear how well it is going when no

deliverables have yet come up. With that one we were told—and I have got all the press

clippings—how great it is going to be for Australian industry: ‘We’re going to manufacture

helicopters in Australia.’ In fact, the releases were, and industry knew, that the numbers being

talked about were greater than the total number of helicopters of that class sold in North

America in a year. Now that it comes to it, and it is in the public domain, there is no project to

manufacture any commercial helicopters in Australia.



Senator JOHNSTON—All right.



Mr Moharich—We put a lot of work into an Australian industry involvement proposal to

undertake certain development. We did not get one question about it. Have you got a question?

Is it important or isn’t it?



Senator JOHNSTON—I am still not clear on the ‘orphan Annie’ expression. What do you

think we are going to get out of Air 87? You have intimated that it is going to be an orphan

Annie. What precisely do you mean by that?



Mr Moharich—One of the things we were looking for was interoperable equipment. Talking

with defence personnel, we gather there is a wide variety of definitions for interoperability. One

extent is that we can talk to each other. The other extent is that we can swap parts; we have

commonality that way so if we operate in the same theatre we can work together. They are the

two extremes. The orphan Annie is the one where we have unique equipment that nobody else

is operating in that configuration, where we have to spend the money to develop that particular

configuration and then support that configuration. Australia will be the only country in the

world, as far as we know today, that will have the Hellfire system integrated with the French

helicopter. That is a major software challenge. It will have to get American software talking to

French software. The communication systems and the data link, which is critical, would be

changed. Perhaps it will work. We had an assurance when I raised the matter that it is okay; that

they know it will work. I have no evidence to say that it will not.



Senator JOHNSTON—Here is an invitation to you: what would you like—or what would

you suggest—a committee such as ourselves ask with respect to that project? You have a blank

cheque, Mr Moharich.





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Mr Moharich—Could I take that on notice? I need about 24 hours to phrase the words.



Senator JOHNSTON—Okay. You mentioned a situation with personnel moving from the

government side to the private sector in which—I pause to underline—you see no probity issue.



Mr Moharich—I have not seen it. I know of instances where it has happened—again in the

helicopter industry. One goes back many years to when the project director for the purchase of

one fleet of helicopters left the Air Force and went to work for the manufacturer the following

day.



Senator JOHNSTON—Is the example you are talking about Air 87?



Mr Moharich—The example I am talking about is on the record in the Department of

Defence. The Australian military attache from Paris, whose resume was well known, was an

army aviator who, shortly after resigning his commission, came back to Australia from Paris

where he had been for three years. He had interfaced with the contractor there. He is now

employed by the contractor.



Senator JOHNSTON—Was that the Air 87 contract?



Mr Moharich—It was.



Senator JOHNSTON—Was that purchase done through the embassy in Paris?



Mr Moharich—No, the purchase was done here, but, because of the officer’s role, he

obviously—I would suggest—had a fair amount of inside knowledge and information about

what went on. The reason I say that is that it is common practice that, when missions from

Australia visit foreign countries, they will brief the attache and quite correctly interface with the

attache about what is happening with the project.



Senator JOHNSTON—Do you have any direct knowledge of the link between the tender

process and that person?



Mr Moharich—No, nothing at all.



Senator JOHNSTON—When, as you said, the tender process invites you to provide

capability advice, so they paint a broad brush picture and say, ‘You tell us how many helicopters

we need,’ do you think they are doing that because they want you to fail—that is, not guess the

correct number—or do you think they are doing that because they are not confident of their own

assessment?



Mr Moharich—I think they are almost seeking a second opinion. Also, there is some

element of window-dressing in it: ‘Industry, here we are. We’re open to you. We want to hear

from you.’



Senator JOHNSTON—‘You tell us what you think we need.’









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Mr Moharich—Yes: ‘You tell us what you think we need.’ In the main, it is already preset.

The reason I say that is that I formed that very strong impression from talking with the people

involved. I have known them for many years.



Senator JOHNSTON—You talk about the funding problem. You say there are too many

funds tied up down the line as opposed to being directed to the capability end in identifying

what is needed.



Mr Moharich—I do not recall that.



Senator JOHNSTON—I thought you were talking about the scarce resources.



Mr Moharich—I am saying that the structure of DMO is one concern. It is not really a

criticism. All the focus and a lot of the resources are being put into the new equipment

procurement end, to the extent that there is insufficient funding flowing down the line to the

support functions. The reason is that procurement, rather than support, is the more glamorous

and more visible part of DMO. This afternoon you will have Major General Haddad, and he

may be able to comment on that.



Senator JOHNSTON—Yes, he is from Logistics. You would, I think, have heard Air

Marshal Houston and Vice Admiral Shalders this morning. They seem happy customers to me.

Do you have any comment you want to make regarding that? Were you here for their evidence?



Mr Moharich—Yes, I was.



Senator JOHNSTON—You said you have been involved for 35 years in Defence

procurement. What struck you? What comments do you want to make with respect to what you

heard there?



Mr Moharich—I know Air Marshal Houston, and I have the highest regard for him

personally. It is very difficult for the serving officers, while they are serving, to voice a

dissenting opinion publicly in a forum such as this. I know that the air marshal is by no means

reticent or slow to come forward and express an opinion, but we did hear earlier that the whole

defence department now seems more in unison. They want to be team players rather than

dissenters. If there is disagreement, they would—quite correctly—rather resolve it amongst

themselves instead of airing it publicly.



Senator JOHNSTON—That is good. Do you have any concerns with respect to your future

contracts as a result of anything you have said here today?



Mr Moharich—Some.



Senator JOHNSTON—Time will tell.



Mr Moharich—Time will tell. It will be impossible to prove or document. As an example of

this, I again refer to Air 87. In the first round of bidding, Bell Helicopter was eliminated. They

said: ‘No, not on.’ We made personal representations to the then Minister for Defence, John

Moore, on the basis that the due process was not followed. After that, there was some internal





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reconsideration. The process was opened again, and Bell Helicopter was invited to tender. It

was allowed back into the process because of the lapse of time, or whatever the reason was.

However, in the ongoing tender process and the subsequent evaluation, the same individuals

have been involved in the program right through. Perhaps being, as I said, a sore loser, it is very

hard to imagine that there is not some element of animosity—revenge is a bad word: ‘We

knocked you out the first time. You put us through all this work. We’ll go through.’



That is also supported by the fact that we are in Brisbane. We are about six kilometres from

Brisbane airport, and we have a lovely new facility. Through the 12 months of the tendering

process, not one person from the project office found time to visit us to see what we do. This is

where we propose to offer the support. Perhaps I am reading too much into it; I acknowledge

that I am one of the disgruntled ones with respect to that aspect. In other aspects, we work very

well with Defence.



Senator MARSHALL—I am concerned about the perception you say is out there that there

will be some disadvantage applied to those who are prepared to stick their heads up or give

evidence in public committees like this. That certainly concerns me greatly. I would like you to

encourage those people, if they think there are examples of that, to inform the Senate. I would

take any disadvantage applied to anybody most seriously, and I know that the Senate would.

This whole process relies on people being able to freely give evidence, so again I invite you to

inform the Senate if you think you are being disadvantaged in the future. I know you said you

think it will never be possible to prove, but there ought to be enough transparency in the process

for reverse onus to apply, whereby the DMO ought to be able to prove to us that fair and

equitable processes have been applied to every tender. If those processes cannot be transparent

enough to a Senate committee, then we have a serious problem within that process too. I do

invite you to communicate with the Senate if you believe that there are difficulties into the

future.



Mr Moharich—I think it would be helpful to industry if there could be some sort of

openness such that the DMO are required to explain and justify their decisions. It should be a

condition of tender that the price and the terms of the contract be disclosed. That way it removes

doubt—for example, ‘They came in two years ahead of us and 10 per cent under price.

Therefore, I have nothing to say.’



Senator JOHNSTON—Is that possible with regard to intellectual property?



Mr Moharich—I think it is possible. Certain things, such as intellectual property items, may

have to be blanked out, but for price and delivery I think it is quite possible.



Senator JOHNSTON—Cost efficiency and price and delivery?



Mr Moharich—Yes. Why not declare it? It can happen in the United States.



Senator MARSHALL—Because of the time, I have a lot of questions for you that I might

put on notice. I would also like to read the transcript of your submission. Quite frankly, I find it

very refreshing. It is a very different submission from what we have had from many witnesses. I

must say I have always had a concern—which has been scoffed at when I have expressed it to

industry players—about the absolute conflict that industry and Defence have in the form of

partnering. As you say, they are contradictory. The goals are different. It has been of concern to



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me that either we or the DMO seem to have embraced this so wholeheartedly as the way to the

future. I will say this: the tendering processes that we had prior to those arrangement have not

served us well either. Given what you have said about some of the problems with partnering, are

there other real alternatives given that, historically, we have not done it well anyway? What are

the other options.



ACTING CHAIR—You might take that on notice. Thank you very much indeed, Mr

Moharich, for appearing before us. I think we have all enjoyed your evidence. We wish you and

your companies very well. Godspeed. You seem to have done quite well so far, and I hope you

are successful in the future.



Proceedings suspended from 12.29 p.m. to 1.15 p.m.









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Friday, 15 November 2002 SENATE—References FAD&T 245







FITZGERALD, Mr John Thomas, Director-General, Contracting Policy and Operations,

Department of Defence



GRAY, Air Vice Marshal Norman Arthur, Head, Airborne Surveillance and Control

Division, Department of Defence



HADDAD, Major General Peter Francis, Commander, Joint Logistics, Department of

Defence



ISAACS, Ms Kim, Director-General, Materiel, People and Performance Branch, Defence

Materiel Organisation, Department of Defence



McKINNIE, Ms Shireane Kay, Head, Electronic Systems Division, Department of Defence



MONAGHAN, Air Vice Marshal John Gordon, Head, Aerospace Systems Division,

Department of Defence



SCARCE, Rear Admiral Kevin John, Acting Under Secretary, Defence Materiel

Organisation, Department of Defence



THORPE, Ms Ann Louise, Head, Materiel Finance Division, Department of Defence



WILLIAMS, Dr Ian Sidney, Head, Land Systems Division, Defence Materiel

Organisation, Department of Defence



CHAIR—Welcome. It is a routine practice at the commencement of an inquiry of the Senate

to read an opening statement. Some of the witnesses who are here today may have heard it. It

was read this morning and I do not intend to read it again. Obviously, everyone appears here

under privilege and there are certain sensitivities attaching to that. If any reflections are to be

made on an individual, it is probably better to think about going in camera for that and asking

the committee do so. An officer of a department of the Commonwealth shall not be asked to

give opinions on matters of policy. However, officers may be asked to explain government

policy, describe how it differs from alternative policies and provide information on the process

by which a particular policy was arrived at. I now invite you to make a brief opening statement

before the committee embarks on its questions. Who is going to lead off on behalf of the DMO?



Rear Adm. Scarce—I will start. Mr Chairman. I think that you are aware that Mr Roche is

overseas on JSF business.



CHAIR—Yes. We saw him in Adelaide on Friday of last week.



Rear Adm. Scarce—So I am the ringmaster, if you like. On Friday, Mr Roche offered a

couple of presentations by Ms McKinnie on software acquisition reform and standard

acquisition management. If it suits the committee, we might start with two presentations on

those issues.



CHAIR—That suits us. Please proceed.





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Ms McKinnie—I will start off with software acquisition reform and what we are doing in the

area of improving software acquisitions. We have experienced considerable schedule overruns

with our software intensive projects, but we have maintained or contained cost overruns by the

use of fixed price contracting. Experience in the US and in commercial organisations around the

world is very similar in terms of schedule but quite different in terms of cost. For example, the

US science board study in 2000 showed that only 16 per cent of defence projects in the US were

delivered on time. Further, the Standish Group’s CHAOS Report on commercial and

government software projects in 1994 showed that, in large companies, only nine per cent of

software projects are delivered on time and within budget.



In that report the average cost overrun for software projects was 189 per cent and the average

schedule overrun was 222 per cent. Defence is probably fairly similar in terms of schedule

overruns but, as I said before, because of the utilisation of fixed price contracts we have

contained cost overruns. Some key issues as to why software is difficult to acquire and manage

go to the fact that software is an intangible product. It is difficult to see, it is difficult to measure

and it is often difficult for people to understand. In addition to that, the industry we rely on to

deliver our software is immature in terms of its processes. Cost estimating and modelling and

schedule estimating and modelling techniques are still developing. I will move to some of the

initiatives we have in that area later on.



Our software acquisition reform program is all about getting to the fundamentals:

understanding what is causing the problems in Defence and coming up with some initiatives

that comprehensively cover the full gamut of software acquisition issues. On the people side,

we have been working very closely with the US Defence Acquisition University to tailor a

software acquisition management course to Australian conditions. We have run many of those

courses, and quite a few hundred of our people have been through them. They are presented in

Australia by US defence officials with substantial software acquisition experience. On the

software surveillance side, where we would in the past have had our quality people working, we

have again brought in a program from the US Department of Defence. We have tailored it and

called it the Australian Professional Software Development Program. As mentioned, this

program is targeted at our software surveillance side. We are moving our QA people from being

basically technical hardware based people to being software surveillance and assurance people.



We have also undertaken some work force planning for software engineers. Our work force

planning exercise looked at demand at a number of levels in terms of software engineer

qualifications. It also looked at supply issues and identified gaps in our recruitment, training and

other development processes. In addition to that, anecdotally there is information to suggest that

we have difficulty retaining software engineers because of remuneration problems. To

understand what we should be doing to recruit and retain software engineers we have started a

career decision work force modelling activity. This activity is about understanding what

motivates software engineers with the qualifications we are looking for to work in Defence or in

any other place. Our intention then is to put ourselves in a much better position to negotiate in

the various enterprise bargaining arrangements and ensure we have the right things in place for

software engineers.



As I mentioned, another risk area we have experienced in Defence is the maturity and

capability of industry to produce software. To this end we have adopted the Capability Maturity

Model Integrated, which is a world’s best practice methodology for appraising a company’s

software capabilities. The model covers issues like process management, project management,



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Friday, 15 November 2002 SENATE—References FAD&T 247





engineering support and acquisition. In the model each process area has a set of practices that

are required to be achieved, and the appraisal process assesses whether the goals associated with

those practices are achieved. It does that by having a large group—an average appraisal team

would probably be about 10 people—which looks at all the processes undertaken in the

organisation and at evidence that the processes are being applied in the organisation. Because

the team members are experienced software people, they also make judgments on how

adequately those processes are performed.



