0 Capability Investment & Resources Division Defence Capability Plan (DCP) Challenges in managing the portfolio: Doing the same for less How can portfolio prioritisation be achieved? Tim Hogan – Acting Director Program Analysis

1 Capability Investment & Resources Division Topics DCP Overview and DCP 2012 Prioritisation framework and planning Financial Planning approaches in the DCP –Planning constraints and realities –Fitting more in – Management approaches –Planning risks Human Judgement in Prioritisation

2 Capability Investment & Resources Division DCP Overview The Defence Capability Plan (DCP) provides an outline of the major capital equipment initiatives that are planned for Government Approval. The DCP is developed taking into account that available funding guidance from Government, the delivery schedule required for the capability and the capacity of Defence and Industry. The Public Defence Capability Plan (DCP) 2012 is a five year rolling ‘working’ capital investment plan of Australia’s military capabilities. It lists the projects that have yet to be 1 st or 2 nd pass approved by Government. Internal to the Department, we manage a program over a longer ten year period.

3 Capability Investment & Resources Division DCP 2012 Overview Minister Smith directed a full review of the DCP in July 2011 driven by realignment of the DCP by programme slippage and reduction to over-programming as a DCP management principle Defence announced Budget –Removed $3.5 billion of Forward Estimates funding –About 35 percent of funding –Affected around 75 projects The DCP 2012 incorporates five main outcomes: –Government’s key strategic priorities, over the next 2-5 years –Reducing over-programming and over-promising –Is coherent –Is achievable and executable –Underpinned by robust set of initiatives Further pressures identified requiring rigorous analysis as part of 2013 White Paper.

4 Capability Investment & Resources Division DCP Prioritisation Challenges DCP planning is a high-stake complex process which requires satisfying several competing objectives under the given constraints External and internal threats exist to DCP planning DCP prioritisation is dominated by the ‘big four capabilities’, thus ‘orchestration’ of the DCP becomes more complex Need a balance between operational priorities vs. available budget Similar challenges Industry may face, but operating in a unique fitness landscape

5 Capability Investment & Resources Division DCP View: Existing Approved Capital Projects being delivered AMCIP

6 Capability Investment & Resources Division DCP View: Approved and Unapproved Capital Projects AMCIP Remaining projects below the Top 10 Remaining projects below the Top 10 Top 10 projects comprise the majority of the DCP portfolio Top 10 projects comprise the majority of the DCP portfolio

7 Capability Investment & Resources Division DCP View: Defence Capital Program over ten years vs. Capital Budget Top 10 projects comprise the majority of the DCP portfolio Top 10 projects comprise the majority of the DCP portfolio Remaining projects below the Top 10 Remaining projects below the Top 10 AMCIP Budget

8 Capability Investment & Resources Division DCP Make-up: Four DCP capabilities represent almost 60% of total programme cost % total programme cost % of cost 80% of cost 95% of cost Project estimated cost as a % of total programme estimated cost 16 projects 4 strategic capabilities SEA 1000 LAND 400 AIR 6000 SEA projects 99 projects 20 projects take up 80% of total programme budget, 99 projects take up 5%

9 Capability Investment & Resources Division DCP Prioritisation Challenges The DCP looks to model this programming problem as multi-objective optimisation problem through: –Balancing Government’s key strategic priorities –Reducing over-programming and over-promising –Dealing with optimism bias in cost estimation –Human judgement What are the decision making trade-offs/ prioritisation decisions that can be made in the portfolio: –Delay –Remove –Accelerate –Re-scope –Merge/ Split Project Phases

10 Capability Investment & Resources Division Prioritisation framework built around two dimensions: strategic importance and urgency What is the relative strategic importance of DCP projects? What is the sequencing priority? Input Force structure Short-to-medium term preparedness Interdependencies Degree of urgency Alignment long-term force structure requirements as defined in the DPG Impact on Defence's preparedness in the next 10 years Number and criticality of dependencies on other capabilities (e.g., "glue" projects) Low: At least 2yr buffer btwn IOC & PWD Med:1yr buffer to 2 yr gap btwn IOC & PWD High: >2yr gap btwn IOC & PWD Working Definition

11 Capability Investment & Resources Division The aim of prioritisation is for a robust, repeatable results from a well defined approach and organised information A formal rigorous prioritisation model Prioritisation process High-level process steps for repeatable prioritisation exercise Outcome: repeatable and robust DCP prioritisation Prioritisation framework Urgency Scheduling tool Key Underlying Input data Forward Work Program Project financials Current System Retirement Date Initial Operating Capability Prepared- ness assessment Force Structure assessment Dependencies Strategic Importance Prioritisation information Prioritisation approach Integrated Decision Support Tool

12 Capability Investment & Resources Division DCP Planning Constraints and Uncertainty “Crystal ball dilemma” - Unfortunately, we do not know which projects will become more risky or more uncertain as they progress through the approval process. Financial constraints: –Most cost estimates that set DCP provisions are actually low quality –Building the DCP is based on uncertain baseline information –Projects with large cash demands can restrict DCP building activities and prioritisation of other projects Financial risks: –Underspend: poor estimates and optimism means we are at risk of not spending early cash –Overspend: unexpected large cash demands risk blowing DCP budget; go to jail under FMA Act

13 Capability Investment & Resources Division DCP Planning Constraints and Uncertainty Capability constraints: –Capabilities more difficult to accelerate –Project independencies with other DCP capabilities –Capabilities can driven by foreign partnership/programs Capability risks to the portfolio: –Capability not delivered: unacceptable capability gaps created, risk to delivering Defence’s strategic priorities –Capability prioritisation: less important capabilities approved, capability immature for Industry to deliver The challenge is to strike a balance between managing the risk and uncertainty in the DCP and applying an adaptive DCP modelling to allow the DCP to remain achievable

