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256,800 Paper Handtowels- Mending Defence's Broken Backbone
Defence Procurement is in for a shake-up, with the stockpiles of "just in case" to go and ordering carried out when necessary. What a bright idea. Nick Warner gave this speech yesterday:
Speech to the Lowy Institute for International Policy by the Secretary of the Department of Defence, Nick Warner
Now that I’m 18 months into my term as Secretary at Defence, I thought it was a good time to share my experiences of leading the Department and outline my agenda for the next 18 months.
Let me start with a story from nine years ago that sums up what’s great - and what’s not - about the Australian Defence establishment.
The intervention in East Timor in late 1999, led by Peter Cosgrove, showed the skill, courage and professionalism of the ADF in dangerous circumstances. It was by any measure a brilliantly executed operation. But look a little deeper and you find the success of the operation came in spite of some real weaknesses, weaknesses that continue to bedevil the Defence establishment today.
There are numerous examples I could point to, some large and fundamental. But instead let me focus on just one small and seemingly inconsequential issue - 256,800 paper hand towels.
The towels were purchased in 1999 for the troops deploying to East Timor. Sounds reasonable: peacemaking can be a messy business. Only they didn’t get to East Timor in 1999 or in 2000. For some reason lost in time they were found to be superfluous to requirements, and remained at the ADF’s main warehouse facility at Moorebank. Nor were they found necessary for the troops that deployed to Iraq in 2003; nor those I worked with in the Solomon Islands in 2004 and 2005; nor those sent to Afghanistan from 2001; nor those who deployed again to East Timor in 2006.
256,800 surplus paper hand towels. So what? They matter because they are indicative of a much broader and deeper problem in Defence. Important parts of the business are ailing. The paper towels are just one tiny part of the broken backbone of Defence.
What do I mean by ‘broken backbone’? I mean the enabling, supporting parts of the business that it’s easy to take for granted, easy to ignore, easy to neglect - until something goes wrong.
You already know about some parts of Defence’s broken backbone: the long-running problems with our financial statements; big under-estimates in the personnel and operating costs of new capability; poorly written contracts. There’s more that I’ll go into later.
Australians are deservedly proud of the skill and courage of the men and women of the ADF. Since East Timor in 1999 and in subsequent deployments in Iraq, Afghanistan, Solomon Islands and in East Timor again, they have shown themselves to be amongst the best in the world. And let’s not forget - as my colleague Angus Houston so often points out - that this professionalism is underpinned by fine work done quietly in the background by many thousands of Defence Force members and Public Servants.
But what worries me is this - unless the underlying weaknesses of Defence are fixed, over time our ability to deploy force successfully will slowly but surely diminish. These issues might not be sexy. They might not grab the headlines. But they are fundamentally important.
Angus and I understand this process of reform will be hard. But we are determined to deliver long-term, far-reaching, tangible and permanent change to Defence.
Because of the size and diversity of the Defence establishment, we’ve adopted a staged approach to fixing the ailing and broken bits. Over the past 18 months, we’ve identified where the problems lie, what they are, their causes and their scale. And we’ve begun the process of reform.
I know many of you here have a detailed understanding of certain elements of Defence - our policy positions, our capability, our operations.
But I’m not sure how many of you are familiar with some of the more "meat and potatoes" elements of the place that go into supporting our deployed troops, and the ADF more generally. Let me give you a snap shot.
A budget of $22 billion - and growing.
$4.7 billion worth of general stores inventory, fuel and explosive ordnance.
64 significant bases scattered around Australia.
Stewardship of 3.4 million hectares of land.
Over 600 owned or leased properties.
We’re one of the largest managers of feral animals and native species in Australia.
We’re one of the largest hoteliers in the country.
We’re probably one of the largest restaurateurs in Australia, serving 7.5 million meals in around 140 messes each year.
We oversee the cleaning of 3.5 million square metres each week.
And every year we make over 700,000 payments and 1.3 million credit card transactions to more than 300,000 active suppliers; and 2 million payments to around 90,000 staff.
Whichever way you look at it - and even before a shot is fired in anger - Defence is a large and complex business.