While I cannot give you the exact outcomes for individual companies—they are subject to

confidentiality arrangements—I can give you some statistics on what we have found to date,

which is where we have some systemic problems in how we deal with our industry and where

our industry is going. Sixty-eight per cent of the companies appraised did not perform adequate

requirements management, 80 per cent did not adequately plan for risk management, 90 per cent

did not have satisfactory decision making processes and zero per cent used measurement to

satisfy information needs. This sort of quantitative information gives us and our industry

players a much better understanding of what we need to do to improve, at least in terms of

processes. DMO has been working with industry basically saying, ‘Let us look at how we and

industry, working together, can improve our software delivery approaches.’ We are also using

the model to measure our own process performance. We have used the model and the same

appraisal process that we use on industry to measure our processes with a view to getting an

understanding of where we are in terms of our process maturity. We have done two groups

within the DMO, representing probably the least mature group and a more mature group.



As I mentioned, software is intangible, so being able to measure performance is important. To

that end, we have adopted the practical systems and software measurement approach, which

again is a world’s best practice approach to measuring software that was developed in the US.

The methodology basically has Defence and industry, pre contract, working through what issues

are going to be important to both of us and are going to affect delivery. Primarily, we are

looking at the significant risk issues that are likely to be encountered on that project. We look at

what sorts of software measures are going to be relevant to measure those sorts of issues and we

develop a software measurement plan that derives information from the supplier’s own

processes, as opposed to adding on new measures that they do not use currently and adding to

cost of acquisitions. At the recent 2002 PSM user group conference in Las Vegas, DMO was

announced as the PSM transition organisation of the year. That was in recognition of the work

that we had done in introducing PSM. We have learnt some lessons from the early pilots we

have done, particularly in the areas of taking the measures, analysing them and interpreting

them at the project management level. We are addressing that with new training for our people.

The training is focused more at the project managers rather than the software engineers inside

projects.



A lot of the software we buy is safety critical. That means it can be high risk, it is real time

and it is much more difficult to produce than the software that you might get down the street.

We have developed processes and training on safety critical software, and we have also

developed an extension to the CMMI model, which we call +SAFE, which looks at safety

processes within organisations. That methodology is now being picked up by the US DOD, the

FAA and a number of other organisations in the US and elsewhere overseas.



CHAIR—Can you tell me what the FAA is?





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Ms McKinnie—Federal Aviation Administration in the US. We have also adopted some

commercial standards for software engineering, with the view to having a lifecycle software

engineering process which is applicable to the DMO, which can be tailored and which is

recognised by industry as best practice software engineering standard. In terms of risk

management, we have developed a methodology for what we call ‘software profiling’. This

methodology understands software risks and seeks to profile each project from a software point

of view in terms of the risks. Some of the typical risk drivers that we have in our projects are

whether or not the software is safety or mission critical, whether it is real time or non-real time,

the size of the software development task and the level of integration that we are looking at

between various subsystems, if you like, where software is what integrates weapons systems

and sensor systems in our major platforms.



We have just initiated a task looking at cost and schedule estimation. What we are doing here

is looking at commercially available tools that will give us a better basis on which to develop

cost and schedule estimates for software. We are trying to find tools that have historical data

from other people’s experience that we can work on and use parametric modelling type

techniques to apply them to our own software estimates. Using these tools, we are also looking

to incorporate our own historical data into the tools with the view to improving the basis for

cost estimating based on historical data. We are also looking at how we might incorporate that

sort of detailed analysis in tender evaluations on software.



All of our training includes issues of software architectures, understanding what a software

architecture is and views on how we can best understand tenderers’ responses to various

architectural offerings. We have also issued policies on independent verification and validation

to assist in understanding at the outset of the software development process whether the

software will meet our requirements.



In terms of contracting, we have developed a template for software intensive contracts. The

new proforma we call ASDEFCON (Strategic Materiel) for software intensive systems. It is

developed to provide a standard approach on which we approach industry in our tenders and

then contract on. The template was developed in consultation with the technical directors of the

companies that we do a lot of defence business with in software. They assisted with us by

identifying what they believed to be best practice in the approaches that we were using across

each of the divisions. They said, ‘We think Air Force has got best practice in this part of it;

Navy does it best in this area.’ So we brought those together using not only the technical

directors of those companies but also some highly experienced software people whom we

brought in on contract. As a result, the proforma is intended to try to introduce best practice

approaches in acquiring software. We are also aiming to reduce the cost of tendering by

standardising the type of information that we seek. So when we ask for a project plan, a project

plan will always contain this sort of information, rather than having individuals create their own

new requirements. In that fashion, industry can know exactly what we are expecting well before

they put in a tender.



The template is also intended to provide a basis on which we can capture any new reform

initiatives and put them in place in terms of the DMO-contractor interface. As well, by having a

standard template, we have the opportunity for industry to contribute to how we might improve,

because we are doing things in a very similar way. We should be able to get quite specific on

those issues in the template which they believe are working and those that are not, and come up





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with views on how we might improve it. That is an outline of what we are doing in the software

acquisition reform arena.



I would like to move on to what we are doing in the standard acquisition management system,

which we mentioned in our submission and which Mick Roche also mentioned to you. The need

to develop a standard acquisition management system evolved from evaluation of how we had

implemented the project management method into the DMO. The evaluation identified a

number of problems with how we implemented PMM. For example, the analysis identified that

our implementation did not really understand the role of government in determining what is

required. Under the PMM model, project boards were designated as being the business case

approver. Clearly in our business, government approves the business case, not a board. If we

want to vary the requirements, it is up to us to represent a need for a substantial variation of

requirements back to government. It was identified that systems engineering issues such as

requirements definition, requirements management and verification and validation were not

tailored into the methodology. Acquisition management issues such as supplier selections,

supplier management and performance measurement also were not there. In addition, there was

logistics, FMA Act accountabilities, people management issues, safety, cost and schedule

estimating. They were all the things that we determined had not adequately been integrated into

the PMM.



We moved to an acquisition management system with the view to saying, ‘We are not just

about processes, we are also about understanding what skills our people must have to

implement those processes, and what tools we are going to give people, in terms of templates,

software tools or other tools, to help them undertake the processes.’ We have completed

mapping all the processes, and we are now providing policy procedures and guidance for all of

those processes.



Our work to date has focused on requirements development. We have been working with the

capability staff on the guidelines for developing operational concepts documents, functions and

performance specifications and test concept documents. Our focus on requirements definition

came from our consultations with industry. They thought we needed to improve requirements

development. They wanted to understand more about how things were going to be used rather

than just getting a specification. We also asked ourselves: if function and performance specs

have been our policy for some time, what has been the difficulty with implementing that policy?

We found that because we did not have a good requirements analysis process in terms of

developing operational concepts and understanding the functions that need to be performed, the

next part of that is obviously the function and performance spec.



In addition, we did some analysis of our work and, certainly in my division, we found that a

large number of the delays in the projects getting to contract were because the DMO had to do

substantial work in further defining requirements. That was leading to delays on our side

because we had to add the additional information. Under our new approach, which the VCDF

outlined this morning, we will have a greater level of requirements definition before we go to

government approval. This will allow us to have a better understanding of the costs, the risks

and the likely schedules that it will take to deliver on the requirements. It will also mean that the

DMO will have a much more detailed definition of what is required from the capability staff,

rather than high-level statements of intention and capability.







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In trying to maintain a lifecycle approach, we have included the operational concepts

documents, function and performance specifications and test concept documents in the

ASDEFCON software acquisition template. The new process of developing operational

concepts and the use of a first and second pass approval process also provides us with the

opportunity to consult with industry early. For example, operational concept documents are

being provided to industry well before approval and we are asking industry: ‘Tell us about the

sorts of requirements we’ve got here. Tell us about the sorts of risks that we may encounter if

we have to meet these sorts of requirements and help us with developing the budget estimates.’

By doing this we also give our industry the opportunity to better understand what it is that

Defence is thinking about for the future so that they can gear themselves to the sorts of things

that we are going to be wanting. Through that process, our intention is also to get ideas from

industry on alternative approaches. Capital acquisition might not always be the best approach

for meeting requirements.



We have also got a project under way at the moment to improve our project scheduling and

reporting. The process we use is to adopt the same methodologies that we ask our contractors to

use to develop good quality work breakdown structures, develop a schedule against the work

breakdown structures, allocate resources in terms of our own people’s time to those work

breakdown structures and also integrate our work breakdown structures with those that we get

from industry through their reporting. This will also allow us to use an earned value approach of

looking at cost and performance of schedule variances to monitor our project performance in a

more holistic way. With regard to people in project management, the mapping—



CHAIR—Can I stop you there for a moment. I am trying to work out in my mind a

programming issue. We are here until four but we have got quite a lot of things to go through.

Have you got much further to go in your statement?



Ms McKinnie—No, I am nearly finished.



CHAIR—Okay. Thank you.



Ms McKinnie—On the people side, we have done a work force planning exercise for project

managers to identify what shortages we may have in the skill mix in the organisation. The

process definition work that we have undertaken also assists us in identifying what sort of

things those people need to do which will lead us to better training. For some time now—about

three or four years—we have had in place a project management development program. It is a

one-year, master’s level program which is based on an academic project management and

includes systems engineering, cost management, contract management, legal issues and the like,

and has on-the-job training elements. That is a summary of the large range of activities that we

have under way in the DMO on software reform and project management.



CHAIR—Thank you. I would be more generous: I would describe it as a comprehensive

summary. Back to the ringmaster. What is the next act?



Rear Adm. Scarce—There was an inquiry about contract policy and operations. I have a

five-minute presentation from the director-general of contracts, if that would be useful?



CHAIR—It would be.





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Friday, 15 November 2002 SENATE—References FAD&T 251





Mr Fitzgerald—To begin, we might define what we mean by contracting. Loosely, it is the

procurement documentation and the processes surrounding the preparation of that

documentation which you eventually get to when you sign a contract. It is the management of

the documentation during the implementation of that contract—and I refer particularly to the

terms and conditions of contract and related legalities. How do we go about doing this in the big

picture? We have a look at the policies applicable, and they include things like reviewing the

Financial Management and Accountability Act, looking at the Commonwealth procurement

guidelines, looking at the Defence chief executive instructions and looking at existing practice.

We might get some specific guidance from our line managers, some of which might actually

come from the minister. We will distil all these things into the Defence procurement policy

manual, which is the top level procurement policy document for the portfolio.



We then develop further into specific contracting and tendering templates—the tools, if you

like, to go about the business of contracting. These tools are that Defence procurement policy

manual, and we are developing a family of tendering and contracting templates. Typically a

template would include the conditions of tender, the draft conditions of contract and the

statement of work, which Shireane has mentioned. Other tools might include help desks,

training manuals, handbooks for guidance—things like that. When we develop these templates,

we do so in extensive dialogue with industry, with legal service providers and with other

stakeholders, both internal to Defence and external. We have working groups and discussion

drafts, and we go through a process which ends up in getting out and selling the final document.



How are we organised to do this contracting business? My branch sits in the DMO, the

Defence Materiel Organisation in the Land Systems Division. I have three basic working

groups. There is a policy group, which has portfolio responsibilities for the whole of the

Defence portfolio, including things like communication with industry and internal Defence

communication—responding to parliamentary queries and things like this. The second group is

the operational areas, the operational directorates who actually advise and assist our customers

in the development of the actual contract documentation. They help the projects tailor the

templates to the circumstances and requirements of the particular project. They advise on

contracting management issues and things like that for the projects. A major skill in this area of

contracting development and so on is the identification of legal issues and assisting clients in

seeking legal advice—refining instructions, if you like. The third major group I have is the

financial investigation group. They do financial investigations of pricing and things like that in

tenders and contracts.



We are located around Australia, trying to match the dispersed DMO organisation, and have

people in Melbourne, Sydney, Canberra, Perth, Adelaide and Brisbane. We are looking at

Darwin, as the DMO gets established up there, in terms of contracting work. The people who

are involved are fairly multiskilled folk. A contracting officer needs to have contracting

knowledge, some legal skills, financial skills, and business and commercial skills.

Communication and negotiations skills are very important and also, probably most important of

all, what I call ‘street smarts’: what is happening in the marketplace. The current asset is a mix

of experienced and younger folk. It is very hard to find a lot of experienced contracting officers,

because they are pretty valuable to other people. That is the current asset. We look at the future

liability in terms of people and work force planning.



CHAIR—Just on that last point about finding contract officers and the difficulties that are

associated with that, is that also true about retaining them once you have found them—



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FAD&T 252 SENATE—References Friday, 15 November 2002





Mr Fitzgerald—We do.



CHAIR—Is there a tendency to remain?



Mr Fitzgerald—Yes.



CHAIR—Can you give us some idea of the turnover rate? You can take that on notice. I do

not want to interrupt your presentation.



Mr Fitzgerald—I have it in my briefcase. It is something in the order of 30 or 40 folk a year.

It is quite significant.



CHAIR—Out of how many?



Mr Fitzgerald—Out of a bit over 200. It is that sort of magnitude. I will give that to you

afterwards. As I say, going back to the future liability in terms of contracting officers, we are

looking at how many we need and when—these sorts of things. Let me assure you that there is a

gap. We have a look at that gap and try and find out what sorts of skills we need to develop and

the strategies we might use to acquire those folk, and we are working with our work force

planning people to do that. As for the processes we use in developing our work plans, about two

or three years ago we did a review of what we called ‘innovative contracting’. We came up then

with a need to revitalise our current contracting templates and to flow that revitalisation down

into all of them. It is a fairly significant job. It is going to take probably four or five years before

we actually go through the cycle once. It takes a fair bit of time to keep things up to date as

well, as policies change.



On the operational side, our contracting folk work in project teams with the project for

perhaps days, weeks, months at a time, as we are developing or evaluating tenders for major

projects. They work under the Defence Materiel Organisation advise and report process, and

they do a bit of work in areas like corporate governance. I have mentioned a little in passing

about contract management. I take the view that contract management is a subset of project

management. Project management is a wider field, and we distinguish between the development

of contracts, the administration tied up with contracts—which is done by the project officers—

and the advice, where requested, on the management of contracting issues. We conduct legal

awareness seminars and project management seminars, addressing contracting and legal issues.



That is a fairly quick overview of how are we set up and how the system operates,

particularly as it relates to the DMO. I will go on and mention how we get legal advice, because

I have read transcript from some of your hearings and you have been interested in that, it seems.

