The demise of the Defence Materiel Organisation
17 Apr 2015|

Following the recommendations of the First Principles Review, the government has agreed to move the quasi-independent Defence Materiel Organisation (DMO) back into Defence. In its place will rise the new Capability Acquisition and Sustainment (CAS) group—effectively a pared down version of DMO with its top layer of management removed, but with substantial extra responsibilities in logistics and capability development.

The report’s language is interesting; the DMO is to be ‘disbanded’, which sounds like what you’d do with an outlaw motorcycle gang. That might not be accidental—DMO has made more than a few enemies over the years.

In 2003, the Kinnaird Review of defence procurement then recommended the establishment of a fully independent ‘executive agency’ to undertake acquisition and sustainment. The goals of the proposed separation from Defence were four-fold:

  • a more business-like relationship between DMO and Defence to support ‘clearer lines of authority, accountability and rewards for performance’
  • ‘more flexible remuneration arrangements’ to ‘attract and retain high quality project managers’
  • a separate identity so that DMO could ‘rapidly transform its culture and develop the commercial focus it needs’
  • give the head of DMO ‘sufficient power to be able to recommend against project proposals that do not have adequate risk analysis or are not fully costed’

Executive agency status was judged to be a step too far and, following push-back from Defence, the DMO was established as a financially-independent ‘prescribed agency’ in 2005. As a result, DMO was neither fully independent of Defence nor fully part of it. Nonetheless, the four goals were retained.

A decade later, here’s what the First Principles Review had to say about DMO:

‘The Defence Materiel Organisation has also been beset with problems that have impacted its ability to achieve the required outcomes. It is clear that the organisation has become top heavy, complex and unnecessarily deep. This significantly contributes to Defence not getting the capability it needs at a reasonable cost or in reasonable time.’

So what went wrong? One way to try to answer the question is to examine the progress towards the four goals from 2003.

There’s no doubt that the creation of DMO catalysed a more business-like relationship between the three Services and DMO. What’s more, DMO has been able to work with the Services and defence industry to drive efficiencies. However, at the same time, tensions emerged between DMO and Defence over finance. The issues are arcane, but because DMO and Defence each have their own financial accounts what’s best for one is not always best for the other.

Progress towards more flexible remuneration has been limited. Although the first Chief Executive Officer was employed on a salary exceeding that of either the Secretary or CDF, things slowed down pretty quickly after that. The problem was not that the Public Service Act provided insufficient flexibility, but rather that Defence wasn’t about to let DMO poach its staff and drive up its salaries. Frustrated, DMO did the only thing it could to get around the roadblock; a new layer of deputy secretary managers was born. Even then, the ability to attract the best talent from the private sector remained incomplete.

In terms of building a greater commercial focus, we’re confronted with conflicting data. There’s no denying that DMO has done a lot to professionalise and upskill its workforce. In addition, progress was made in establishing performance-based contracts, especially after the introduction of ‘smart sustainment’ in 2009. On the acquisition side, DMO was certainly a more formidable counterpart when it came to dealing with industry than its predecessors. And notwithstanding claims to the contrary, DMO has been very effective in delivering project within budget (though schedule remains a work in progress). Nonetheless, the First Principles Review believes that much more can be done via a ‘smart buyer’ approach with the private sector playing a greater role in managing both acquisition and sustainment.

Finally, if there was tension between DMO and Defence over financial matters, it was nothing compared with the rancour over whether DMO should provide independent risk assessments to cabinet submissions dealing with major projects. And there were other turf wars, such as the tussle over whether DMO’s financial workforce should be absorbed into Defence ‘shared service’ regime.

Would things have turned out better if DMO had become a fully independent executive agency as recommended by Kinnaird in 2003 and again by the Mortimer Review in 2008? Who’s to know? Greater separation may have prevented the squabbles over finance, staffing and advice to government, but it may have also introduced a different set of problems.

In the end, DMO had few friends. Sooner or later, something was going be done to reduce its power and independence. We can only hope that the pendulum has not swung too far back.

No doubt champagne corks are popping in the executive suites of defence industry as they look forward to dealing with a weakened contractual counterparty. But it must be a bittersweet victory for the folks over at Defence who will now have to take responsibility for the things that used to be blamed on DMO. Sometimes you’ve got be careful what you wish for.