What Defence does well
Whenever I think of leviathan organisations like Defence, images of the Cold War Soviet Union come to mind - groaning bureaucracies known for their inflexibility and lack of responsiveness and creativity. Groaning bureaucracies that don’t do anything very well but exist.
That’s not Defence. Despite its size, there are important things Defence does extraordinarily well.
We enjoy an enviable international reputation on operations and are first class intelligence collectors and analysts.
The DMO, the largest manager of projects in Australia - works tirelessly - and well - to support both the needs of the ADF on operations and Australia’s future Defence requirements.
We’ve also got first class environmental and estate managers and award-winning logisticians, executive assistants, scientists, occupational health and safety officers, engineers, and communicators.
And I want to pay tribute at this point to my predecessor Ric Smith, under whose leadership there were enormous improvements in Defence’s financial management. As a result of the improvements begun by Ric, I’m hopeful that our financial statements will be accepted without qualification this year. Ric’s tireless efforts in this area ensured that we now have accurate financial information on which to base our business decisions. Without that solid foundation, Angus and I couldn’t have hoped to undertake the reform program I want to outline to you today.
Ric also left me a cadre of first class and expert Deputy Secretaries - to whose ranks I’ve since added several more talented professionals - without whose commitment and dedication the hard work of reform would be impossible.
And at every other level, there are lots of very good people and a great deal of talent in the Defence establishment.
What Defence doesn’t do well
But unfortunately, important parts of our business aren’t first class.
Parts of our business are ailing or broken from neglect, from turf wars, from poor decisions in the past and from bad planning.
These parts of the business aren’t in the public eye, aren’t what Defence commentators dissect and analyse. But I believe they are as important to our warfighting capability as the high policy issues many of you spend your time thinking and writing about.
Whose fault is it that these parts of the business are broken? Nobody’s and everybody’s. Defence establishments are notoriously difficult to manage. My counterparts around the world are grappling with the same issues, for much the same reasons.
Apportioning blame for the things that are broken isn’t what matters, isn’t why I’m here today and won’t get us anywhere. 18 months into the job, I’d hardly be taken seriously if I tried to do so. The problems are mine and Angus’s to solve - and solving them is what matters.
To begin explaining why, let me tell you about the consequences of, and more importantly, what we’re doing about, longstanding problems in just four areas - four out of a range of areas - our financial management; our inventory; our explosive ordnance; and our information systems.
Financial management encompasses a lot more than our financial statements. But if those statements aren’t correct, it’s not only our reputation that suffers. If the underlying numbers are wrong, the business decisions we make on the basis of those numbers can’t possibly be the best decisions.
And the real problem is not actually the numbers themselves - it’s the flawed behaviour, systems and processes that produce the wrong numbers.
Ric Smith understood this and relentlessly drove home to Defence’s senior leaders the importance of getting the financial data right.
Once you have confidence in the data, you can begin reforming the way you actually manage your budget. Angus and I began that process in early 2007 when we decided - not altogether to popular acclaim - to take a much more hands-on, directive and centralised approach to Defence budgeting.
At least once a month we spend two or three hours with the Chief Finance Officer reviewing Defence’s financial position: how it’s changed since the last month, how we are tracking in terms of our budgeted outcome and, most importantly of all, scrutinising requests from the Groups and Services for increases to their internal budget allocations. In the months leading up to the Federal Budget, of course, this process intensifies, as does our scrutiny of - and often skepticism about - claims that more is needed to deliver the outcomes that Government requires.
Like the program to remediate our financial statements, this monthly scrutiny is designed above all to change attitudes and behaviour. It’s designed to drive home to Defence senior leaders some simple messages: funding can’t flow to one part of the Defence system without it coming from somewhere else; not everything is equally important; and leading and managing is as much about stopping less productive activities as it is about doing new things.
And that takes me to inventory, a case-in-point of how getting the financial data right gives you critical insights into what you should, and shouldn’t, be doing.
It’s an area of our financial statements that was plagued with audit qualifications and the only area in which a qualification - in relation to pricing - remains.
A few months ago I visited a place where we store a huge quantity of inventory - the Defence National Storage and Distribution Centre at Moorebank.
Moorebank is the largest of Defence’s 24 significant stores and warehouses
It houses about 55 million items of ADF stock, worth in excess of $2.7 billion. These range from watercraft, small arms and communications equipment to combat rations, field kitchens and clothing - and yes, the paper hand towels.