Our contracting officers do not provide legal advice, even though some of them may have a law

degree and, indeed, some of them have practising certificates. We have established a defence

legal service provider panel, on which there are four law firms: Australian Government

Solicitor, Blake Dawson Waldron, Clayton Utz and Phillips Fox. On that panel we have a

further three firms that we call ‘reserves’—for cases where there are particular conflicts of

interest or particular skills that we seek—and they are Mallesons, Minters and Freehills. That

legal service panel is managed by me and my folk, and we have some group managers down

with the legal service organisation in Defence and in Infrastructure. We tend to use the lawyers

a little bit for providing legal protection advice to us on commercial approaches—sometimes we

do, and sometimes we do not—and the projects people themselves do those sorts of things.



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Friday, 15 November 2002 SENATE—References FAD&T 253





CHAIR—With what frequency would you resort to outside legal advice?



Mr Fitzgerald—We would probably, in aggregate, go to our lawyers 50 or 60 times a

week—10 times a day. That is not necessarily me; it is projects people seeking advice on

particular issues. It is fairly significant activity, really.



CHAIR—Do you know what the total value of the legal contracts with your legal advising

firms is?



Mr Fitzgerald—It is in the order of $20 million a year—I will come back to you on that with

a more accurate figure, but that is the order of it. That includes a lot of work not done by the

DMO but by the defence legal service, with international and personnel type things. A lot of

work is done there.



CHAIR—But is that the total bill for Defence for legal advice?



Mr Fitzgerald—Yes; it is. That is right.



CHAIR—Are you able to provide us with any indication—and this may be a question for

notice and, if it is, that is fine—of what the DMO legal costs are, not for in house but for outside

advice?



Mr Fitzgerald—I can get you an estimate of those.



CHAIR—Thank you.



Mr Fitzgerald—A lot of the funding and the accounting of our legal advice goes back to the

project offices, and that sends the money into a different accounting stream. It makes it a bit

harder to count. But I will get back to you on that.



CHAIR—Thank you.



Mr Fitzgerald—That is the run-down, loosely, of how we go about contracting in Defence.



CHAIR—Thank you. Admiral?



Rear Adm. Scarce—I have five or six areas where questions were raised this morning.

Should you wish, we could go through each of those issues and provide some answers.



CHAIR—This might be an appropriate way of dividing the time we have. We will go to

questions from the committee now. If those questions are relevant to some of those issues we

were pursuing this morning—and they may well be—that might be the appropriate time to bring

forward those people to provide a more comprehensive answer, rather than to go through that

checklist now and take up our time doing that. But, if we have not covered some of these points

before we close, with a bit of notice before we close we will go back and maybe take that

evidence directly. Is there anything else that you would propose to put before us?



Rear Adm. Scarce—No.



FOREIGN AFFAIRS, DEFENCE AND TRADE

FAD&T 254 SENATE—References Friday, 15 November 2002





Senator MARSHALL—The first line of questioning I have is about foreign exchange risk

management practices.



Rear Adm. Scarce—I might invite Ms Ann Thorpe forward. She is head of Materiel

Finance.



Senator MARSHALL—Ms Thorpe, the May 2000 Audit Office report on Commonwealth

foreign exchange risk management practices found that foreign exchange risk was not

effectively and prudently managed by Defence because they did not have systems to identify,

analyse and assess the risk. The report found that, up until April 1999, budgets for projects in

progress had increased by $2.98 billion, due to foreign exchange rate movements. That was in

1999. Does the DMO now have in place effective foreign exchange risk management systems?



Ms Thorpe—The policy of the government is that the risk management of foreign exchange

is actually managed at the whole of government level. It is not managed at the departmental

level. There has been a recent study done by the department of finance, which has confirmed

that it is actually cost effective for the Commonwealth to self-insure and to run it at the whole of

government level. That said, there is still a requirement on each department to risk manage,

within those bounds, its foreign exchange. That foreign exchange is managed through us

keeping the department of finance well and truly informed of foreign exchange spends,

expected spends et cetera. But the actual foreign exchange and the management of it is done at

the whole of government level and through a self-insurance process.



Senator MARSHALL—That being as it is, can you provide an update on the foreign

exchange losses suffered in Defence projects until now?



Ms Thorpe—There are not exactly foreign exchange losses. If you look at our budget

statements each year, there is a clear line in there of the funding that Defence receives for

foreign exchange. That is an ups-and-downs thing. We do not go through contracting in terms of

just specifically managing foreign exchange. Value for money is our criterion for selection. In

terms of foreign exchange, it is an agreement with government that it is a no win, no loss thing,

on the understanding that we risk-manage that within the department by keeping them well

informed, so that they are aware. As you would be aware, from the whole of government there

is both money going out and money coming in, given the whole of government’s business

transactions; and so they find that it balances out overall often.



CHAIR—Foreign exchange risk is being managed through whole of government. From a

departmental point of view, how quickly do you receive a top-up? Up until the tech wreck, the

US dollar was strengthening against all other currencies and even more so against the Australian

dollar, and so the price of American equipment was increasing in Australian dollar terms quite

rapidly. But now we are edging back a little. Do you get immediate adjustment? Or, when the

currencies in which you are purchasing goods are strengthening against our currency, is Finance

just a bit slow to repay you, but are they really quick when we are strengthening against the

other currencies? Overall, things might pan out, but I want to know how this system really

works on the ground.



Ms Thorpe—It works this way: through the budget cycle at the beginning, when they are

working out Defence’s budget for the coming financial year, Defence provides an estimate to

the department of finance of what we expect to spend on foreign exchange that year. The



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Friday, 15 November 2002 SENATE—References FAD&T 255





department of finance has their anticipated rates of foreign exchange for that year. Defence

therefore receives funding up front for that expected sorts of exchange and the exchange rate.



CHAIR—So you have it built in up front?



Ms Thorpe—It is built in up front. Then, at the end of the financial year—



CHAIR—They make an adjustment?



Ms Thorpe—Yes, they make the adjustment. So each year we do get money up front, and

then it is adjusted in arrears at the end of the financial year.



Senator MARSHALL—What are the projections over the next three to five years—and I

will use the word ‘losses’, because I cannot think of a better word—of currency exchange losses

for defence projects?



Ms Thorpe—We do not look at it in terms of losses. As I said, we identify with the

department of finance what our foreign exchange requirements are. The department of

finance—and Treasury, as well—do the estimating in terms of where they think the rate of

exchange is going. That is their responsibility, not ours. Our responsibility is to keep them well

informed on our foreign exchange requirements. Then they do all the calculations and all the

management. As I explained to the chair, they provide us with the funds to make sure that it is

on a no-win, no-loss basis.



Senator MARSHALL—But $47 billion worth of projects is in the pipeline. Surely Defence

is doing some independent analysis of what that $47 billion will be worth over the next three to

five years, in terms of our commitments.



Ms Thorpe—We have guidance that we receive from the department of finance that allows

us to put it in dollar terms. When you read portfolio budget statements and things, they always

refer to what year the price is. They will tell you that it is in December ’02 prices or December

’01 prices, and part of that is the foreign exchange rate. So when we do our out-year estimates,

we use the exchange rates that have been provided by the department of finance and we make

our estimates accordingly. So there will be in the price an exchange rate that has been provided

at this particular time—like 2002-03—we have advice from the department of finance on what

we do for this year, plus the prices in exchange we should be using for forecasting our out-

years. That is the way we do it.



Senator MARSHALL—What is that advice?



CHAIR—Are any of these contracts done in fixed prices, in fixed dollar terms, to exclude

exchange rate variations?



Ms Thorpe—We are required to examine that and to decide whether it is value for money.

But generally that means that all the risk is then borne by the Commonwealth, in a sense,

because obviously the contractor does not want to carry the risk, and so they will obviously put

up their price because they are going to bear the risk, therefore the price usually means that they

will charge us for their own hedging. But we do use that advice and we do that assessment—and

it is part of the requirements under the new guidelines for risk management of foreign exchange

FOREIGN AFFAIRS, DEFENCE AND TRADE

FAD&T 256 SENATE—References Friday, 15 November 2002





that we do that assessment—and we will get expert advice as required. But generally it is not

value for money for the Commonwealth for us to require the contractor to bear the risk.



CHAIR—Does the Auditor have access to the assessment that you do about fixed pricing

and what the exchange rate movements may have been in that scenario compared with the

current operational arrangements?



Ms Thorpe—The Auditor has access to all our documentation.



CHAIR—So there is an independent assessment made, if necessary, of the way you manage

the exchange rate in terms of fixed prices compared with flexible exchange rates?



Ms Thorpe—As I said, this is something they are bringing in now under the new guidelines

where we need to make that assessment. But generally with respect to value for money—in fact,

I had a meeting not that long ago with DOFA and they agreed, too—there would be very rare

cases of value for money. They recognise that we need to go though that exercise because it

involves quite a complex calculation. Generally speaking, it would be surprising that we would

require the contractor—particularly involving five- or ten-year contracts, which we are often

talking about—to bear that risk, because they obviously will cover their risk by charging the

Commonwealth accordingly.



Senator JOHNSTON—Coming back to Audit report No. 45, it states that in 1999-2000 you

did not have a management strategy to effectively and prudently manage foreign exchange risk.

You did not have a system in place to identify, analyse and assess the risk. Are you now saying

that you have that system, that you are doing that work, and that the problem identified in that

audit report has been arrested?



Ms Thorpe—It was a policy at the time that the ANAO report was released—and it is still a

policy now—that the risk and the management of and the hedging et cetera of foreign exchange

were addressed at the whole-of-government level, not through the Department of Defence. The

Department of Defence are required to make sure that we undertake value-for-money decisions,

which is our policy. We are also required to keep the Department of Finance and Administration

and the Department of the Treasury well informed of our foreign exchange expected spends. We

also keep them informed of our commitments so that they then manage, from a whole-of-

government point of view, the foreign exchange exposures.



Senator JOHNSTON—Doesn’t that whole-of-government assessment not adequately

identify each project risk? When you have a project that you want costed, don’t you need to take

it right down to the detail of which country, what the exchange rate is at each time, and have a

process in place for each project so that you have factored in where the money is going to go if

things go up or down?



Ms Thorpe—I think it would be a bit of a worry if we ended up choosing a particular

supplier on the basis of foreign exchange. Obviously it is a consideration of value for money,

but think of some of the currencies that are strong against Australia’s: they are not necessarily

the countries that are able to meet our capability requirements. So there are a whole lot of

factors we need to take into account. I think that it would be of considerable concern if we

ended up selecting a company simply because of the foreign exchange rate.





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Friday, 15 November 2002 SENATE—References FAD&T 257





Senator JOHNSTON—I am not suggesting that at all. All I am suggesting is that we know

that factored into the cost of a blow-out is a foreign exchange problem that was not anticipated,

because if it were anticipated it would not be a blow-out.



Ms Thorpe—I question the use of the word ‘blow-out’; I know that is the terminology that

has been used in the press. We have price and foreign exchange adjustments each year—that is a

normal business practice. As I said, we apply the Treasury-DOFA rates for foreign exchange

future; but we are not asked to, and we would not, make decisions specifically on foreign

exchange when we are selecting a supplier. We have a number of selection criteria, and

obviously capability, capability requirements and value for money are our criteria.



Senator JOHNSTON—Are you familiar with report No. 45?



Ms Thorpe—Yes, I am familiar with that report.



Senator JOHNSTON—Are you telling me that you have decided to go in a different

direction to what is recommended in that report?



Ms Thorpe—No; we have not gone in a different direction. There are guidelines and

requirements that our foreign exchange be managed at the whole-of-government level. We are

specifically not asked to manage our foreign exchange at the department level; it should be

managed at the whole-of-government level. We are asked to have risk management strategies in

terms of being aware of what our foreign exchange exposures are, and under the terms of the

guidelines we will now be required to make the assessment as to whether it is better for the

contractor to bear the risk or for us to bear the risk.



Senator JOHNSTON—I am interested in following this up, because there is ‘only’ $15

million involved. The ANAO’s submission at page 3, dealing with the project to acquire

helicopters, states:



In the project to acquire helicopters for the ANZAC Ships, Defence’s approach to foreign exchange risk understated the

likely cost of the acquisition, which gave decision-makers the mistaken impression that a contract could be signed within

the approved budget. Had Defence chosen to manage contract exposures in a project to acquire Chinook helicopters,

contract costs could have been maintained at $56.0 million, a saving of $15.2 million.



Are you familiar with that particular problem?



Ms Thorpe—Not that particular problem, but I understand the concept of what you are

talking about.



Senator JOHNSTON—Are we still exposed to that extent in that framework?



Ms Thorpe—As I was saying, when we do our assessment we do it on value for money and

we do not go through a process of selecting something purely on the basis of foreign exchange.

We are required under the guidelines from the department of finance to do foreign exchange at

the whole-of-government level.



Senator JOHNSTON—But we are just talking about management of exposures.







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FAD&T 258 SENATE—References Friday, 15 November 2002





Ms Thorpe—We are required to keep them informed of our foreign exchange risks and our

exposures.



Dr Williams—At the time the ANAO report went through, I was in the financial area of

Defence and was partly responsible for our response at the time. In simple terms, the audit

report tended to focus very much on individual projects without looking at the broader picture,

and so I think you need to be very careful. What we have done since with finance is look at the

whole-of-government perspective. To give a simple example, if you take any project—be it

Chinooks or whatever—your options would be to try and negotiate the contract in Australian

dollars or accept the source currency. If we take a company—Boeing or whoever—and try to

negotiate in Australian dollars, as I think Ann suggested, we would finish up paying a lot more

because they would cover the risk. Put in simple terms, they would be looking to cover their

risks—let us take a figure—at the 90 per cent level. If we ignore that and say, ‘We’ll bear the

risk,’ then over a large enough number of projects—and we are a big business going long

term—we are essentially bearing the risk at the medium. We will win sometimes and lose

others. Going a step beyond that, if you then look at the whole of government, the government

has both income and outlays. Once again, even more so, our exposure is offset because we are

pulling in US dollars for other areas. In my view, it would be extremely unwise for us to try and

hedge, manage and pay much more up-front to get it in currency to give the appearance of

saving on foreign exchange. It would be just an appearance.



Regarding the other point you raise, in my view, the logic of doing it for the whole of

government is overwhelming, as various consultants have said. Accepting that, we do keep

track of where our projection is in project future funding. Part of good management is risk

management. What is the future funding profile? If we, for example, have a delay in schedule,

we would be keeping track of the implications of that for expenditure and, of course, the flow-

on effect to foreign exchange. On average, you will win sometimes and lose at other times. You

need to look at the audit report in the context that it was focusing on projects. It probably should

have focused more broadly on what is best for the government as a whole.



