Defences asset management project is also examined. 1. 153Defence [DMO], CEO Roundtable Discussions [Note: Document dated 23 July 2008. This recommendation was not included in the summary of First Principles Review recommendations at the front of the report of the review, whereas the recommendations set out in the preceding and subsequent paragraphs of the report are included in that summary (recommendations 2.12 and 2.13 respectively). Generally, this comprises a description of the asset and an account of the focus of Defences sustainment effort during the prospective year. 200.405 Allocable costs. Care would need to be taken to avoid any conflict of interest among vendors in these circumstances.173, 5.54Defence has long aspired to introduce a systematic approach to asset management for its specialist military equipment (see Appendix 6 of this audit report). 141Defence, DMO End State Design Final Report, December 2013. Also, it incurred related staff costs of $3.1million over six financial years (201112 to 201617). The Commonwealth's discretion, and a reasonableness test, will apply with regard to the use of the Cost Principles for tendered contracts. The PBS includes other occasional references to sustainment. Step 1develop a risk profile for the project, which identifies the severity of risk in nine categories for the acquisition phase and eight for the sustainment phase; and. The success of the contract will be measured by Defences ability to operate without Bechtel support at the end of the contract, rather than by any specific product delivered by Bechtel. 3.10Reviews of Defence over the years have highlighted the importance of management reporting on its activities. For example, a commercial organization An organization, institution, corporation, or other legal entity, including, but not limited to, partnerships, sole proprietorships, and limited liability companies, that is organized or operated for the profit or benefit of its shareholders or other owners. The first is a Defence internal review conducted in late 2015; the second comprises work done following the First Principles Review as part of the Systems Program Office reform and consolidation project. By any reasonable standard the military outputthe effectiveness of the ADFis world class, but does the Department arrive at that effectiveness in the most efficient way possible? Appendix 5 of this audit report sets out both the root causes and those of the Coles Reviews consequential recommendations that have wider applicability in Defence sustainment. A primary example is the detailed, technical paper produced by Navy in 2006, A Quantitative Approach to Navy Performance Measurement. Failure of this Key Health Indicator will affect the achievement of all three of the Materiel Sustainment Agreement outcomes. The implicit assumption is that future costs will be influenced by the same factors as past costs. 111The ANAO has not verified the reported savings in the three cases quoted here. [12] Gumley had headed an executive team of around 20 senior managers. Such cost reductions may be required to re-invest into inventory, obsolescence remedies, new infrastructure to manage an ageing fleet and the transition to future submarines. Materiel Ready Days Achievement, measured as a percentage achieved against planned reflects the reliability of the Mission System and the Support System. Defence informed the minister there was a significant risk that Defence would fall short of the cost reduction target for the Program ($20.6billion) by some $4billion, almost one quarter of the remaining target ($17.6billion). 160Defence, Review by Mr Jeff Worley, 30 May to 3 June 2016. 3.69When sustainment costs are presented cumulatively, the contribution of items other than Navy, Army and Air Force sustainment to sustainment cost growth over the forward estimates can be seen. are set forth in HHS regulations at 2 CFR Part200, Subpart E, 45 CFR Part 75, Subpart E, and Appendix IX (Hospital Cost Principles) to Part 200 and Part 45. In August 2022, Chris Deeble was appointed Deputy Secretary CASG. 5.48The First Principles Review recommended that Defence establish a single end-to-end capability development function and that this would require, among other changes, Moving to a leaner smart buyer model that better leverages industry, is more commercially oriented and delivers value for money.164 The Review cites a US Government Accountability Office report which is also consistent with past Australian usage: A smart buyer is one who retains an in-house staff who understands the organizations mission, its requirements, and its customer needs, and who can translate those needs and requirements into corporate direction. 3.7A joint review of Navys performance framework, completed in March2016 by Navy and Capability Acquisition and Sustainment Group, concluded that there was universal acceptance that the framework provides a sound basis for the assessment of sustainment outcomes.38 However, the review decided to remove one of Navys core key performance indicators (cost per materiel-ready day achieved) on the basis that the measure required the Systems Program Office to enter four separate data elements and stakeholder compliance was reportedly low. Systems Program Office consolidation and reform is one of the largest reforms to Capability Acquisition and Sustainment Group deriving from the 2015 First Principles Review. This chapter examines Defences governance and operational arrangements for managing the sustainment of specialist military equipment. Defence was urged to use lifecycle costing throughout the acquisition lifecycle by an ANAO performance audit in early 1998. 