The people I met - public servants, ADF, contractors - were first class.
The visit was fascinating.
But not for the right reasons.
Because what it highlighted was that our inventory management is broken, through decades of neglect, poor practices and the lack of appropriate systems. While the financial statements told me this area had been overlooked, there was nothing like seeing it up close and personal to underscore the fact.
There’s a massive amount of obsolete inventory at Moorebank and across Defence that should have been disposed of years ago, decades ago, and now we’re playing catch up. Of the 295,000 active stock codes at Moorebank, 68% of them (or 200,000) haven’t been used in two years and 29% (or 82,000) have had less than two moves in the past two years. Some of that is reasonable and entirely understandable - it’s not every day you need a heater for the ANZAC frigates’ gas turbines in case they need to be used in extreme cold. But much of it is not.
Too many items are purchased in bulk and stored for years when it would be much cheaper - at no risk to our operations - to buy them as needed from the local hardware store.
And then there are the six street sweepers and nine 40 year old fire trucks that, until we disposed of them in May, had been sitting around for anywhere between three and 12 years. Street sweeping, I think you’ll agree, isn’t core ADF business. And from what I’ve seen of the trucks, they would be better used as scrap metal than for fire fighting.
I also learned on my visit to Moorebank that too many items get to where they need to be via circuitous, time-and money-wasting routes. A good example, believe it or not, is toilet paper. Toilet paper for use on our ships is sourced in Adelaide, sent to Moorebank, and then distributed to Navy bases and ports of call all over Australia. This obviously adds unnecessary cost in terms of freight and contractor double-handling. It’s money we could be spending on something else.
So there’s a lot of small stuff - and some big stuff - that we don’t need, that represents thousands of human hours wasted on stock-takes.
It also represents wasted space. A portion of our land at Moorebank is leased at over $200,000 per hectare, per annum. It’s money we are spending on leasing space to store things that shouldn’t be there - money that would be better spent paying for goods and services that Defence genuinely needs.
In short, we unnecessarily chew up time, money and effort at Moorebank that could be so much better used maintaining current capability or building the ADF of the future.
The static inventory at Moorebank does not reflect the quality of the people who work there. I can’t fault their efforts, or the efforts of a number of senior leaders in Defence who have helped in the identification of this problem and are now tackling it with vigour and determination.
The issues that manifest at Moorebank reflect outdated, inefficient business practices and lack of necessary systems - for example, a warehouse management system. They reflect unnecessary risk avoidance; confused and complicated accountabilities; and too many signatures needed to get simple things done.
So what are we doing?
We’re training our people in smarter purchasing practices - we need to worry less about stocking up for a rainy day and more about getting our quantities right. Where it makes sense to do so, taking a ‘just in time’ rather than a ‘just in case’ approach will save both time and money.
We’ve implemented an accelerated disposals program. Since April last year, the team I met at Moorebank has disposed of an average of 1600 line items each month. In the past eight weeks, thanks to the focused effort of logistics staff all over Australia, they’ve disposed of over 8,000 line items. And we’re hoping to increase that to 10,000 a month from July.
We’re also developing new business rules to ensure our stock is not criss-crossing the country but getting to where it needs to in the shortest possible time. So, where a supplier has operations across the country, we’ll source locally rather than sending things on a magical mystery tour.
Preparedness levels are the biggest cost driver of all when it comes to inventory. As commander of the ADF, Angus Houston has made it clear to his military leadership team that ensuring our forces are ready to deploy within the necessary timeframes doesn’t mean our equipment needs to be flown, driven, steamed or otherwise used to the limit all the time.
So we’re developing a new preparedness model that will ensure the ADF is not only superbly effective as a military force but also as efficient as it can be. The pay-off is that more resources will be available for new capabilities and our current equipment should last longer and cost less to maintain.
As you can see, issues around inventory are inexorably linked to the ‘sharp end’ of the Defence business. And those qualifications on our financial statements were about far more than a failure to adhere to stringent accounting rules - they were symptoms of the broken backbone I alluded earlier.
A related area of underperformance - and one that is clearly integral to our warfighting capability - is the security and broader management of our explosive ordnance - EO for short.