Senator MARSHALL—Are there other examples that were not described in the ANAO

report that are similar to the Chinook helicopter example?



Dr Williams—One of the comments that have been made in the response is that it depends

on what time you pick. As the chairman indicated, it was a period of strengthening in the US

dollar, so the appearance will be of a considerable increase in costs in Australian dollar terms. If

you take a different period, when the dollar was going the other way—in fact, if you look at

recent times when our dollar has been strengthening—you would find the reverse effect.

Depending on which way the currencies are going and where we are buying from, you will get

examples of the currency shifting in all directions.



Senator MARSHALL—I want to move on to the materiel reform program itself. I will start

by quoting a press release announcing on 1 July 1999 the reform of Defence acquisition. The

then minister, John Moore, said:



Experienced project managers will be recruited into the Acquisition organisation and provision will be made for

secondment to industry of senior acquisition personnel in order to strengthen commercial and project management skills

throughout the organisation.









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Friday, 15 November 2002 SENATE—References FAD&T 259





Defence will be required to report more fully to Cabinet on major projects. This will include setting out, in advance, clear

project road-maps and schedules against which performance will be measured allowing any problems to be more rapidly

exposed in future.



Does the DMO now report more fully to cabinet on major projects, as outlined in that press

release?



Rear Adm. Scarce—Yes. The top 20 projects are reported to the senior levels of Defence on

a monthly basis, and the major projects are then carried on to the National Security Committee

of Cabinet, where regular reports are made on the very issues that you have mentioned in that

press release.



Senator MARSHALL—What is the detail of the material provided to cabinet?



Rear Adm. Scarce—The trinity, I guess: schedule, cost and quality of the product. They are

the issues that cabinet are interested in, and that is what we report on.



Senator MARSHALL—Foreign exchange implications?



Rear Adm. Scarce—No.



Senator MARSHALL—Does the use of this reporting process mean that the cabinet was or

should have been aware of the difficulties with major Defence acquisitions since the

establishment of DMO?



Rear Adm. Scarce—Do you have a specific project in mind?



Senator MARSHALL—No.



Senator JOHNSTON—What was the question in relation to?



Senator MARSHALL—Given that they are reporting monthly to the cabinet, I assume that

they should have been aware of any major Defence acquisitions or any difficulties with major

Defence acquisitions since the establishment of the DMO.



Rear Adm. Scarce—No, what I said was that we report to the senior levels of Defence on a

monthly basis the top 20 projects and that those major projects are reported to the National

Security Committee of Cabinet on a regular basis. That process has, I think, been in for about a

year.



Senator MARSHALL—I am sorry: I thought you said it was reporting to cabinet on a

monthly basis.



Rear Adm. Scarce—No.



Senator MARSHALL—Can we just go back to that: can you tell me how often cabinet is

actually informed on the major Defence projects?









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Ms Thorpe—We have had four projects that have regularly been required to report to

cabinet—the ones that cabinet had specifically asked for. Some of them are reported on on a

three- or four-monthly basis, and some of them on a half-yearly basis. We have recently reached

an agreement with cabinet that from February onwards we will report twice a year on the top 10

projects by project value. We will also provide them with a six-monthly report on projects of

concern.



Senator MARSHALL—What is the definition of a project of concern?



Ms Thorpe—That will be really in terms of those projects that we have identified. We have a

risk profile on our projects in terms of cost, schedule and capability. The projects we identify as

being serious problems in those particular areas are the ones we provide to cabinet. They are

very similar to the criteria used internally within Defence, which—as Admiral Scarce said—we

report on monthly to the senior committee in Defence.



Senator MARSHALL—And this is a system that has just been put in place now?



Ms Thorpe—It has been put in place now. As I said, cabinet were getting four projects

regularly as it was. We thought it would actually give them better information if we provided

them with this alternative process. We are currently discussing with the other key departments

the detail of the information that will be provided. We are just resolving that at the moment.



CHAIR—As the Treasurer has said, the budget surplus may not be able to be reached

because of cost drags on the budget. What are your arrangements, separate from reporting to

cabinet, for reporting to Treasury or to the department of finance about cost control?



Ms Thorpe—The Department of Defence provide monthly reports to the department of

finance, from the whole Defence perspective. So they keep very close track of our performance.

There are a lot of regular meetings between PM&C, Treasury and the department of finance. We

keep them extremely well informed on what is going on. When they get our monthly reports, if

there is anything they would like to have more information on, they come to us and we give

them detailed briefings. They are very much informed and keep very much up to date on what is

going on in Defence and our funding requirements.



CHAIR—So when MYEFO comes out we can expect that to reflect the current outlays as far

as Defence is concerned, can we?



Ms Thorpe—Yes.



Senator MARSHALL—How many times has cabinet been briefed in relation to difficulties

with acquisition projects since DMO has been established?



Ms Thorpe—Cabinet get briefed on particular projects that they have asked for information

on or that we have brought to their attention. As I said, this is why we suggested to them this

new way of keeping them informed. We thought this was actually a better way of doing it.



Senator MARSHALL—Sure, but how many times have you approached them to brief them

on difficult projects?





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Rear Adm. Scarce—We report on Anzacs, on the Collins submarine fast-track improvement

program and on AEW&C. Those are traditionally the projects that we have reported to cabinet

and, as Ms Thorpe mentioned, there will be a holistic report on 10 programs plus any problem

programs.



Senator MARSHALL—Have any of the job swaps flagged in the press release I referred to

earlier actually occurred?



Rear Adm. Scarce—We have swapped some people at the junior level but we have not, to

my recollection, made any senior level exchanges with industry. We are very keen to do so but,

at this time, the priorities are to standardise our procurement processes, to deliver the white

paper projects and to support the increasing levels of deployment in country. So it is a question

of priorities, and it is not high on our list at this time. It is very important for us to do so, but it is

simply not a question of priorities yet.



Senator MARSHALL—Can you tell me how many?



Rear Adm. Scarce—I would have to get back to you on the numbers, but they would be very

small and at the junior level.



Senator MARSHALL—So we are talking about fewer than 10?



Rear Adm. Scarce—Probably more than that. In terms of graduates, we have undertaken a

program of bringing more graduates into the DMO to see if we can boost the skill base of the

organisation. Those graduates generally do a six-month stint with industry. We bring I think 40

graduates in per year, and part of their program of understanding the breadth of the Defence

Materiel Organisation is to do six-month stints in various elements of the organisation; one of

those rotations takes some of those graduates into industry. That is where the primary focus has

been to this stage.



Senator MARSHALL—What is your assessment of the implementation of the reform

program? Would you say it has been satisfactory?



Rear Adm. Scarce—As Mr Roche mentioned on Friday of last week, it is an enormous job.

You have heard from Ms McKinnie about the approach to look at software, to look at

standardising our practices. We have taken an enormous step forward in bringing three disparate

systems together and incorporating them through life support elements into the DMO. No-one

here would say there is not a lot of work to be completed, but we have made a very solid start to

it in a period of unprecedented deployments that also require our time and in a period of a very

substantive acquisition or purchasing program.



Senator MARSHALL—Have you undertaken any internal or external evaluation process of

the reform program?



Ms McKinnie—In each of the areas that we have been, say, doing process improvement, we

are looking for people to benchmark against so that we can understand how well we are

improving. As I mentioned, we are using the CMMI model as an example to benchmark and to

identify areas for improvement in acquisition management, in particular for software intensive

systems.



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Senator MARSHALL—Do you have a view as to whether there would be any value in the

government investigating a regime under which your administrative budget is dependent upon

your performance?



Rear Adm. Scarce—I think this was Mr Hammond’s suggestion. We would all be prepared

to be judged upon our performance; it is a question of how best to do that. In the very busy

Defence Materiel Organisation, taking away administrative budget is probably not a sensible

approach to judging performance. There are other ways to do it, and we started that process by

trying to benchmark our performance against Australian industry and international industry. I

think Mr Roche is on record as saying that we are looking closely at other countries to see if

they have a better way of doing business and to judge our performance accordingly.



Senator MARSHALL—I want to talk generally about staffing now. Are you able to tell the

committee how many personnel are currently employed by the DMO and where they are

located? Is it possible to obtain a breakdown of the areas in which these staff are working and

the projects they are working on?



Rear Adm. Scarce—I am sure we can provide broad generalities, but for exact numbers we

could take that on notice.



Senator MARSHALL—In broad numbers, how many are involved in this?



Rear Adm. Scarce—I would like to introduce Ms Kim Isaacs, who is the head of materiel

personnel.



Ms Isaacs—Your question relates to the number of people and where they are dispersed?



Senator MARSHALL—Yes, and in particular the breakdown linked to projects—project

specific. I understand that that detail may not be available.



CHAIR—You can take it on notice.



Ms Isaacs—If I can put my fingers on the right bit of paper, I can tell you roughly where they

are by state but I cannot give you a project picture. But we could provide that data.



Senator MARSHALL—All right. Just give us the thumbnail sketch.



CHAIR—If we wanted a figure by project, could that be taken on notice or is that figure not

available?



Ms Isaacs—It would be available on notice.



Ms Thorpe—The only problem we have is that because of the new DMO structure, where

we have set up SPOs and have tried to integrate the whole of life, it might be a bit difficult.

Some people might be partly working on a project and partly working after the capability has

been delivered. The definition might be a problem.



CHAIR—You might have a figure on person days, in that circumstance.



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Ms Thorpe—Alternatively, would you find it useful if we gave you the information in terms

of how many people are working in the different types of SPOs?



Rear Adm. Scarce—I am sure we will be able to give you some meaningful information on

that.



Senator MARSHALL—Please take that on notice. Ms Isaacs, if you are the appropriate

person, could you give us some practical examples of the people reforms that DMO have been

undertaking in order to retain existing staff and to attract new staff?



Ms Isaacs—With regard to attracting and retaining personnel, we have a lot of anecdotal

evidence that we lose people in contracting areas—software engineers, for example—but we do

not have precision about the size and scope of those issues. So our reforms have been really

about getting some fundamentals in place, some proper work force planning and analysis of the

career streams in the DMO so that we have an understanding of what sorts of people we need to

perform job roles and where and how. The reforms have also been about getting more precision

in what our needs are and where our deficiencies potentially lie. Earlier this year, we piloted a

work force planning approach. As mentioned by John Fitzgerald and Shireane McKinnie, we

piloted three job roles in that work force planning pilot. They were: software engineers, project

managers and contracting personnel. That has been proved to be a successful methodology. We

are intending to roll that out across other critical job roles that we have, such as finance

personnel, aerospace engineers and systems engineers, as our next priority. That has given us a

much better grasp of what our challenges will be over the next five years. It has given us a much

more precise picture of the types of people we will need and the rough numbers we will need.

That will enable us to target our recruiting, development or other people strategies accordingly

rather than to react in a way that we think will best meet our need.



The second key initiative we are rolling out is our career streams work. That is an analysis of

the chief job roles in the new organisation, the disciplines within each of those job roles, how

the roles differ at different levels, the skills required at different levels and the appropriate

learning and development strategies we need to put in place to enable our people to acquire

those skills. Again, we were piloting that as an approach and we have validated that concept.

This year we have mapped what we call our commercial job family, which is made up of our

finance personnel, our contracting personnel and our industry policy advice personnel. We have

also looked at skills requirements against four different levels: not only the technical skills you

need to work in the DMO but also how they apply in the context of the newly formed

organisation and the people management and individual skills needed. We are concentrating on

the core business needs and also the more generic qualities we want our people to have.



Senator JOHNSTON—Who determines what skills are required at each level?



Ms Isaacs—The methodology was basically to go out to managers at all levels of the

organisation and run focus groups to gather data. We have validated all those findings with the

managers at various levels in the DMO.



Senator MARSHALL—Has the DMO used any form of bonus payment system to retain

staff?







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Ms Isaacs—No; we do not have the capacity under our current certified agreement to be that

flexible in the way we remunerate our civilian staff.



Senator MARSHALL—So there has been no other form of incentive or bonus payment?



Ms Isaacs—No.



CHAIR—Was it a consideration when you were settling the terms of your certified

agreement to offer such a structure?



Ms Isaacs—It is an issue that has been around. I know other agencies across the public

service use it, but it is not one that Defence has yet broached or considered appropriate for us.



Senator JOHNSTON—Why not?



Ms Isaacs—I believe that the philosophy has often been that we know that remuneration is a

key factor but not the only factor. A lot of the information that comes back into the Defence

level about why both civilian and military staff choose to stay or choose not to stay is about

other factors such as job satisfaction and the quality of the leadership they experience in the

work place. Those are also important factors. It has been the philosophy of the Secretary and the

CDF to date that we perhaps need to put greater emphasis on those sorts of issues rather than

see remuneration as the only way to retain our people.



CHAIR—Does the certified agreement, either at the point of negotiation or now, provide for

senior staff—or, for that matter, any staff—to choose to accept some degree of salary sacrifice

within their remuneration structure?



Ms Isaacs—That provision exists so that you can salary-package—trade off salary for other

aspects. But, as I mentioned before, we do not have the flexibility to provide any kind of

retention bonus at all.



CHAIR—No; but I think the Department of the Treasury or the tax office has some

guidelines for salary-sacrifice arrangements. Are you able to say what the take-up of that type of

option has been?



Ms Isaacs—No, I could not; I would have to take that on notice.



Rear Adm. Scarce—I just want to clarify that certain skills are scarce within the Defence

Force. We do pay retention bonuses for those, but they are not specific to the DMO. I have in

mind RAAF aerospace engineers and some RAAF logisticians, who are certainly employed

within the DMO. They will receive a retention bonus, but it is not linked to performance; it is

linked to the retention of a suitable number of engineers for the RAAF’s needs.



Senator MARSHALL—Can you tell me how many people within the DMO are involved in

that?



Rear Adm. Scarce—I could, on notice.







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Senator MARSHALL—I acknowledge that you said you are working towards reforms to

retain people within the DMO. How difficult will it be to replace the skills, expertise and

corporate knowledge that have already been lost?



Rear Adm. Scarce—I can give you some examples from a maritime perspective. Often we

hear too much about this loss of expertise. When we transferred our Anzac systems program

office from Melbourne and Canberra to Perth, to Stirling, there was certainly a period where we

did lose a considerable number of people and some expertise. It did offer us the opportunity,

though, to bring new blood into the organisation in Perth, and different job markets allowed us

to bring people with business, finance and management skills that we had not had access to

before. So there is going to be a turnover of that skill base. In certain parts of the country it is

very difficult for us, on our salary levels, to attract technical people—in Sydney in particular.

