Defence Business: Standing behind the budget | ADM Jun 08

1 June 2008

ADM has the occasional guest column and this examination of defence project management from Bruce Ferguson of the Helmsman Institute for Project Governance is a look at the way defence does business from another perspective.

By Bruce Ferguson, Sydney

In my work I am frequently asked by executives and managers in sectors such as Finance, Telecommunications, Mining, why is the Defence budget so high?

Why do we need to spend on such expensive equipment and why do so many of the defence projects fail?

These questions come from educated and influential people.

It leads me to believe that in the public mind there is a lack of credible explanations about defence spending and defence projects.

We need a set of simple answers that will reset the perception about defence spending.

Here is the way I approach it.

Why is Australia purchasing such expensive military hardware?

The first assumption is that it is expensive.

The annual spend on defence is 2.4 per cent of GDP and ranks Australia as 70th in the world.

This ranks us behind Singapore, United States, China, France, and the UK.

We rank 68th in terms of force size, while we are the sixth largest land mass, and, by comparison, we are the 14th largest economy.

So, the better question is; how does the sixth largest land country, a country with one of the smallest population densities guards its population, economy and trade effectively?

Surely we need to invest in the tools to equip a small force to be mobile, highly skilled and extremely well equipped.

I like to think about defence as a country's insurance policy.

With the average total for all insurance industry revenue at 2.6 per cent of GDP, we pay about the same for insurance as defence.

Is that about right then, or possibly even relatively low?

The second question is why are we buying these things?

In Australia's case, the potential for invasion is never the main driver for the need for defence capability.

It is the necessity to maintain our international trade routes that really matters.

The lifestyle that we are so fortunate to have in this country is largely due to our commodities export together with finished goods import.

It is a much easier task for a foreign failed state to interrupt or harass our international trade through the use of short-range land based missiles, aircraft or small ships or submarines.

These actions are well within the capability of some emergent terrorist forces.

It is against these threats that we must measure our capability.

That is why we need mobile missile ships like the air warfare ships, the Frigate upgrade and the Anzacs (to protect our commercial vessels).

That is why we need strike fighters such as the Super Hornets, the Joint Strike Fighter (to provide coverage to ships, and to manage the threat from small vessels, missile sites and terrorist camps).

That is why we need the airlift capability, long range patrols, the heavy lift aircraft, and the amphibious ships.

The third question is why do defence projects go wrong and who is to blame?

Is it incompetence within the Defence?

Recent analyses conducted by the Helmsman Institute across multiple sectors places most defence projects at a much higher complexity rating on average than other government and commercial projects.

Defence projects deal with much higher levels of ambiguity, political issues and technological change.

However, even with this greater complexity, relative to other sectors of government and commercial projects, the performance rate is much higher.

The average cost performance blowout on a defence project is 5 per cent.

Most commercial organisations have as much as 40 per cent cost blowouts.

Schedule slippage in defence projects is relatively consistent with commercial projects with the same 50 per cent slippage in time.

Another consideration is how we measure the health of a project.

The government auditing standards, based on process adherence, probity adherence, contract adherence and decision making accountability, do not contain the key elements needed to indicate the health of a project.

This is not only an issue for Defence, this is an issue for all government projects.

Audit, by focusing management on the wrong issues, causes additional problems for projects.

The focus must shift from compliance and retribution, outcomes and governance.

Finally, when we look at the skills needed to project manage such complex projects, the defence sector pay scales just don't compete.

The average salary for a defence project manager is in the range of $120-$150,000.

This is to manage a project that may be billions of dollars. In the Finance, Mining and Telco sectors a similar role will earn the project manager $400,000 - 600,000 per year, for a project that may cost $100-200 million.

The research at the Helmsman Institute over the last five years has shown that appropriate governance, together with proper project skills improves project performance by up to 40 per cent.

It is my view that the public debate on Defence spending needs to come from a supportive view point, and I hope some credible explanations on key defence issues can be the starting point.

Bruce Ferguson is the Chairman of the Helmsman Institute for Project Governance.