I cannot think of anything more likely to erode the confidence of the government, the parliament and the Australian people than a perception that Defence is unable to secure and manage its explosive ordnance.
You all know the stories about M72 rocket launchers and other weapons and EO being stolen from Defence armouries. In the wake of the M72 thefts, we conducted a comprehensive audit of the security policies and practices applying to Defence weapons and EO. The audit found we needed to better secure our stock of rocket launches and that our security regime didn't meet international best practice.
Separately - as part of our response to an incident in which a Defence employee was severely injured in a grenade accident at the Joint Proof and Experimental Unit in Victoria - we reviewed our policies and procedures for the broader management of EO. That review found that there was a need to improve our overall governance of EO to ensure Defence-wide accountabilities and processes were clearly identified and specified.
The inventory value of our EO is around $3 billion - a lot of money in anyone’s language - with potentially very serious consequences if it gets into the wrong hands; isn’t available when it’s needed; or doesn’t work properly.
Here, as with obsolete inventory, I want to make it clear I’m not blaming the people who work in this part of Defence for any underperformance. Rather, we haven’t given our logistics management system the priority it deserves and our stovepiped cultures have gotten in the way of comprehensive solutions.
Both reviews found that a lot needed to be done. And although conducted in response to separate concerns, both found shortcomings in our management, accounting and security practices. And in the case of EO, the recommendations came on top of dozens of previous reviews, projects and audits which - because of our previously stovepiped approach to these issues - were designed to fix parts of, rather than the whole, problem.
So what are we doing about EO management?
Our key reform has been to streamline and strengthen accountability by making the Vice Chief of the Defence Force responsible for the oversight, coordination and assurance of the efficiency and effectiveness of the overall weapons and explosive ordnance system of management.
But we’ve also begun work on a range of activities including revising EO accounting procedures, improving physical security at weapons and EO storage facilities, and consolidating the myriad of publications in this area into a single, easily understood and accessed reference point.
I should also point out that Defence industry is a critical part of the EO story, and we are working with it to improve cost and schedule performance in the EO supply chain.
I’ll turn now to our historically poor performance - in spite of some heroic individual efforts – in the area of information systems.
Defence's information and communications technology network is one of the largest in the country. It’s a highly complex enterprise, spanning deployed systems to standard desktops to Blackberrys.
If the system doesn’t work properly, it affects not only productivity - a serious issue for any business - but also operational effectiveness. Here are just a few examples.
At the moment, our deployed forces operate on different systems to those used within Australia. This results in unnecessary training and makes the job of service delivery all the harder - in the field, where it matters the most.
Defence’s information systems are the repositories of vital knowledge on everything from environmental management to the procurement of complex weapons systems - but we don’t have an enterprise search capability.
Most large corporations run between three to five data centres. We’ve got 200. All of them power-hungry and giving us a large carbon footprint
Our people in smaller depots don’t all have access to our IT systems, so not all of our workforce can access basic IT services like email, pay and leave databases. Nor can they participate in convenient and cost-effective on-line training.
We are one of the most technologically advanced militaries in the world - but the system we use to pay our Reserve soldiers and officers still uses 1980s- style "Green Screen" technology.
So how are we taking this forward?
Our strategy for fixing IT focusses on four key areas - improving service delivery; improving governance of the whole IT enterprise; reducing the time it takes to deliver new IT capabilities; and reviewing our sourcing strategies.
While this list is probably typical of any agency or corporation we have taken a deliberate 'back to basics' approach.
On the service delivery side, based on feedback from customers, our Chief Information Officer has identified the ‘top ten irritants’ that he and his people are working to resolve by 30 June.
On the governance side, we’re overhauling the process of how we set priorities and assign resources - replacing a bottom-up, uncoordinated approach with one led by Angus and me that looks across the enterprise and takes the hard decisions about where investment will get the most return.
We’re reducing the time it takes to introduce new IT capabilities from literally years to 90 days. We simply can’t continue to deliver obsolete technology to support our war fighters or our business reform efforts.
And we’re trying to be much smarter about how we use our significant buying power. Over time, we’ll replace a multiplicity of IT contracts with a smaller number of larger, more cost-effective ones.