The further we go from the capital cities the easier it becomes. As Mr Roche mentioned on

Friday, we have a turnover rate of about 11¾ per cent, which is reasonably healthy for an

organisation of approximately 8,000 people. I am not trying to make light of the problems of

attracting certain skills but, as we decentralise, we are broadening our skill base and bringing

into the systems program offices, in particular, a range of skills that we have not had access to

before.



Senator MARSHALL—In the Saab Systems submission they suggest that Defence has

attempted to overcome the loss of in-house expertise over the last five years through extensive

use of external consultants, and we will call them professional service providers, or PSPs. One

of the issues Saab raised was that the PSPs would inevitably face a conflict of interest between

meeting Defence’s objectives and satisfying their own organisation’s ambitions for revenue and

future contracts. The result is that the costs of defence acquisition of both Defence and industry

have increased significantly. According to the annual reports, the DMO engaged 24 external

consultants in 2001-02, at a cost of $2.536 million, and 18 external consultants in 2000-01, at a

cost of $4.153 million. These amounts represent the highest expenditure on external consulting

among all defence groups. They must be in there to do something. In 1999-2000, defence

acquisitions engaged 87 external consultants at a cost of $4.144 million. How many PSPs do

you have in DMO now?



Ms Thorpe—We do not capture the number of people; we only capture in terms of contracts,

so I could not tell you how many actual PSPs there are. I could only tell you in terms of

contracts. At 30 June, for the last financial year, we had about 591 contracts.



Senator MARSHALL—You may have to take this one on notice: could you break those

down to when they were first engaged, their location and the project which they are working

on?



Ms Thorpe—It would be a huge exercise because of the number of contracts. We do publish

in the Gazette, as you know, all contracts over $2,000. We identify there who has been

contracted and give a broad description of what they are. As I said, we collect the information

on the contract. To try to do 389 contracts, line by line, would be an enormous exercise for us,

because we do not record that information. We do it through the financial system; we do not

have another register on another system.



Senator MARSHALL—And it cannot be provided through the financial system?





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Ms Thorpe—I am just saying: the financial system records only the contract, the purchase

order, the commitment and the value.



Senator JOHNSTON—What about the duration?



Ms Thorpe—Not on a financial system. I think it is captured sometimes in the Gazette. The

purchase order might or might not, depending if they put in the commitment. If it has been put

in, as a two- or three-year contract, it is not an easy thing to go through.



Senator JOHNSTON—So we have got no idea of the PSPs we have had for several or more

years.



Ms Thorpe—As I said, we might be able to capture some of the contracts. If you think of it

from a management point of view, our focus is on the service provided and how much it is

costing us.



Senator MARSHALL—I put this to you. There were 18 external consultants engaged in

2000-01 at a cost of $4.15 million. There are now 389 consultants.



Ms Thorpe—In the annual report we publish consultants figures, and I suspect that is what

you are looking at. You asked a question on PSPs, which are the figures I have given you. I

have not looked at this year’s annual report, but in past years we have been required to publish

consultants figures, and I suspect that we are not quite talking about apples and apples.



Senator JOHNSTON—So they are different things? Are consultants and PSPs different?



Ms Thorpe—Yes, they are.



Rear Adm. Scarce—Quite different things.



Senator MARSHALL—That may be the case but, even given that, 389 PSPs on the books

must be a substantial cost. I am a little bit surprised that the information would not be readily

available about why they are there, what they are doing and when they started.



Rear Adm. Scarce—We are not suggesting that the information is not there. Each of the

SPOs will have a record of their PSPs, how long they have been there and what their objectives

are. Ms Thorpe was mentioning the fact that this is an enormous exercise to scour the DMO for

that detail. We do have a value for those PSPs, which we can give you.



Ms Thorpe—Yes. It is about $41 million.



Rear Adm. Scarce—What is our salary per year?



Ms Thorpe—Our annual salary is just under $600 million.



Senator JOHNSTON—Can you see the object of the questions here? We are looking at the

career incentives within the organisation for the troops, for want of a better word, and yet we





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have a very large budget for PSPs. I would have thought, if we wanted retention as actual team

players, we could look at using some of that $26 million.



Rear Adm. Scarce—There are a couple of reasons why we use PSPs. Firstly, because the

number of projects increase and decrease on a very regular basis, they are used as some

flexibility. We would not want to bring in public servants to work for, say, a year or 18 months

to finish a particular activity. It is much more cost effective to bring in a contractor to deliver the

output that we want from that particular activity. We do use PSPs as a bit of flex when we are

moving the number of projects up and down, as continually happens. The second reason we use

PSPs is that in some instances, particularly now that we are looking at whole-of-life

management, we want particular skills for a short period to progress a particular activity. We use

it as flexibility and we use it to bring in their skill base. In a lot of instances, it is technical work

that we may not need on a longer term basis. We are very cognisant of the fact that we do not

want PSPs around for long periods, because the information that they gather and retain needs to

be brought back into the organisation.



Senator JOHNSTON—What mechanisms do we have for that? Do we pair up our PSPs

with our ordinary wage and salary personnel? If you have whole-of-life management issues for

assets that go on for a very long time—and that is the nature of our business in Australia, by the

look of it—it seems logical that we would bring the PSPs in and we would team them up with

our own people and acquire the skills, if not directly then indirectly, for those professional

approaches. If we are not going to put them on the staff, we need to bring staff along to match

up with them, don’t we? Is that not logical?



Ms McKinnie—That is quite logical. In the software area and systems engineering area, that

is exactly what we are doing. We have a number of very experienced PSPs working with us.

They have experience in delivering major projects in the industry. They are working with our

policy teams as well as our SPO people with the view to transferring their understanding and

their experience as far as we can to the people.



Senator JOHNSTON—What benefit do you give those people as they assume greater

responsibility?



Ms McKinnie—Our own people?



Senator JOHNSTON—Yes.



Ms McKinnie—We reward them with more work, usually.



Senator JOHNSTON—That is the problem!



Ms McKinnie—That is ultimately part of the overall Defence employment arrangements that

we negotiate with the unions at the Defence level.



Senator JOHNSTON—Are you happy with that?



Ms McKinnie—From my point of view, I would probably want some more flexibility in

approaches that we can take to recruiting people.





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Senator JOHNSTON—And rewarding people?



Ms McKinnie—And rewarding people. In my own division, we are looking at establishing a

wellbeing program for our people so that we can exercise the flexibilities that are under the

DECA.



CHAIR—What is a wellbeing program? It sounds to me like a holistic medicine treatment.

What is a wellbeing program?



Ms McKinnie—A wellbeing program is a program where you look to providing your people

with opportunities for flu injections, assisting them with fitness stuff and those sorts of things.

We are just investigating what we can and cannot do and what our people would want us to do

in actually exercising the flexibilities we have under the current DECA arrangements.



Dr Williams—Can I just make an observation. I think we probably need to put it into

perspective. If you look at the dollar figures, we are talking about perhaps five per cent of the

people being in the category of PSPs. So it is, if you like, a top up or an add on. It is a question

of whether that is the right figure, and that is something we constantly monitor, but the nature of

project business is that projects come and go and therefore there are occasions—as Admiral

Scarce said—where you have got a short-term need where it is not worth the time to recruit, and

then you have to ask, ‘What do you do with the person at the end of it?’ We try to do that where

we can by moving people but, again, there are some practical aspects. The other thing would be

there are some skills where it just is not cost effective to try to maintain them in Defence. A

good example would be with the legal experts. It is better to hire them on an hourly basis or

whatever, because it would be just too expensive an overhead for us.



Senator JOHNSTON—But how many people have we got in Contracting Policy and

Operations?



Dr Williams—In our branch?



Senator JOHNSTON—Yes.



Dr Williams—We have got in the order of 230 people in total in the branch—that is inside.



Senator JOHNSTON—This is Mr Fitzgerald’s operation?



Dr Williams—Yes.



Senator JOHNSTON—Do you know that $20 million equates to some 10 years of legal

work at $300 an hour?



Dr Williams—It may well do.



Ms Thorpe—The 26 days talked about is not just legal work.



Senator JOHNSTON—Okay. I want to go back to the proposal that was put to the USDM

with respect to these internal PSPs. As I understand the proposal, it was the creation of a cell of



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internal PSPs using DMO staff at EL1 and EL2 level with a recent postgraduate qualification in

project management. The proposal was based on the concept of ‘have expertise, will travel’,

where project managers would be available for short duration specialist tasks in any geographic

location. The proposal predicted a cost-benefit ratio of 49 to one in the first year and nine to one

in subsequent years. USDM agreed that such figures could not be ignored and that the proposal

has obvious merit. Where are we at with that?



Rear Adm. Scarce—Where are you reading from, Senator?



Senator JOHNSTON—I am taking it from a submission.



Rear Adm. Scarce—From the DMO submission?



Senator JOHNSTON—No.



Rear Adm. Scarce—I will have to take that on notice. I am not aware of that.



Senator JOHNSTON—I am happy for you to do that. This is a confidential submission.



Senator MARSHALL—If you are taking that on notice, I wish to move on to clarifying

another point. The 389 contracts you talked about do not necessarily relate to people. There

could be more people employed as PSPs under that arrangement?



Ms Thorpe—It could be more people, that is right.



Senator MARSHALL—It could be more people. So there are 389 contracts. I would

actually like the information I have asked for, but if it is going to be too costly or too difficult, I

may reconsider that. So I would like you to go away and find out how difficult it is and, if you

believe it is too difficult, you could write to us to advise the reasons why it is too difficult and

we could reconsider whether we want to press the issue. Is that okay?



Ms Thorpe—Yes.



Senator MARSHALL—When I first started talking about this issue, I referred to the Saab

Systems submission, where they talked about the potential conflict of interest with PSPs. What

do you do to account for the possibility of conflicts of interest with PSPs between meeting

Defence’s objectives and satisfying their own organisations’ ambitions for revenue and future

contracts?



Rear Adm. Scarce—Each of the PSPs is managed by the project office or the project

managers, who are very conscious of probity issues. Particularly in the major acquisition

projects, we have probity advisers within the project to assure ourselves that proper ethics and

process are being followed. In terms of ordinary project work, I rely upon my project managers

to define to the PSP the objective of employment and to manage the PSP provider to deliver

those objectives. I think that is an individual responsibility of each of the project managers. I

have not seen any evidence of what is alluded to in Mr Hammond’s paper. We are all very

conscious of ensuring that the PSPs deliver the product for which they are paid and are

managed accordingly.





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Senator MARSHALL—So you do not see any real potential for that problem?



Rear Adm. Scarce—I see potential but what I am suggesting is that we are very aware of the

potential and it is managed very carefully on an individual basis for each of the PSPs.



Mr Fitzgerald—We do have non-disclosure clauses in all of our PSP-type contracts. We do

have confidentiality agreements that we enter into with our PSPs, and we do have conflict of

interest clauses which put the onus on us to observe them and on the PSP to clear any conflicts

of interest which might arise during employment.



Senator MARSHALL—What I am more concerned about is that you obviously need a skill,

it is a skill that you do not have, you engage someone to provide that service and they

automatically, or very quickly, find themselves in a niche position where they control the

knowledge and the skills, because that is what you have got them in to do. It becomes an

endless roll because people do it. I must say, I have had direct personal experience of this, but I

am not necessarily relying on that. I just put the question: why did Saab put this in their

submission as a concern if they did not think it was actually happening in Defence? Can you

explain that?



Rear Adm. Scarce—No. You would have to ask Saab that. But I emphasise that we employ

PSPs for outcomes and they are engaged in a contract to deliver those outcomes. They give us a

price—



Senator MARSHALL—But what you said earlier was that you are relying on the individual

contract manager to determine that. Is there any broad organisational evaluation system of the

use of PSPs throughout the DMO? If there is not, do you think there should be?



Dr Williams—Can I just make a comment. Getting back to the individual project managers,

there are some fairly strong incentives in that PSPs are good where they provide good quality

work and fill a particular gap for a short time. To employ them long term would be a more

expensive exercise in almost all cases than employing a Public Service person. For a manager

with a limited budget, particularly now when staffing budgets are very tight, it would be a very

brave person who would employ lots of PSPs who they felt were not performing well. Whilst,

yes, you may be looking for external checks and balances, the managers are given fairly strong

incentives: their budgets are tight and their staffing is low. I have made the point to my own

people that, certainly with PSPs, we ought not to be employing them long term. If it is a long-

term need then we should be recruiting to fill the position internally, if we can do it more

cheaply. If they can afford 1½ people for the cost of one PSP, they will do that. I think there are

some internal mechanisms to avoid accepting poor quality or overpayment. I refer to Rear

Admiral Scarce’s comment that the internal pressures on managers are pretty strong to avoid

waste.



Senator MARSHALL—There may have been some confusion in the numbers I was using.

They may have been referring to consultants—I accept that. But given that, are the numbers of

PSPs increasing or decreasing? Which way would you like that to go?



Rear Adm. Scarce—I am sorry; I missed the last part of that question.







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Senator MARSHALL—If you would like it to go one way, what are you doing to ensure

that? There are 389 contracts at the present time. If we asked you this question next year, would

you expect there to be 389 or more or less, and what would you like to be happening?



Rear Adm. Scarce—We would like the number to be less; clearly we would like the number

to be less. Mr Roche has required all of us to go back and review the number of our PSPs and to

reduce them. That is clear policy from him; it is a policy that we all endorse and support.

However, there is an enormous amount of work coming to DMO at the moment: work

generated by the white paper; work generated by the deployment of our ships, aircraft and army;

and work generated by trying to develop standard policies, procedures and practices that enable

the DMO to reap the benefits for which it was formed. Balancing those very demanding

requirements at this particular time requires us to grab a number of professionals and employ

them. It would be a fairly brave fellow who sat here and said that next year that number would

be less. It will simply depend on the activities levels that are generated. We all recognise the

requirement to reduce the numbers; but it is a function of the amount of work that is before us.



Senator MARSHALL—I would like to follow that up: given that Mr Roche has given that

direction across the board, I guess I should ask him—and maybe you might ask him on my

behalf—how he intends to evaluate whether that instruction has been implemented and whether

it has been implemented correctly. It really goes to the question I asked earlier about your

internal mechanisms for evaluating the needs and effectiveness of the PSPs. He must intend to

do something—



Rear Adm. Scarce—He does.



Senator MARSHALL—if he intends his instruction to actually happen and then make his

own decision as to whether it is happened effectively or not.