132Defence considered not using the term Systems Program Office as this could be confused with the use of the same term in the USA, where Systems Program Offices were said to be concerned only with acquisition and not sustainment. HWrH+z S, ?~#|~!hI&Y{/.>ae0KQ $$ 3,B(3ot=zh6+EZ(Z=\(]/EY&bm>KD_;$8Gb 7Recent Parliamentary inquiries include: Joint Standing Committee on Foreign Affairs, Defence and Trade, Procurement procedures for Defence capital projects, August 2012, p. xxvii; Joint Standing Committee on Foreign Affairs, Defence and Trade, Review of the Defence Annual Report 201112, Canberra, June 2013, p.90; Joint Committee of Public Accounts and Audit, Report 442: Inquiry into the 201213 Defence Materiel Organisation Major Projects Report, Canberra, May 2014, and Report 448: Review of the 201314 Defence Materiel Organisation Major Projects Report, Canberra, May 2015, pp. 2The MPR Guidelines, which are endorsed by the JCPAA, provide that data of a classified nature is to be prepared in such a way as to allow for unclassified publication (see ANAO Report No.40 201617, 201516 Major Projects Report, paragraph 1.16, p. 463). 92See Defence Portfolio Budget Statements 201516, p. 21, Table 6: Capability Sustainment Programme; Defence Portfolio Additional Estimates Statements 201516, p. 21, Table 10: Capability Sustainment Programme. Specifically, the review identified instances where: 2.18Defence makes extensive use of external service providers and contractors to deliver acquisition and sustainment services. @ GV Second and Combined approvals were selected, as Defence is expected to understand costs better at the Second Pass approval stage, than at First Pass. 13. 5.63The Sustainment Business Model project has not delivered all that DMO expected. Accrual Accounting vs. Cash Basis Accounting: What's the Difference? Defence has had no central facility to maintain a register of contracts for sustainment (or, indeed, acquisition) until January2016. To address these problems, Support Command Australia, the Defence Acquisition Organisation and part of National Support were merged to form the DMO. 115Raytheon Australia, Smart Sustainment Solutions, March 2013. The Review proposed the immediate implementation of productivity measures at a project level: It is also incumbent upon the organisation to have a process in place that effectively measures its cost, schedule and productivity at a project level. There has been no consistent application of fundamental tools such as Earned Value Management. Project Accountant at Northrop Grumman | The Muse Note c:Defence defines a materiel ready day as a day in which a submarine is not in planned maintenance or does not have defects that prevent it from being at sea. 199In its 200809 Annual Report, Defence stated that to implement this recommendation, it had created the Sustainment Reinvestment Office to co-ordinate DMOs role in achieving the $5.5 billion in savings expected from Smart Sustainment under the Strategic Reform Program. 323. Defence records show that the department made substantial efforts to keep track of the large number of diverse initiatives identified across the department under the smart sustainment reforms associated with the SRP, including internal reporting to management. 2.1The ANAO examined Defences governance and operational arrangements for managing the sustainment of specialist military equipment, with a particular focus on the clarity of: 2.2Defence has clear and long-standing arrangements for the management of materiel sustainment for specialist military equipment. 4.19Notwithstanding Defences effort to keep track of the claimed and planned savings from Smart Sustainment, Defence has not been able to provide the ANAO with adequate evidence that the savings were realised. Ongoing Failure to provide spares in full to support External Maintenance Period demands will drive deferral of maintenance, or partial completion of external maintenance resulting is a direct impact of Completion of Maintenance to Plan and an increasing likelihood of system failure resulting in Open Priority 1 Urgent Defects. MRS and, to an increasing extent, SPMS, are now used to populate a Quarterly Performance Report on both acquisition and sustainment (see paragraph 3.11 forward). 26Paul J Rizzo, Plan to Reform Support Ship Repair and Management Practices, July 2011, p. 8the Rizzo Review. 3.6SPMS was introduced, first, for Navy (MayJuly2015) following work to develop its sustainment performance framework with a standard suite of performance indicators.37 The system was being implemented in Air Force and Army from late 2015 through 2016. This was, strictly speaking, a previous initiative. Defence has not been able to provide the ANAO with adequate evidence to support this claim, nor an account of how $360million allocated as seed funding for Smart Sustainment initiatives was used. 11. 