14 Capability Investment & Resources Division DCP portfolio management to “fit more in” Given the complexity, ‘orchestration’ of DCP, development of the portfolio can be inherently difficult as any other Capital investment program Objectives of portfolio management aim to adjust for DCP-wide financial uncertainty including estimation biases and financial slippage, and schedule uncertainty The DCP is constantly evolving, if somewhat volatile, and being updated to reflect: –Changes of capability priorities –Revised cost estimate/ acquisition strategies –Schedule adjustments –Approval of projects Portfolio modelling can be applied to allow for these ‘real world’ considerations

15 Capability Investment & Resources Division DCP portfolio management to “fit more in” Portfolio assumptions and modelling applied to the DCP for the ‘real world’: –Over-programming –Slippage –Portfolio contingency Given the DCP is due to ongoing review, there is a need to systematically capture information to inform the validity of current capital portfolio assumptions and modelling The aim of portfolio modelling is to strike a balance in the DCP to ensure: –Full use of available budget so no potential important opportunities are wasted –There is no over-spend or under-spend of the DCP Budget –Smooth development and progression of project approvals with a balanced option set to ensure both major and smaller projects are approved

16 Capability Investment & Resources Division DCP portfolio management risks Slippage modelling –If more early cash required, it means in short term that something else needs to wait –If costs blow-out – need offsets from elsewhere in the plan Delays on approvals –Without over-programming, we no longer have a buffer –Lose opportunity to use cash for capability outcomes/ too late to spend funds in time Contingency calls –Lean programming – ensure sufficient funding held to cover contingency needs –If someone needs contingency cash, they have a priority

17 Capability Investment & Resources Division Collecting this information together to target value-based DCP prioritisation Bringing together each of the elements to target prioritisation: –Schedule tightly linked to DCP –Resourcing pressures can be quantified –Capability impacts understood –Portfolio assumptions are linked to build a ‘plan’ Whilst bringing these elements help inform prioritisation, the value of each project cannot be measured on the same scale: Human Judgement required!!! Interdependency Planned end of service date Capital Budget Workforce Force structure Preparedness Project cost templates Price basis and forex Project schedule risk assessment Planning Rules -Out-turning -Slippage -Contingency Approval constraints Acceleration assessment NPOC Budget Project Information Project Prioritisation DataGuidance Data Actual project spend MinSub/ CabSub Human Judgment DCP Prioritisation Portfolio Assumptions

18 Capability Investment & Resources Division Human Judgement on Project Value Proposition The aim of human judgement on a project value proposition is to: –Understand the true nature of a projects value and its prioritisation –There is no over-spend or under-spend of the DCP Budget –Smooth development and progression of project approvals with a balanced option set to ensure both major and smaller projects are approved This framework provides portfolio prioritisation to a start state, but requires an element of human engagement to define the capability value proposition of each project The value of a Navy project cannot be measured on the same scale as a Army project. There is a need to consider the collective demands from Services to determine the value of a project

19 Capability Investment & Resources Division Human Judgement on Project Value Proposition Human engagement required with the expertise of relevant Capability Managers and Subject Matter Experts to convince the value proposition of a Navy project over an Army project for example Other human engagement considerations include –Threat level –Strategic Environment –Industry capacity –Politics –Capability performance requirements

20 Capability Investment & Resources Division Summary Given the complexity, ‘orchestration’ of DCP prioritisation can be inherently difficult as any other Capital investment program The ‘big four capabilities’ make up the majority of the DCP which determine how the DCP is shaped DCP prioritisation framework aims to maximise capability outcomes against an available Defence capital budget and a project information/value/data This framework provides portfolio prioritisation to a start state, but requires an element of human engagement to define the capability value proposition of each project

21 Capability Investment & Resources Division QUESTIONS?? THANK YOU

22 Capability Investment & Resources Division Rational of financial adjustments to capital estimates Portfolio assumptionRational for adjustmentApproach for DCP Slippage Slippage is intended to account for post- approval, non-expenditure of funding across the program Assumes that projects on average, across the entire program will be delivered later than expected or not expend funds at the rate expected This could be due to approval delays, external schedule delays Assume that planned program spend will be 30% less than Gross DCP Bid in next planning year Payback rates – slippage from a given year accrues to subsequent years at a rate of 10% to total in the first year followed by 30% in the three years after. Project contingency provision Budget held to account for financial impact of risk events Contingency is calculated at project level but held at portfolio level For budgeting purposes, 80% contingency is spread over last 30% of the project cost profile plus 1 year post end of spread Over (under) programming Difference between DCP Bid and DCP Budget Can be positive or negative in any given year Over-programming applied to account for delays to projects Negative over-programming applied towards back end of program to allow room for delayed project spend Objective of the DCP Review was to minimise the level of over-programming Reduced over-programming will require tighter management of project schedule to deliver against available DCP Budget

23 Capability Investment & Resources Division A range of planning rules are currently applied to DCP capital and NPOC estimates to mange inherent uncertainty and risk Capital NPOC Project estimateProject provisionAggregate portfolio provision Cash management Budget artefact Planning rule subject to focused analysis in this project Key Project base estimate Outturn escalation Base portfolio estimate - sum of NPOC provisions Project provision Project bid Net portfolio bid NPOC base estimate NPOC BidNPOC provision Port. NPOC bid Base portfolio estimates Slippage Portfolio contingency Project bid adjustments Project contingency Cost growth wedges NPOC bid adjustments Once provision made, cash management rules determine how much funding provision is held where within the organisation Over (under) programming Planning rule not subject to focused analysis in this project