13 May 2009

Defence Savings: The Strategic Reform Program

As noted in Defence White Paper: an appraisal, $20 billion of the cost of the future defence force as outlined in the recently released Defence White Paper is to be found by internal savings, which will be retained and reinvested in the capital equipment program. I expressed scepticism that these savings can be found. Having read the Defence Minister’s Budget media release on the Strategic Reform Program, I remain sceptical. I have seen this movie before.

First, the facts: what the Minister said about the Strategic Reform Program, straight from his media release:

The Strategic Reform Program and other initiatives will deliver savings of around $20 billion over the decade, which includes approximately $5 billion over the forward estimates [the first four years of the decade]. The success of this program will depend upon fundamental changes to policy, practices and culture across the department.

The Strategic Reform Program will change the way Defence does business, and will draw on detailed analysis of every aspect of Defence, including strategic planning, managing major cost pressures, capability, logistics and workforce management, amongst other areas.

Defence will reform its costing methodology to more accurately forecast major acquisition costs, improve the governance and oversight of cost estimates, and implement more efficient business practices. In response to the Defence Procurement and Sustainment Review, the Government has also directed Defence to implement a 20-point plan to make Defence equipment acquisition and sustainment more business-like.

Key reforms to Defence business practices that will generate savings include:

* Reforms to the design of the military support backbone, including supply chain and inventory management and military equipment maintenance. These efficiencies will deliver savings of approximately $1.5 billion in saving across the forward estimates and $5.5 billion across the decade.

* The creation of more efficient enterprise support functions, such as the information and communications technology infrastructure, reducing the use of contractors and providing more centralised support to the ADF. These efficiencies will deliver savings of approximately $0.5 billion across the forward estimates and $3.5 billion across the decade.

* The Defence workforce will be rebalanced to ensure that we have the people with the right skills in the right jobs. Our highly trained military members will focus their skills where they are most needed and, wherever possible, expensive contractor positions will be converted to Australian Public Service positions. These efficiencies will deliver savings of approximately $0.5 billion across the forward estimates and $2 billion across the decade.

* Defence will reduce input costs to doing business, including non-equipment procurement. These costs can be reduced through changing Defence’s approach to business. Examples include procuring more competitively priced products and making greater use of Defence’s extensive videoconference network rather than undertaking single-day travel. These efficiencies will deliver savings to Defence of approximately $1 billion over the forward estimates and $4.5 billion over the decade.

* Defence will make further savings through a range of other initiatives, including more effective major equipment procurement practices through the implementation of the Mortimer Review. These savings will deliver saving to Defence of approximately $1.5 billion over the forward estimates and $5 billion over the decade.

This all sounds very fine, and I have no doubt that every one of these areas is worthy of significant attention. They are all the sorts of things that should be addressed on an ongoing basis as part of a process of continuous improvement. My doubts relate to the quantum and timing of the savings that will be delivered.

The above looks to me in the first instance less like a major savings program and more like a major investment program. One can only hope that the investment returns the hoped-for amounts of savings, and there is no way we can know this ahead of time. There is many a slip twixt the cup and the lip on anything that involves the development and roll-out of major corporate IT systems.

I remember, for example, something called PMKeyS that was going to resolve all Defence’s personnel management issues during my time in Defence in the late 1990s. The reader will no doubt be surprised to learn that, a decade later, PMKeys had more than a little to do with the SAS pay problems which came to a head earlier this year.

The need for an integrated personnel management system was identified by Defence as a result of the 1996 Defence Efficiency Review. Initiated in September 1997, the PMKeyS project was to consolidate both the delivery of personnel management functions and the number and disparate nature of the systems that performed those functions. It was to deliver those outcomes by June 2000, at an estimated cost of $25 million.

Unfortunately, things went horribly wrong, as a glance at the Australian National Audit Office’s Audit Report No. 8 of 2005-06, a Performance Audit of the Project, clearly shows:

The Project suffered from extensive schedule slippage, with Phase 1 [Civilian HR and Payroll] delayed by 39 weeks and Phase 2 components [Navy HR, Army HR and Air Force HR] rolled out between 75 and 158 weeks late. When the Project closed in December 2002, major outcomes under Phases 3 [ADF Payroll] and 4 [website enablement and employee self-service functionality] had not been delivered.

The Project was also to facilitate significant savings of $100 million per annum, which had been identified in the 1997 Defence Efficiency Review. The Defence Personnel Executive (DPE) reported in May 2003, nearly six months after Project closure, that PMKeyS was yet to demonstrate a return on investment and that although savings had been achieved through decommissioning the legacy systems, those savings fell well short of the costs so far expended.

The Project was found to have exceeded its notional budget of $25.0 million by $38.4 million, representing an increase of more than 150 per cent. In addition to Project expenditure, Defence reportedly incurred additional costs for Infrastructure ($26.3 million) and Production Support ($41.2 million) between July 1998 and June 2003. The total cost to Defence to bring PMKeyS into service, including the Production Support costs during the Project rollout period, is estimated to be at least $131 million. This cost exceeded Defence’s 1998 estimate of $103.5 million to maintain its legacy personnel systems for five years by more than $26 million.

In summary, the schedule slipped and the costs blew out, even though the ADF Pay component and the web-enabled functionality were abandoned, and the savings were not delivered.

There is more in the ANAO Report; the above will suffice to demonstrate that savings become bankable when they are actually achieved and not before.

Fixing PMKeyS and other corporate systems will be expensive, and in my view uncertain. This MIS Australian Financial Review report of 4 May 2009 states that “the Department of Defence will spend $940 million over the next four years to iron out glitches in its ageing corporate computer systems, including an upgrade of the applications at the heart of the SAS pay bungle”. PMKeyS was supposed to have saved Defence that sort of money over the last decade, but clearly didn’t. Instead, it produced a public roasting of the fifth Defence Secretary by the fifth Defence Minister since the project was initiated in the days of Ian McLachlan and Tony Ayers.

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