64The instruction was Defence Instruction (General) LOG 45004 Defence Policy on LifeCycle Costing Analysis; this was updated on 14 November 2003. The MPR has added value through the review process and the transparency of information providing increased assurance to the Parliament and the Government. All 22 Tiger helicopters, simulators, ground support systems and contracted training devices have been accepted and introduced into service within project budget approvals. examining each Systems Program Office to determine where each fits within the smart buyer function, and the most appropriate procurement model for delivering the capability and achieving value for money. This narrower focus risks telling only a partial account of sustainment within Defence and is potentially at odds with the One Defence model promoted by the First Principles Review. 3.61The Defence Annual Report 201516 includes financial information and some descriptive material for the same Top 30 sustainment products reported on in the PBS and PAES.91 However, the Annual Report does not report the actual expenditure for Defences Capability Sustainment Program, for which estimates were reported in the Defence PBS and PAES.92 Additionally, there is no reconciliation of the total sustainment product funds available amounts reported in the Annual Report93 and the total funding for the Capability Sustainment Program reported in the PBS and PAES tables. It does not explicitly analyse the Coles Review and its lessons (such as the value of international benchmarking, discussed below).121 Rather, the report passes the task of learning from Coles back to Defence, stating that the implementation of the First Principles Reviews proposed approach should encompass the progress made through the Rizzo and Coles reforms. Coles also draws an insightful distinction between acquisition and sustainment work in relation to submarines. In early 2018, CASG, the Defence group that acquires and sustains military capability, established a panel through which the overwhelming majority of contracted and consulting services to Defence are delivered. This was to focus more holistically on benefits realised to the organisation through reform, rather than only acquitting financial targets. 126This mirrors similar changes underway in the counterpart UK organisation, Defence Equipment and Support. In June2017, Defence advised the ANAO that implementation plans for significant reforms to Systems Program Offices would be developed in the second half of 2017. 5.51In its implementation of the smart buyer concept, Capability Acquisition and Sustainment Group does not clearly articulate the competencies required to specify outsourcing requirements. The Systems Program Office Director reviews the data and comments for each measure and provides comments for a set of key performance indicators and an additional set of key health indicators.35 Further comments can be added up the hierarchy to the relevant Capability Acquisition and Sustainment Group division head. Systems Program Office consolidation and reform is one of the largest reforms to Capability Acquisition and Sustainment Group deriving from the 2015 First Principles Review. 40Rather, it would be a Strategic Sustainment Analytic, a high-level sustainment health indicator that can be used for broad cross-product comparison. 3.28Defence will institute a Quality Assurance process covering the Defence Quarterly Performance Report. The ANAO suggests that Defence could devise a means of doing this, thereby capturing additional useful information on sustainment performance and current risks. 5.14Defence offered Bechtel significant additional work in May2016, engaging them to provide advisory services and a senior manager, seconded into a Capability Acquisition and Sustainment Group division head role.130 The estimated cost of all current contracts with Bechtel is about $107million.131. Commercial organizations are subject to the cost principles located at 48 CFR Part 31.2 Federal Acquisition Regulation. 108Defence, The Strategic Reform Program: Making it Happen, 2010, p. 4. This was the case with the earlier Smart Sustainment reforms. Cash management, also known as treasury management, is the process that involves collecting and managing cash flows from the operating, investing, and financing activities of a company. During the course of this audit (9January2017) the Committee announced that it had commenced an inquiry into Defence Sustainment Expenditure. To form a conclusion against the audit objective, the ANAO adopted the following high-level criteria: 1.8The scope of this performance audit is the management of sustainment of specialist military equipment. Defence needs to be an intelligent customer for sustainment. Source: Abstracted from Defence, Reform Issues, April2011. 47Defence, First Principles Review, p. 17. 