I believe that of all the challenges we face, improving our information systems is the one that promises the greatest reward. IT touches each and every person in Defence. When it works well, it enables great results. When it works badly, it frustrates, delays and can imperil success. It’s the ultimate example of why Defence can’t function properly with a broken backbone.
Why it matters
I’m talking about these things today because I firmly believe they have a direct impact on Defence’s ability to do its core business. The unused paper towels; the view that new activities can’t be undertaken without additional funding; the confusion around EO management; the IT updates that are delivered years after the technology has become obsolete - are all symptomatic of problems that, if not fixed, will degrade our ability to develop and deploy effective military force.
But surely a ‘can-do’ organisation like Defence can rise above these mere bureaucratic distractions and concentrate on the real business of developing and deploying capability? Surely there’s not really that close a linkage between obsolete inventory and the defence of Australia and its national interests?
The linkage is that doing these things badly instead of well represents an enormous amount of time, money and effort that could so easily be spent on providing for our future defence needs.
These problems point to longstanding failings in the governance and accountability arrangements that we must get right if we are to perform to the highest level while also conforming with the law and Government policy.
They demonstrate a lack of concern to ensure that every dollar is spent where it will have the most impact.
And they betray a worrying level of complacency about waste and inefficiency.
Every dollar wasted represents a lost opportunity to enhance the effectiveness of our capability.
Waste and inefficiency is bad everywhere and always. But particularly so at a time when Defence faces enormous funding pressures - like personnel and operating costs that haven’t been properly budgeted for - while the government is also trying to control inflation. And even more so in a year when we are developing for Government consideration a White Paper that will articulate the capability we need out to 2030.
Capability that certainly won’t come for free.
How it all fits together
But maybe what sounds like a tale of woe is in fact a happy coincidence.
Maybe a determination to fix the seemingly small things while also advising Government on how to tackle the biggest thing of all - what is it we should be defending and what will it take? - is exactly the right combination of effort.
Timing, after all, is everything.
I think the stars have aligned and we now have a chance - perhaps for the first time - to advise Government not only on the warfighting capability Australia needs but also the Defence organisation it will take to support that capability over the next 20 years and beyond. Not only the naval, land and air power it will take to defend Australia and its national interests but also the optimal information technology, personnel initiatives, logistics systems, and living and working environments to support the delivery of that military power.
The White Paper will be the vehicle for advice about our future force structure.
Flowing from and inter-connected with the White Paper are four other key initiatives: the so-called companion reviews; the $10 billion savings program; an external audit of the Defence budget; and our ongoing program of reform.
Let me explain how these various initiatives knit together.
The initiative with which you will be most familiar is the new White Paper.
A lot has changed since the publication of the last White Paper: the events and ramifications of September 11, the rise of India and China, and increasing state fragility and instability in the South Pacific. With about 3, 000 deployed overseas, the ADF continues to operate at a very high tempo. There are some very big projects in train, such as the LHDs, AWDs and Super Hornets. And some very big decisions needing to be made about our future capability, in areas like air combat and undersea warfare.
Most of you will know how a classic White Paper works. It will assess our strategic environment out to 2030 and, through a force structure review, recommend to Government the type and size of military forces that we will need in the future.
But the companion reviews are a first for Defence. Leveraging off White Paper judgements about the future ADF, the companion reviews will enable us to determine what is needed to ensure the Defence backbone is strong enough to support it.
We’ll be looking at information and communications technology; industry capacity; the Defence Capability Plan; science and technology support; logistics systems; the integrated Defence workforce; the size and location of the Defence estate; and the way we estimate and manage personnel and operating costs.
We’re also reviewing our intelligence collection and assessment functions to ensure they most efficiently support our needs.
And David Mortimer’s Defence procurement and sustainment review will help ensure the valuable progress we’ve already made in these areas continues.
Together, these reviews provide an ideal opportunity to propose reforms of functions and processes, improve efficiency and generate long term savings for reinvestment.
The companion reviews in particular will give us the chance to take an even closer, longer term look at some of the issues I’ve been talking about - things like our ICT infrastructure, warehousing and logistics - which have been overlooked for too long.
We’re encouraging everyone involved in the companion reviews to think outside the square. We’re after creative, bold and innovative thinking. This is not the time to confirm the status quo. It’s an opportunity to challenge current processes, make improvements, and consider new directions.