Rear Adm. Scarce—The number of PSP contracts is a KPI—a key performance indicator—

that we as an executive manage and watch every month. If the number goes up, we are on the

table to explain why.



Senator MARSHALL—All right. Could I take you to project management systems now?

Have project management systems used by the DMO in recent times effectively delivered

outcomes, in your view?



Ms McKinnie—When you are talking about project management systems, are you talking

about the processes and methodologies that we use to oversee projects?



Senator MARSHALL—Yes. There are examples: you have your TQM systems, your Prince

systems and CMMI.



Ms McKinnie—Okay. We need to understand where all of those fit together. As I mentioned

earlier, the evaluation of project management methodology identified the fact that it was not

adequately linked to processes like engineering—which in our business is an important part of

what we do—and acquisition management, as another example. As part of developing our

standard acquisition management system, we are further tailoring and integrating the Prince

type methodology that we adopted some years ago into a best practice approach to how we do

business in acquiring the sorts of systems that we are acquiring. We can use the CMMI



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approach to evaluate the extent to which our processes are maturing in terms of that acquisition

management system and its rollout to the organisation. The process element of the acquisition

management system will be captured in our quality management system, which we are also

introducing into the DMO. This is a system where we are trying to bring in standard processes

right across the organisation, which is a very large task. At the moment, we have a number of

SPOs that have fully qualified quality management systems and we have others that do not.



Those which have safety critical issues, particularly airworthiness issues, pretty much have

quality management systems that are certificated or close to certification. In other areas, we do

not have much in terms of quality management systems and processes identified, but we are

currently doing that. In addition to mapping the processes in the acquisition side of the business,

we are also going through a process of mapping the processes in the in-service support side, so

that we can try to get some standardisation. That will all be linked through the quality

management system. As a part of our normal quality management system, we have processes

for continuous improvement so that, as we identify areas where the processes are not working or

need to improve or what have you, there is a feedback loop to improve the processes. That is

how it is all linking together.



Senator MARSHALL—And you say that it is going well?



Ms McKinnie—As I mentioned earlier, we have completed the mapping of the acquisition

processes. We have only recently started the in-service support processes. We have just got

agreement from the DMO executive to establish a DMO-wide quality and environmental

management system, and it will be in that system where all of our acquisition and in-service

processes will live. The work is there. It is a big body of work. It will take some time to

complete. Mapping the processes is only the first bit. What comes next is developing the

practices and the guidance for people to implement those processes.



Senator JOHNSTON—Do you have a diagram of all of these internal processes, how they

are working, and where the interfaces and interactions are?



Ms McKinnie—I could provide it.



Senator JOHNSTON—I would like to see it. Thank you.



Senator MARSHALL—I refer you to the Saab submission again. How do you respond to

the criticisms that the DMO is a bloated organisation because of excessive numbers of staff

involved in project management, at the expense of staff involved in actual project delivery?



Rear Adm. Scarce—I guess my first comment is to suggest that I think our numbers are very

tight for the level of activity that we have. I do not accept that criticism. I would like to know on

what basis the criticism was made. It may well be from knowledge of prior years. When we

started to decentralise and take the SPOs out into the field, we had a very close look at our

organisational structure. We put our people—certainly our senior managers—through an

organisational review to see whether they were on board with the new DMO policy. I think we

have a fairly tight organisation. I do not see that, with the level of acquisition activity, we have

lots of people skulking around and not profitably employed. I know for a fact that those people

on the front line who are delivering the products and services for our fighting men and women

are very busy, and there is no scope for nonperformers within that organisation.



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Senator MARSHALL—Do not take anything that I have said as a direct criticism of any

personnel; it is a purely matter of looking at structures and organisation. Given that you have

said that, do you actually go through a process of benchmarking those project management

tasks against other industry? And what sort of industry do you think might be available to apply

an equivalent benchmark against, if any?



Rear Adm. Scarce—We certainly benchmark our performances amongst the three

environments. There was a body of work completed earlier this year that looked at our project

management activities, our SPO activities, and at a comparison between those three. We got

valuable information from that. It is fairly difficult to benchmark our organisation against

external defence organisations, because no-one has yet really incorporated acquisition and

through-life support in a single organisation. Others may well be able to talk about

benchmarking against industry.



Ms McKinnie—If you look at the acquisition budget, typically we spend over $2 billion a

year. We have about 2,000 people in the DMO who are directly involved in the acquisition

function. When we compare that in budget terms, probably in the order of one to two per cent of

our budget goes on people. Other organisations in the private sector are amazed that we are

talking about two per cent to manage such large projects, because they think that perhaps 10 per

cent is closer to what is occurring in other organisations. When I look at the projects that I

manage and compare the number of people that I have in my organisation managing projects of,

say, $50 million with other departments, it is a very big difference. Other departments would

probably have an entire division or branch managing a project of that size, whereas it is just one

of many projects in a system program office in DMO.



Senator MARSHALL—That may well be the case. I am actually particularly interested in

whether any quantitative work has been done to establish that.



Ms McKinnie—We did some work a few years ago, as I recall, with PACRIM, which is a

benchmarking organisation. I have a recollection that we did do some benchmarking on a

number of people in project management, but I do not recall the details.



Senator MARSHALL—Are there any plans to undertake that exercise again in the future?



Rear Adm. Scarce—There is certainly a plan to continue to work on the benchmarking that

we have delivered internally. We have not yet completed that work, but the logical next step,

once we have benchmarked against each other, is to take that externally.



Perhaps I could make one comment. We were talking about conflicts of interest. I think it is

very important that we have the opportunity to explain how we do protect the information that

individuals have, when they leave the organisation. Perhaps I might call upon Dr Williams.



Senator MARSHALL—I was fairly satisfied with that. I am happy for you to do that, but I

was more concerned about a situation where a job is coming to an end and I do not have another

job to go to. It is in my interest and the company’s interest—obviously, as it takes a cut of the

fee I am paying—to ensure that this job continues on until I have something else to go to. This

may be particularly so when there are peaks and troughs. If you are employing the same skills at

the peaks, it would be very comfortable to make the peak last until the next one arrives, rather

than being put off at the trough. It was those sorts of conflicts that I was concerned about. I am



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concerned about the other issues too, but I was aware that you had a number of confidentiality

processes in place to protect that side of it.



Rear Adm. Scarce—I think I was talking about the broader prospect that was mentioned by

the managing director of Helitech; that is, when project managers move on to a civilian

organisation, how do we protect knowledge that they have so that it does not give an unfair

advantage to the industry that they go to?



Senator MARSHALL—Then I think it is appropriate that you talk about that now.



Rear Adm. Scarce—I just thought I would clear that now, if I might.



Dr Williams—John Fitzgerald can give more detail, but let me give you a quick answer and

see whether that suffices. At the moment, we do have a number of policies, in terms of our

people management issues, that have requirements on anyone wishing to leave Defence and

work for other companies. There are guidelines that managers should review in considering

whether it is appropriate to leave. Our view is that we can probably strengthen that by

introducing some measures in our contracts so that there is also an onus on companies that we

are dealing with to ensure that people cannot move across. As well as having our own internal

policies, we are looking at the possibility of clauses in contracts. Again, all of that has to be

balanced with the right of the individuals, free trade et cetera, and so we need to be careful. In

doing that, we would always have an arrangement whereby people have the right of appeal and

there will not be rigid rules; there will be commonsense application. Relative to other areas of

the private sector where movement is fairly free, we are probably much more careful in terms of

allowing people to move—but it is something that we keep monitoring.



Senator MARSHALL—The next area I go to is tendering. Again I refer you to the Saab

submission. One of the things Saab said in the submission is that they consider that Defence has

always demanded much more data than the industry needs to generate to define prices and

reduce risk to an acceptable level, and that the principal cause appears to be an attitude of ‘let’s

ask for it, just in case’, which creates a number of problems. They say that this attitude could

result from the traditional risk aversion, coupled with a lack of understanding of industry by

Defence personnel, particularly by junior staff. So I ask the question directly: what has the

DMO done to reduce the amount of documentation that is required as part of a tender process?



Rear Adm. Scarce—I will just open with the comment that I actually agree with the

criticism by Saab in relation to the way we used to do business. We have over specified in a lot

of instances, and that has led to unnecessary costs. We have very consciously in the past two

years looked at reducing the contracting requirement and specifying what we want quite

specifically. I will go to Ms McKinnie for the details. While we are on this subject, I think it is

important that we understand the issue of the patrol boat, which has been raised a couple of

times. This was an example of our reducing the specification and the amount of documentation

to define what we wanted with the patrol boat. I must assure the committee that we know

exactly what we want in terms of outputs for the patrol boat. We wanted to give industry the

opportunity to be innovative in delivering that output. So what we defined was 3,000-plus days

and we said to industry, ‘You can deliver that in any particular form that you see fit, with some

constraints about concurrency,’ and each one of those submissions was taken away by DSTO

and modelled to make sure that they could provide the number of patrol days with their

particular recommendation on the project. As it was in that case, the project manager’s estimate



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of the number of boats was out by about three. So I can assure you that, in this process of trying

to—



Senator JOHNSTON—Or they have all got it wrong.



Rear Adm. Scarce—We are quite confident in the modelling that DSTO has completed that

each of our short-listed tenderers will be able to deliver that number of days with the boats that

they have proposed—but, more importantly, we are confident in the specifics of what we have

done in relation to reducing the detail in our some of our contracting.



Ms McKinnie—In developing our new template for software-intensive acquisitions, we

identified a set of typical evaluation criteria that you would normally use to discriminate

between tenders. We then identified what sort of information you would need to inform those

sorts of evaluation criteria. We did this with industry and, as I mentioned earlier, with the

technical directors of most of the large companies that we deal with. When we are tendering, we

are looking for information from tenderers essentially for two purposes: one is to evaluate

tenders and the other is to form the baseline of the contract.



So in working through this process we went through and asked, ‘What do we need to inform

the evaluation criteria?’ and then, ‘What sensibly do you need to have in a contract so that you

can nail the contract down and understand what you are getting, what processes you will be

using in the contract, how you will evaluate whether the products that are being delivered are

being delivered in accordance with your requirements, and whether the processes are being

conducted in accordance with your requirements?’ In that process we also introduced the notion

of an offer definition phase. This allows us to short-list, say, one or two companies—or a

number of companies, depending on the strategy for that particular project—and to work with

those companies under an arrangement whereby we pay them to develop the documents that are

required for more detailed plans, say, to go on contract. That reduces their costs, and it gives us

a better quality basis on which to contract in the first place.



Senator JOHNSTON—When did we start using this template?



Ms McKinnie—We released the ASDEFCON for software intensive systems in March.



Senator JOHNSTON—Of this year?



Ms McKinnie—Yes.



Senator JOHNSTON—So Air 87 is not one of them?



Ms McKinnie—No. At this stage it covers only software intensive systems, but our intention

is to use a similar process to develop templates for lower level procurements. We deliberately

took the high-risk stuff, the hard stuff, first, and we are developing further templates. We will do

that along similar lines.



Dr Williams—Perhaps I can add to that. Shireane and I share responsibility for some of the

template development, and I will make a couple of observations. I know at times I have had

comments from industry concerning whether we can simplify our process. I would have to say

that we have requirements visibilities that go beyond what a number of the private sector

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companies can do, even with processes such as this—the publishing of all our contracts et

cetera. So there is a visibility and an expectation from companies that, unless we have a very

rigorous process for explaining our source selection, they will come back and demand

explanations and, in the worst case, could cause delays in us progressing. So there are some

requirements on us to be more thorough. Perhaps in some of the comments that you have had

from SMEs where they have expressed concern about dealing with primes and have said that

they want to deal direct, it is partly the rigorous nature of our process which gives them greater

confidence that they will get a fair hearing; whereas the primes want to get in quickly, minimise

the cost of the process and make a decision—which they can do because they do not have some

of the requirements.



However, I agree with Admiral Scarce’s comment that some of our processes in the past have

been too much and we have gone perhaps too far. There has been a lot of work. As Shireane

identified, there have been a number of developments in templates. One of the things we are

working on now is, where we make a judgment that we can justify a sole source procurement

because there is clearly no competition, to try to simplify the process. Instead of going out with

pretty much our normal open competition tender and expecting one company to respond, we are

trying to move more quickly into negotiations with them to avoid a lot of the paperwork. Again,

one would hope over the next few months that we will be getting that into place. So we have

done a lot of work on templates, on trying to simplify. We are also trying to go out early with

requests for information so that we can then short-list companies. Instead of putting them all

into the big cost of our final process, we are trying to limit the number to those that are viable

and simplify that way. So there is an enormous amount of work. The complaints from industry

in this case are partly historical and partly a desire sometimes for us to move as far as the

private sector can. I believe we do not have quite that same flexibility.



Senator MARSHALL—On another topic, in response to a question on notice in the Senate

on 11 November 2002, it was indicated that 98 personnel are currently posted overseas to work

on capital equipment acquisition projects. Of these personnel, 36 are working on the airborne

early warning and control aircraft project, 25 on the Hornet upgrade project and 16 on the

armed reconnaissance helicopter project. Why are so many personnel posted overseas to work

on these projects, and what is the cost of this?



Rear Adm. Scarce—I will invite Air Vice Marshal Gray to the forum. I think the best way to

answer your question is to explain what his people are doing in AEW&C, to give you a

representative view of what the other major contractors are doing overseas.



Air Vice Marshal Gray—The AEW&C is my major task in life. The project team is mostly

in Seattle, and it is there to manage the contract, the day-to-day workings of the contractor.

When you look at a program like AEW&C, we are not buying off the shelf, as you would be

aware; it is a highly developmental program. One of the things that we did with AEW&C to

reduce the risk and to actually make the program come off on time was to put in place an

extensive risk management process, one which would get much earlier insight into what the

contractor was doing. We had to work with the US government to get an appropriate export

licensing framework to allow that to happen, and part of that export licensing framework means

that our people need to work within a US classified environment to be able to get that early

access.







