0 Capability Investment & Resources Division Defence Capability Plan (DCP) Challenges in managing the portfolio: Doing the same for less How can portfolio

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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

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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

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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 1st or 2nd pass approved by Government.

• Internal to the Department, we manage a program over a longer ten year period.

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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 2012-13– 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.

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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

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DCP View: Existing Approved Capital Projects being delivered

Defence Capability PlanTen year view with Top 10 projects highlighted

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22

AMCIPAMCIP

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DCP View: Approved and Unapproved Capital ProjectsDefence Capability Plan

Ten year view with Top 10 projects highlighted

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22

AMCIPAMCIP

Remaining projects below theTop 10


Top 10 projects comprise the majorityof the DCP portfolio


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Defence Capability PlanTen year view with Top 10 projects highlighted

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22

DCP View: Defence Capital Program over ten years vs. Capital Budget





AMCIPAMCIP

BudgetBudget

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DCP Make-up: Four DCP capabilities represent almost 60% of total programme cost

% total programme cost

100

80

60

40

20

0

57% 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 5000

• 57 projects

• 99 projects

20 projects take up 80% of total programme budget, 99 projects take up 5%

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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

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Prioritisation framework built around two dimensions: strategic importance and urgency

What is the relative

strategic importance

of DCP projects?

What is the sequencing

priority?

InputInput

Force structure

Short-to-medium term preparedness

Interdependencies

Degree of urgency

1

2

3

4

• 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 DefinitionWorking Definition

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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

Schedulingtool

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

Prio

ritis

atio

n

info

rmat

ion

Prio

ritis

atio

n

app

roac

h

Integrated Decision Support Tool

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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

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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

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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

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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

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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

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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

CapitalBudget WorkforceForce

structure PreparednessProject

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 Data Guidance Data

Actual project spend

MinSub/ CabSub

Human Judgment

DCP Prioritisation

Portfolio Assumptions

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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

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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

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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

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QUESTIONS??

THANK YOU

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Rational of financial adjustments to capital estimates

Portfolio assumption Rational for adjustment Approach 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

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A range of planning rules are currently applied to DCP capital and NPOC estimates to mange inherent uncertainty and risk

Capital

NPOC

Project estimate Project provision Aggregate portfolio provisionCash

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

Pro

ject

pro

visi

on

Pro

ject

bid

Net

por

tfol

io b

id

NPOC base estimate

NP

OC

Bid

NP

OC

pro

visi

on

Por

t. N

PO

C b

id

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

Documents

0 Capability Investment & Resources Division Defence Capability Plan (DCP) Challenges in managing the portfolio: Doing the same for less How can portfolio