5.25The 2009 report from the Pappas Review identified opportunities for efficiencies in maintenance activities carried out by Systems Program Offices by consolidating maintenance facilities; restructuring outsourcing contracts to ensure the contractual conditions create the right incentives for performance improvements; and implementing lean techniques in workshop management.138 From the formation of DMO, Defence received similar external advice from different sources that substantial improvements in efficiency were possible in the Systems Program Offices. Smart Sustainment had a ten-year savings target of $5.5billion. Reflecting the First Principles Review theme of better engagement with industry, Defence has engaged a USA-based engineering company, Bechtel, to help with implementing the Reviews recommendations. This prevents accurate lower level plans and targets (for example, for maintenance and operations) being established and achieved. CASG was established in June 2015 after the Defence Materiel Organisation was disbanded after recommendations from the First Principles Review. The 2012 Coles Review, by subsequent reports, has been both successful and insightful.119. Defence has advised that Collins Class sustainment cost per materiel ready day has decreased by approximately 40percent. 3.68For each Service, comparing the amounts presented in the first and last years of this analysis yields an average annual (compound) rate of growth in the estimates.97, Table 3.1:Increases in sustainment estimates by service, 200607 to 202021 ($m), Annual rate of growth (compound) from 200607 to 202021. Defence has summarised Bechtels tasks under the contract as follows: The contract is fee-based with no performance measures. Similarly, a new Systems Program Office may be created for a major acquisition project. 1.6The ANAOs observations on this aspect of the audit are reflected in the Summary and Recommendations section of this report (paragraph 32 forward). Final Operational Capability was declared with caveats by Chief of Army (CA) on 14April2016. Support of products represents about 2025percent of sustainment expenditure. Figure 1.1:Defence acquisition and sustainment expenditure. 5.1The most recent major review of Defence, the 2015 First Principles Review, was a comprehensive examination with a suite of recommendations for reform. Other, related GAO work has used the term in relation to the management of sustainment: privatizing total support on new and future weapon systems can make it difficult for the organic depots [equivalent to Systems Program Offices] to acquire and sustain technical competence on new systems, leading edge technologies, and critical repair processes necessary to maintain future core capabilities, provide a credible competitive repair source, and be a smart buyer for those logistics activities that will be contracted out.207. 2.13Generally, the lifecycle of Defences military assets falls into two periods: acquisition and sustainment. Defence expects that this research will be complete in 2018. The ANAO has recommended that Defence institute a risk-based quality assurance process for information included in the Quarterly Performance Report. 5.4Although sustainment does not attract a separate focus in the First Principles Review, the reviews findings and recommendations have major implications for how sustainment is performed. 17. Encouraging Competition 6. 3.11The Quarterly Performance Report is the primary way by which Defence provides information to government and senior Defence personnel about the status of major acquisition and sustainment activities.43 The report was developed in 2015 in consultation with the office of the Minister for Defence. since 2000, a specialist acquisition and sustainment unitpreviously the Defence Materiel Organisation (DMO) and most recently the Capability Acquisition and Sustainment Groupstaffed by a mix of civilian and military personnel; maintenance by the specialist unit of physically dispersed sub-unitsknown as Systems Program Officeswith day-to-day responsibility for Capability Acquisition and Sustainment Group sustainment activities. 5.30In August2016, Defence finalised a Systems Program Office Design Guide to provide Capability Acquisition and Sustainment Group senior managers with sufficient guidance to design or redesign Systems Program Offices.146, 5.31In March2017, Defence advised that the first 25 Systems Program Office reports had been provided to the Capability Acquisition and Sustainment Group Executive Advisory Committee for exposure and awareness. 5.67Defence already has an evaluation process developed that will be implemented by the end of 201617. 5.41The proposal to establish Centres of Expertise is reminiscent of the business improvement teams envisaged under the Sustainment Business Model project (Appendix 6), and a further similar proposal to establish a centre of procurement excellence recommended in 2000.157 The novel element is the adoption of a matrix management arrangement for the control and deployment of a range of areas of expertise. 142Defence, First Principles Review, p. 36. The system supporting the current AusTender site is described by Defence as in a state of decay as it is over a decade old and no longer viable to upgrade and sustain. Completing this work is likely to take longer than the two years intended for the First Principles Review Implementation. External Maintenance Period Demand Fill Rate. The development of an effective sustainment monitoring system remains a work in progress, and the effectiveness of Defences internal reporting system for sustainment could be improved in several areas.
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