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We put the team into Seattle with three roles, really. Their first is to clarify our requirement. It

is a functional requirement, which is the way we are all trying to move, so that we do not tie

ourselves down to obsolescent technology in these developments but, rather, specify functional

outcomes at the other end. Functional requirements are good from that point of view. The

downside of functional requirements is that they are much more open to interpretation. So, as

you are going through the design process, you need people on the spot who can actually sit

down with the contractor and work through what that actually means as they design the

equipment for you. Their second role is to give us insight into the design. We find many issues

as we go through the design process. Having people on the spot actually cuts off problems much

earlier than if we wait until design reviews to find them. If you cut them off early, you stop

them having to be reworked and you do not lose schedule. Their third role is to evaluate the

work the contractor is doing for claims for payment. It is one thing for the contractor to claim

that work is done; it is another thing entirely with a complex project like this to actually be able

to evaluate and say, ‘Yes, that amount of work has been successfully done and therefore that

much of the money can be paid.’ We have structured the team into multidisciplinary subteams,

and each of those mirrors Boeing’s teams so that we can actually put our people in at all levels

of Boeing’s management—from the individual peer reviews in the design teams right through to

Boeing’s senior management and their configuration control board. That drives the number of

people that you need to do that.



Senator MARSHALL—So that is why there are 36.



Air Vice Marshal Gray—That is why there are 36; that is how many you need for the

amount of work they are doing.



Senator MARSHALL—How long have they been there and how long are they going to stay

there, and how much has that cost and how much is it going to cost?



Air Vice Marshal Gray—The cost works out to $100,000 per person per year, roughly,

additional to their normal salaries, when you look at removals to get them over there and back

and the on-costs for overseas allowances for the cost of living adjustment in having them there.

The teams started to build up just before contract signature. There were not as many earlier on,

obviously. The full team built up at the beginning of last year. The team numbers will fluctuate

a bit right through until we actually take delivery of the aircraft. Next year, I will pull about 10

of those current jobs out of Seattle and bring them back to Adelaide. The design work that is

being done in Australia on the support systems will be done by contractors in Adelaide. For

exactly the same reason that I put the people in Seattle now, I will put those people in Adelaide

next year. So, as that work moves, they will move down. About the same time, or within six

months or so of that, we will be starting the test program. So, as the design engineers come out,

the testing crews will go in. The numbers will fluctuate a bit, depending on the exact stage of

the work; the actual people and the skill sets will vary considerable over that period of time. But

people will be there until we complete the test program at the end of 2006.



Senator MARSHALL—And it is the same rationale for the Hornet and helicopter projects?



Air Vice Marshal Gray—Yes. Their numbers are smaller because the projects are a bit

smaller. Air 87 is largely off the shelf. The Hornet project is very complex, but they are doing

just an aircraft upgrade whereas AEW&C are actually developing a new aircraft, new





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simulators, a new ground support system and a new logistics support system. It is a much bigger

job, hence the size of the teams.



Senator JOHNSTON—What is the expected date of delivery for the AEW&C project and

what guarantees do we have that you and all of these 36 quite uniquely trained and experienced

personnel are going to be with us throughout this project and to the benefit of the project?



Air Vice Marshal Gray—That is a good question. The delivery date is easy: November 2006

should see the delivery of the first two aircraft and subsequent aircraft will come at about four-

month intervals after that. The simulators should be in place around the same time. The logistics

support package will come in over the next year or so, as will the software and hardware

engineering support facility. The aircraft then needs to do an OT&E, as was mentioned earlier

today, to stretch it and find out how far it can really go and to work up the crews. The

operational capability will come in late 2007, early 2008. That is when you would be able to say

that you had a fully operational capability with everything on the ground. But first delivery is at

the end of 2006. I was given this job to stay with the program until we successfully accept the

first two aircraft, so that will see me around until the end of 2006.



Mr JOHNSON—Did you want the job?



Air Vice Marshal Gray—Of course. There is no better way of running a project than to have

it from start to finish. In fact, I would have liked to have had it even earlier. I got the project at

contract signature, so there are things in the contract that I have to live with that I might have

wanted to try and do differently. They are nothing serious: they are just little things that make

me think, ‘Oh, why did we do that?’ That is just my own idea.



Mr JOHNSON—May I ask how old you are?



Air Vice Marshal Gray—Fifty. I know I only look 40.



Mr JOHNSON—You do only look 40; that is right.



Air Vice Marshal Gray—It is in my genes; my dad was the same. When I was given the

project, the then minister asked me to stay until at least delivery of the first aircraft, preferably

until we had actually established a full capability. He realised that that was a long time to

commit to it. I guaranteed him I would stay here, at minimum, until we get through delivery. If

we do that bit properly, it is then dotting i’s and crossing t’s as you wind up the delivery of the

remaining aircraft and the rest of the systems. So I will be here the whole time. The rest of the

project team will not. I have got extremely good people, both military and civilian, in the team.

For their career development, I cannot hold all of them for that long.



Mr JOHNSON—What do you do to try and hold them?



Air Vice Marshal Gray—I will not try and hold them. If I did that we would—as one of my

people put it—end up with a bunch of ‘space cowboys’: at the other end, I would have a whole

bunch of very experienced people who know this system back to front but would all be too old,

and there would be no room for new people to come through. It is actually in our interest to

cycle younger people through the project and build up their experience on this capability before

we deliver it.



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However, in doing that it is important that we control the time that the people move and who

goes into the positions. I have identified 15 key positions in the project teams in Canberra and

in Seattle which we will actively succession-plan out the next three years. So, we work with the

civilian personnel people and Air Force personnel to make sure (a) that we pick the people that

we want for those jobs and encourage them to come and (b) that we set the time that those

people move.



Mr JOHNSON—Is that our normal practice with projects of this magnitude?



Air Vice Marshal Gray—It has not been, but there have not been very many projects of this

magnitude. It is a very strong commitment—from Air Force, in particular—to help us make this

project work. I soak up a lot of Air Force’s best engineers and logistics people in this process. It

is easier to do the military side of that, because I can work directly with the chief to get

agreement to priority when I need it. The civilian personnel management system does not have

a posting process, so it is more a matter of attracting people and holding them. We cannot do

that with money, as you know and as has been discussed earlier today. We try and do that by

making the job exciting and giving them a feeling that they really are going to achieve

something at the other end. So far that has been successful. I have a very low unplanned

turnover rate: I have people that are happy to come in and be brought up to speed and be kept in

either Canberra or Seattle, depending on what their skill sets are. We move people at an

appropriate time. We have a significant overlap, which is also not usual, because there is a big

expense that comes with it. The standard process for handover/takeover is that someone arrives,

you spend a week talking about the job and you head off. Those 15 positions, roughly, are

succession-planned and all have significant handovers. A couple of those positions will change

next year, and we will have between three and six months overlap between the new people

coming in and getting up to speed and the old people leaving. Again, there is a bit of a cost to

that, but it is a small investment in risk management.



Senator JOHNSTON—What are the next career opportunities in the Royal Australian Air

Force for an air vice marshal who has very successfully delivered a technical and complex piece

of capability over the course of five years?



Senator MARSHALL—You could destroy your career, depending on the way you answer

that!



Air Vice Marshal Gray—That has never been a concern of mine; I tend to answer things the

way they hit me. It depends a lot on timing and what happens with the system overall. As a two-

star Air Force officer, if you are successful and good and in the right place at the right time—

because there are very few three-star jobs—



Senator JOHNSTON—You get a three-star job.



Air Vice Marshal Gray—There are two three-star jobs I can compete for. Technically, I

could compete for Chief of Air Force, although I have been more in this sort of field than in the

operational field for some time, so that is probably less likely. I could compete for the Vice

Chief of the Defence Force job if that is due to be turned over at a time I am available. So there

are other options, but that is not the driver for me. The driver for me is to pull this program off

on time. It is a huge capability for the Air Force and for the Defence Force as a whole. I

promised my team that, if we do things this way and are as flexible and focussed as we



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currently are, they are all going to come to a big party at the end of 2006 to see this aircraft on

the ramp—and I am buying. I am committed to that; I have to pull it off, and that is why I will

stay.



ACTING CHAIR (Senator SANDY MACDONALD)—Are you conscious of the capability

of the program all the time?



Air Vice Marshal Gray—Very much.



ACTING CHAIR—Is it possible that the capability will change because of technology

changes that provide a different capability from that the project was planned for when you

started?



Air Vice Marshal Gray—Yes; that will happen. When we write a functional spec—or a

technical spec, but in this case it is a functional spec—we specify what we want the system to

do at the other end; what we want the capability to do, as a minimum. As the design goes

through you find that some bits of that specification are harder to achieve than others and that

some bits are more important than others. In this particular program the radar is a new

development. As that radar develops we may well find that in some areas it only just meets the

spec and in some areas it may well and truly exceed it. If it exceeds it, it may change the way

you operate the equipment. The specification itself will not change. We have a budget locked to

a particular specification. If someone wants to change that spec because they have a new good

idea, then they need to give me more money.



ACTING CHAIR—The project was announced on the basis that there was a possibility for

further aircraft.



Air Vice Marshal Gray—That is correct.



ACTING CHAIR—Is it necessary to have further aircraft to fulfil the capability, or do you

have an increased capability if you have further aircraft?



Air Vice Marshal Gray—You have an increased capability. You say ‘fulfil the capability’. It

depends on what you define as the capability.



ACTING CHAIR—Originally it was for more aircraft.



Air Vice Marshal Gray—But that is not the capability. When we originally looked at the

program all the analysis done by DSTO said that, if you want an AEW&C capability worth

having, you need a minimum of four aircraft. There were significant advantages in going to six

aircraft. It is not a 50 per cent increase in capability; it is significantly more than that in the

flexibility it gives you, the number of areas you can cover and so on. But all the studies said that

four was the minimum: ‘You have to have four to have an effective capability; six is a

significant increase, and it’d be good if you can get it.’ That is why the original contract

negotiations and all the study was done to say, ‘Let’s try and get six.’ The decision was made

out of the white paper that we gave for the minimum capability of four, leaving the option open

of trying to get the capability advantage from the other two aircraft at a later stage. At that later

stage the decision would be based on all the other competing funding priorities and how much





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extra capability you get for how many extra dollars. But the basic AEW&C capability can be

established with four aircraft.



Senator JOHNSTON—This project sounds quite successful to me; I hope that is right.



Air Vice Marshal Gray—That is right.



Senator JOHNSTON—We are purchasing this from Boeing and we are in there providing

our specifications, learning the tasks and what have you. With regard to project management

software, are we using Prince2 on this one?



Air Vice Marshal GRAY—No. We are using the Prince2 concept, in that we have clearly

defined stages, deliverables for each stage and tolerances around those stage boundaries. We do

not have a Prince management board—



Senator JOHNSTON—We have you!



Air Vice Marshal GRAY—We have me. I am accountable for it; the decisions are all mine. I

believe that is a much more effective way of doing it. The good bits of Prince—making sure

that people plan ahead and that you give people tolerances to work within before you start

interfering—are all in place.



Senator JOHNSTON—So you have Prince2 skills yourself?



Air Vice Marshal GRAY—I have done Prince training and I used to chair a Prince board for

a different project.



Senator MARSHALL—I asked your colleagues in capability systems this morning a

question that went to the proposed full performance audit by the ANAO. The DMO made a

submission to delay that audit, which ultimately was accepted by the ANAO. Why was the

decision taken to request the Audit Office to defer its full performance audit, and what

information was provided to the ANAO to support that request?



Ms Thorpe—When the ANAO came to visit us to discuss this particular audit, the DMO had

been going for about six months. As you have heard today, a lot of activity is being planned in

terms of the DMO renewal agenda. I had a discussion with ANAO and said that they could

come in then if they liked. Things were ‘work in progress’ and there were a lot of things

happening and they were just beginning. We discussed this and I suggested that it might be

more beneficial for us, as well as for government, that they come in next year—2003—when we

would be able to have these things up and running a bit, so that they could actually see how they

were going. You were asking earlier about some assessment on performance. We agreed with

the ANAO that probably the timing would be better, given the cost of going through this

exercise, and we would all get a lot more from it, if we delayed it until 2003 so that they could

actually look at what we have started to do, the effectiveness of what we are doing and whether

it is going in the right direction. That is why it was deferred.



Senator MARSHALL—When was it scheduled to take place?







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Ms Thorpe—It was scheduled to take place last financial year and we asked them to defer it

for a year. It was 18 months, I think, we agreed with them. It was 12 to 18 months—



Senator MARSHALL—So when will it take place?



Ms Thorpe—It is currently in their agenda to take place during 2003. I have had advice

recently that they are waiting now for what comes out of this particular report, and that is when

they will finally decide a date.



Senator MARSHALL—At the time of the proposed full performance audit, you would have

been established for how long?



Ms Thorpe—It was about six months. We had just got the plan out and we were just starting

things. We did not stop them or anything, but they too agreed that it would probably be a much

better exercise for everyone if they waited until we got a little bit further down the track.



Senator MARSHALL—You have been going now for over two years. Are you now in a

position to be able to demonstrate the implementation of real reform?



Rear Adm. SCARCE—Yes, I think we are. As Ms Thorpe has mentioned, we expect to

conduct that audit in 2003 and show the ANAO how we have restructured ourselves—the

policies and the practices that we have put in place—and demonstrate the outcomes that have

been delivered.



Senator MARSHALL—So there will not be any submissions from the DMO to defer that

audit again?



Rear Adm. SCARCE—I cannot speak for Mr Roche, but I think we all agree that there is

benefit in this process, and I see no reason why we would want to stop that.



Senator JOHNSTON—Ms Thorpe, I am advised that we have an enormous number of

financial systems under the umbrella of this organisation. We have ROMAN, Promis, GPFMS,

budget estimates software, additional estimates spreadsheet software, individual project cost-

scheduling software and spreadsheets called ASO 3/4. Do you follow all these? Why do we not

have one system?



Ms Thorpe—A lot of the systems you are naming are not actually the financial systems. The

main financial system for Defence is ROMAN, which is a SAP based system.



Senator JOHNSTON—What does SAP stand for?



Ms Thorpe—It is a brand; it is a company.



Senator JOHNSTON—I am strictly a Microsoft man. You will have to forgive me.



Ms Thorpe—SAP is one of the big companies. That is the general ledger system for

Defence, and all financial and management reporting comes off that system. There are some

corporate subsidiary financial systems, and the main ones from our perspective are: PMKeyS,



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which is the personnel system which captures the information relating to civilian salaries and is

gradually picking up the ADF pay, but that will take some time; SDSS, which we use for

inventory management and is again like a subsidiary ledger, where we capture inventory and

spares information; and a system called COMSARM, where we get financial information and

which is where we keep the explosive ordnance, because that has to be on a secret type system

and not on the normal financial system. Those are the key systems we use for financial

reporting. In terms of maintenance management and a whole lot of other things, there are other

systems used—but not for financial reporting. All the data we report in terms of financial

management, the annual report, the budget—all those sorts of things—are generally on those

core systems I mentioned.