While the various reviews will be looking for organisational reforms able to yield significant efficiencies and economies in the longer term, our Minister has also introduced a savings initiative to deliver $10 billion over the next ten years.
In his address to ASPI earlier this year, the Minister reiterated the Government’s commitment to increasing Defence’s funding by 3% real growth a year until 2015-16 - since extended in the budget for another two years to 2017-18.
He also said that the future environment is likely to mean we’ll need that 3% and more - with the ‘more’ needing to come from internal efficiencies and economies.
We’re looking at everything from inefficient practices and processes and duplicated activities to travel, conferences, unnecessarily expensive renovations and promotional items for internal audiences.
Only those aspects of Defence directly related to the preparation, deployment and reconstitution of our forces are excluded from the savings measures. In relation to everything else, we are looking hard at what we do, and how we do it, to decide whether the expenditure of public resources can be justified.
Defence has been generously funded in recent years. Most of the money has been well spent. Some has not. I know there is fat in Defence.
I’m reminded of this every time I see a coffee mug, mousemat or glossy publication with the aim of promoting Defence to its own people. Small things - but again, highly symptomatic.
I’m reminded of this every time I speak to my colleagues in smaller policy-only Departments in which attendance at conferences is a luxury that can be afforded only for the lucky - or possibly unlucky - few.
Every government agency is delivering financial and human resource efficiencies and economies, and Defence is not immune - nor should it be.
So we’re now identifying lower priorities and testing their importance against new ones.
We’re now taking the first steps towards developing a much stronger culture of efficiency and economy in Defence.
Angus and I have already identified, and the Minister has agreed, about $500 million in savings for 2008-09. We’re looking for another $500 million in 08-09 and have already begun examining efficiency and economy plans for the next nine years. I’m confident of finding the $10 billion the Minister asked for and considerably more - including through the deeper, longer-term, more strategic efficiencies likely to flow from the companion reviews.
The fourth key initiative is an external audit of the Defence budget. This will fulfil a Government election commitment to assess the true position of Defence’s finances.
The audit is an opportunity, not a threat, and one on which Defence needs to capitalise.
The audit will advise the Minister on the efficiency and effectiveness of the Defence budget and future risks associated with it. As such, it will provide external, independent validation of the deep reforms we expect to flow from the White Paper companion reviews and our savings program.
Defence’s ongoing program of reform supplements the other four initiatives.
All of the agreed 52 recommendations of the Proust Review will be implemented by the end of this year. The recommendations addressed several key areas of our business - governance and accountability, supporting our Minister and the Government, people management and business reform.
I’ve already touched on four areas of our business undergoing significant reform. More broadly, over the next 12 months, we’ll continue to roll out our new business model and governance framework, which will refine and improve our knowledge and risk management, customer-supplier agreements and performance reporting.
And a range of other initiatives are underway to ensure Defence delivers to Government the first class policy advice, and financial and business management, that I’ve been encouraging in my weekly messages to all staff.
I particularly want to highlight the major changes that I’ve made to the operation and membership of the Defence Audit Committee. My goal is to embed an integrated, uniform, enterprise-level risk management approach across Defence. The committee will focus on our corporate risks and controls, compliance and assurance processes, and continue to review the financial statements to ensure the recent improvements are sustained and enhanced. The new Audit Committee’s breadth of view will make it central to reform in every area of our business.
The final point I want to make about reform is that it doesn’t have a beginning, middle and end. While full implementation of Proust will be a significant achievement, we won’t be declaring victory.
For leviathan organisations like Defence, a culture of continuous reform is the only option.
Change is now
Angus and I acknowledge this is an ambitious agenda.
The development of a White Paper is a big enough job in its own right.
But it was clear to me after a short time in this job that a new White Paper, while absolutely necessary, would never be enough.
That if government gave Angus and me the opportunity to provide a strategic view of how the whole organisation should be configured to support the future ADF, we should seize it.
That if Australia is to have the Defence establishment it needs and deserves we have to institute deep and sustained reform.
So, how many paper towels does it take to wipe the dust off those parts of our business that have been neglected for too long?
They were sold and removed from Moorebank last week.