Senator JOHNSTON—Give me a bit of a practical picture. If I walked through the

organisation, I would come across computers loaded with different operating systems and

software from division to division?



Ms Thorpe—No. In terms of their specific management, for example, there are particular

project management tools that we might use in a project, and Ms McKinnie can talk to you

about where we are going with that. In terms of financial reporting, it will be only the ROMAN,

which is where all the financial information is kept. All payments are made off that system; any

payments to do with Defence are on that system.



Senator JOHNSTON—How long have we had ROMAN?



Ms Thorpe—I think ROMAN has been in place for about two or three years. We used to

have a system called DEFMIS, which was the payment system, but that was not accrual based.

With the introduction of accrual accounting, we had to move to a new system, and that is what

we call ROMAN.



Senator JOHNSTON—Admiral, can we talk about this balanced scorecard. Where do we

get this concept from?



Rear Adm. Scarce—From Kaplan and Norton. It is an American concept of aligning your

business principles and practices with the measuring of those principles and practices.



Ms Thorpe—The balanced scorecard was also identified in the report Beyond

beancounting—effective financial management in the Australian Public Sector, 1998 and

beyond that came out a couple of years ago. That identified the balanced scorecard. It was

promulgating departments to move down that path as a very well-recognised and accepted

mechanism for capturing performance, because it looks not just at the financial side but at the

various elements. You might be doing brilliantly in a dollars sense but if you are losing all your

people or something like that the organisation is not healthy. The intent of the balanced

scorecard is to try and capture performance in four quadrants: how successful you are in

finance, how successful you are with your customers, how successful you are with your

processes, and how successful you are with your people. You then develop key performance

indicators underpinning those four quadrants, and those are what you track. You tend to track

those through a very simple red light type of thing so that management can focus very quickly

on the key elements of the business.



Senator JOHNSTON—Who sets the key performance indicators?



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Ms Thorpe—At Defence, that is being done at quite a high level and we roll it down, so the

key managers—depending on what level you are looking at—will decide it for the DMO. We

have a balanced scorecard that came from an iterative process, but essentially it was developed

in the end by the executive, by the people you see in this room today.



Senator JOHNSTON—So the KPIs are determined from within the Defence organisation?



Ms Thorpe—Yes, within Defence, because it is a management thing. It is like business

planning, where you identify your key performance areas and everything else; it is part of the

normal business planning process.



Senator JOHNSTON—Do you see a problem with the KPIs being determined by the people

who are actually involved in delivering?



Ms Thorpe—A balanced scorecard is a mechanism for internal management. Industry uses it

widely; it is normal in industry. It is like business planning. It is a way—



Senator JOHNSTON—It is held out to us as being an indicator that things are all going

beautifully.



Ms Thorpe—Sorry, in what sense?



Senator JOHNSTON—I keep reading in submissions and reports that balanced scorecard is

the ‘benchmarking system that we have incorporated within the DMO, and that is the way we

test ourselves’.



Ms Thorpe—That is right, and we do have red lights. I present a monthly balanced scorecard

to the DMO executive on how we are going against the key performance indicators. There are

red lights and yellow lights and green lights. We tend to focus on the red lights, which give us

early warning that there is an issue, and we discuss that particular issue.



Senator JOHNSTON—But there was no external objective determination on what the key

performance indicators should be; they are an internal measurement.



Rear Adm. Scarce—Senator, what Ms Thorpe has been saying is that we established this

based upon what government requires of us. In this annual report you will see our performance,

which is given to government. From that performance we derive, at the senior level, the

performance indicators that tell us whether we are delivering the objectives that government

requires of us. That flows down through the organisation to the various levels in an iterative

fashion so that we build up a picture of what we are delivering to government. So it is linked to

this annual report, and our performance is assessed by government based upon what has been

agreed.



Senator JOHNSTON—What are the key performance indicators, for example?



Rear Adm. Scarce—The key performance indicators in terms of availability of systems will

be availability of spare parts for systems; we will have people performance indicators, financial

indicators and schedule indicators. There is a range, probably in the 20s, of the key performance





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at the executive level that we will review on a monthly basis that we think determines the health

of the organisation.



Dr Williams—I will give you as an example one measure I use in my division which is in my

own division’s card and which then filters up to the DMO card. For each project we run, be it

major or minor, I have a scorecard which indicates how we are performing against the cost

dimension, the timing schedule dimension and also the capability dimension. What we feed into

that is a traffic light presentation. Underlying that, of course, is information to support those

judgments. You can build that up and say, ‘From my area, how many projects are experiencing

problems in one of those three dimensions?’ That can build up to a high-level measure. So as a

check for the undersecretary, he can see broadly how we are doing, what is the level of

problems and then he can burrow down and, in my case, right down to talk to individual project

managers to get explanations. So the KPI in a sense for those sorts of things—that is our core

business, and it is fairly obvious—is a fairly objective method of assessment.



Senator JOHNSTON—So the correlation between the KPIs and the positive or negative

status of individual projects, or even divisions, is very strong?



Dr Williams—From that measure you can look at a high level as to what percentage of our

projects are running well. As we collect data from other areas you can start to compare us with

others. Right now you can compare internally from one division to another, which has an

element of benchmarking internally. But, importantly, take my case: if I go forward and my

situation in Land is looking bad then there is a fairly strong incentive for me to push down into

my team to start addressing the problems. It is a fairly positive sort of way of keeping the

pressure on managers: there is visibility up and it also gives me visibility down.



Senator JOHNSTON—Which division is responsible for the overall surveillance of the

balanced scorecard system and its practical applicability to each division?



Ms Thorpe—My division is responsible as part of the performance reporting for the DMO.



Senator JOHNSTON—The Materiel Finance Division?



Ms Thorpe—That is right.



Senator JOHNSTON—And which heading does that come under: project development and

review; performance reporting; financial management?



Ms Thorpe—Performance reporting.



Senator JOHNSTON—That is based in Canberra?



Ms Thorpe—My people are based in Canberra, but we are obviously collecting information

from all around. We do it off systems and a whole lot of things like that. We do not just invent

it.



Rear Adm. Scarce—Ann provides the structure in close consultation with us because we are

the people who know our business. Ann puts it together in a DMO perspective. Each of the





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heads of division will manage their particular organisations and feed up to the DMO executive,

where Mr Roche reviews our performance on a monthly basis.



Senator JOHNSTON—Listening to you all this afternoon, I get the impression that there has

been somewhat of a conversion on the road to Damascus within the last two years. What did we

do before we had Ms McKinnie doing all of her good work and the balanced scorecard and all

of these things? What happened with this organisation prior to that?



Rear Adm. Scarce—I guess the reason we are amalgamated is that it did not go very well. In

terms of in-service support we had three separate organisations, Army, Navy and Air Force,

each doing their own thing and each delivering a similar product. We had an acquisition

organisation that was certainly collocated, but some of its practices were again driven by the

environment. We had this divide between acquiring a capability and then managing it through

life. That brought with it significant problems because there were two separate organisations

with two different goals. The reason that the DMO was brought together was to have end-to-end

processes for the whole of the capability life cycle to make one organisation and one individual

within that organisation responsible for each of those processes. What you are seeing now is the

development of the policies, procedures and practices to support that life-cycle cost approach.

Each of us, as business process owners for parts of that organisation, has a responsibility to

develop those new policies and procedures and to bring it together in a coordinated fashion.



Senator JOHNSTON—What do we have in place to determine whether the culture that I

perceive existed prior to these reforms is still evident underneath the surface?



Rear Adm. Scarce—If we were to be honest, the culture takes a long time to change. Prior to

this amalgamation, the support command brought the three support command organisations

together and we started on an extensive program to change the culture. It is not something that

can be achieved in two years; it is something like five to 10 years. In the DMO, we are under a

similar requirement to change the culture—to bring together the values based culture that we

have established. How are we doing that? We are doing that through an extensive leadership

program, where we are sending our senior managers off for a period of five separate weeks to

bring them in line with the new DMO culture, to give them the skills to enable them to go back

to their workplace to drive the new culture that we want in the organisation. Each one of us has

a responsibility of going to our people and driving that value set, as do our senior managers. So

it is being attacked in a number of areas from the top and the middle levels, and our leadership

program will eventually go to lower levels to again drive that culture. It is not something we

will achieve overnight; it is a five-year solid program. It is something that we are all cognisant

of and are driving to change, but there is no doubt that it is a tough process.



Dr Williams—May I make an observation? We need to be a little careful to avoid the

assumption that we had a disastrous organisation and then overnight saw the light and created

DMO. I think you have to view it—



Senator JOHNSTON—That is just the impression I got from listening to you all. I am sorry.



Dr Williams—What we have to look at is that it is part of a continuum. If you go back to the

mid-seventies, for example, there were separate departments of Army, Navy, Air Force and

defence supply. It has been an ongoing process and there have been a number of clear watershed

shifts towards a more integrated organisation. The area where DMO has been critical, and I



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think where you would find all of us saying there has been a big step forward, is in pulling

together the support and the acquisition so that we take a whole-of-life approach. That is a

significant step forward, but I do not think one would want to conclude that all our projects

were poorly managed before and suddenly they are all right. Project management is difficult,

and we believe that by having the support integrated with acquisition it is much easier to get

things correct up-front because you are looking at it from the whole-of-life perspective. It has to

be viewed as a continuum that we are constantly looking to refine, just as with our contracting

templates where we are looking for the opportunity to improve them and make it easier for

industry and also better for us. It is part of an ongoing process which, in my view, will never

stop.



Senator JOHNSTON—Chair, I have a number of further areas I would like to cover but I do

not see that we have time now. I am in your hands as to whether we come back again or

whatever.



CHAIR—Are they appropriate things to put on notice or are they more appropriate to a

hearing?



Senator JOHNSTON—I think they are straight issues that should not require any real

notice. I would like to discuss them.



CHAIR—Okay; that is a matter we will consider in committee. It may be that we need to

return, maybe not with the whole group of people but with a smaller group. We will talk about

that. Senator Marshall, you have some questions.



Senator MARSHALL—Can you advise the committee about whether any action has been

taken against suppliers and/or contractors under penalty clauses for failure to deliver specified

requirements during the time the DMO has been established?



Dr Williams—Perhaps I can lead off and then Mr Fitzgerald can go to the detail. First of all,

it might be worth clarifying that, under the terms of contract law, we do not have penalties as

such; we have liquidated damages, which are meant to compensate the Commonwealth for the

costs we might incur as a result of delays or other problems. So we need to be careful when we

use the word ‘penalty’. In terms of liquidated damages, yes, there have been cases where we

have exercised that where a company has clearly defaulted. In some cases it will be grey

because there will be issues where the company argues there was some excusable problem that,

for example, could have been our provision of equipment. Perhaps Mr Fitzgerald can give some

more detail.



Rear Adm. Scarce—Before we start, I think we would keep to numbers rather than the

names of companies.



Mr Fitzgerald—We prefer to negotiate rather than to litigate. We find that damages are

really not an adequate remedy for us. We tend to want to seek capability rather than tie up a

contractor in a court for five or 10 years and have nothing at the end of it but a lot of hassle in

the meantime. We also tend to want to establish long-term relations with our suppliers, and that

is another reason we tend to negotiate out of any difficulties that arise. In our contracting

templates we prefer ADR, alternative dispute resolution. Loosely, that might mean negotiation,

mediation, arbitration before you get to litigation. Whatever we do, we always seek legal



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advice, and we usually find that that legal advice is a bit messy and inconclusive, regrettably.

Liquidated damages is a damages provision as distinct from a penalty, and we might have half a

dozen of those each year on our major capital projects. We normally fix those issues by

amending the contract to get additional capability to the value of the liquidated damages.

Sometimes we take the dollars; not very often.



We rarely terminate contracts—perhaps one a year. In terms of terminating a process—a

tendering process, for example—or restarting a tendering or contracting process, we have a few

of those. We might have a couple a year for major capital projects; sometimes they are restarts,

sometimes they are hiatuses or whatever. We have provisions in our contracts for default, for

companies going bankrupt or into liquidation and things like that, for breaches of intellectual

property provisions, for maintenance of export licences and for what you might call wilful

nonprogress on a contract. We have a process that establishes those sorts of things. There is a

raft of remedies and approaches that we use. Normally, we negotiate to get a resolution to fix

the issue so that we can get a capability for our fighting folk.



Senator MARSHALL—I am wondering whether you can be more precise with some of that

information—I am happy to give you that opportunity on notice—and attach the values that we

are talking about. I would also be interested to know whether we have initiated legal

proceedings that have proceeded to conclusion where the Commonwealth has been

unsuccessful.



Mr Fitzgerald—From recollection, the short answer is no, we have not had any in that last

category. In terms of dollar values of liquidated damages, I will have to take that on notice. A

lot of that is in camera sort of stuff. Companies do not like their names mentioned as ones that

money is being extracted from.



Senator MARSHALL—No, it was already said that the names would not be provided. I am

more interested in the occasions, the value and the category, because you named a number of

different categories it would fall under. The categories that they fall under would be useful.



Mr Fitzgerald—We can take that on notice. It will take a little while to extract that

information, but we could certainly give you a feel for it.



CHAIR—It is just on four o’clock, and we all turn to pumpkins around here pretty quickly.

Admiral, we started off by saying that there were some questions that you were going to bring

forward which had arisen from your reading of the previous Hansard. Are there particular areas

that we still have not touched that ought to be mentioned?



Rear Adm. Scarce—No, I do not think so. I will make one comment, though. There was

concern expressed by some of the senators that bringing bad news against the DMO might

impact upon a company’s ability to get further business from us. I would just like to make the

point that we have a robust and mature relationship with industry. We do not always agree.

There are lots of dollars involved and there are lots of companies and people at stake, but I can

assure you that the relationship we have will continue with any company that comes in here and

provides a different view about the process that the DMO currently has under way. There will

be no retribution. We will continue to work with industry, we will continue to disagree and there

will continue to be pressure on both sides as we go through what is a very difficult process.





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CHAIR—Thank you very much. As you have heard in our discussion, there are a number of

questions that members of this committee would still like to pursue, some of which are capable

of being put in writing and answered on notice. It may be that we would need in some form to

revisit this type of hearing. That will be a matter for our secretariat to pursue with you, and

questions of availability and time arise. On that note, thank you Admiral Scarce, Air Vice

Marshal Monaghan, Dr Williams, Ms McKinnie, General Haddad, Ms Thorpe, Ms Isaacs, Mr

Fitzgerald and all the others who have been here today for making your time available and

providing the information necessary for our inquiry.



Committee adjourned at 4.00 p.m.









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