Examination of witness (Questions 20 -
39)
WEDNESDAY 10 JUNE 1998
SIR ROBERT
WALMSLEY
20. I recognise that you are using words
generally here, but you said we should "contemplate"
and not we should do. Have you reached a stage where you have
decided what you should do as opposed to where you should think
about what you should do?
(Sir Robert Walmsley) The reason I used that word
was not that we do not do it in some specific——
21. That is why I picked it up.
(Sir Robert Walmsley) For every project we should
look at whether that is appropriate. For some it is not. If you
are introducing a new nuclear powered submarine it has all got
to be there or it will not work. If you are introducing a new
command and control system it is absolutely right that its performance
on introduction into service will need improving and we should
plan on that and we will and we do. So it depends on the project.
When I said contemplated that is what I was trying to get at.
22. I am thinking now of things back in
history like PINDAR, the control centre underneath Whitehall.
It started off as a project of a couple of years at very little
cost and it grew and grew and grew and eventually took something
like 12 years to complete, by which time the Russians had decided
they did not really want to fight us anyhow, so it probably was
not of much use. It took a long time to learn that. You have not
learned that lesson because that is the exception you are quoting
to your new contemplated rule.
(Sir Robert Walmsley) It is true to say that we
do now plan to apply incremental acquisition wherever it is appropriate
and I have mentioned two examples, one of where it is not and
one of where it evidently is. I think that particularly with computer-based
projects we have to look at a short time horizon or the technology
will be out-of-date before we get there and it becomes so complicated
that the business that you are trying to support with the computer
probably changes its aims or its basic method of operation while
you are struggling with the development. That was the PINDAR problem.
23. The people you are planning to defend
against are themselves advancing their equipment and so there
is always the temptation to try and get that stage further.
(Sir Robert Walmsley) I totally agree with that.
I also think that we cannot remember too strongly that you cannot
wish risk away. Technical risk needs management, so staged commitment
will remain an important part of this.
24. I generally accept these are real problems
for the Department. We have seen the recent spate of mergers in
the United States. They are becoming increasingly aggressive competitively.
We are becoming increasingly inadequate competitively on scale
issues. Therefore, having found how complicated it is for you
to manage projects within a national context we are now increasingly
become dependent on multi-national projects. Eurofighter lost
three years on phase one and it increased by 23 per cent in cost
terms, if I remember our hearing on that and our international
competitors could not quite agree on which were the best control
techniques and so on. How far do you think we in Europe are advancing
our ability to manage projects to compete in terms of efficiency
with the concentrated control that you have in the United States?
(Sir Robert Walmsley) We are advancing. I think
the success of Airbus shows that it is not impossible in Europe
to run a high-technology company in the most competitive market
in the world and succeed against the United States companies.
That tells me that it can be done. I think the relative success
of the United Kingdom in defence equipment exports shows that
our defence industry is not miles behind world standards either.
In terms of project management, we have to do something both in
industry and in government and so developing our people, as I
mentioned before, remains absolutely central to the improved performance
which we seek. As far as industry is concerned, it is very important
that the competitive spur is applied wherever possible as that
is such an incentive to introducing better manufacturing methods,
etcetera, etcetera. So I believe it can be done in Europe. I think
it depends on developing people and I think competition will continue
to have to play a part in that.
25. How far do you think you have been successful
in trying to encourage British industry in adopting BS 6079 as
the automatic visa into the American market for their products?
Has British industry taken it on board? I think you said you had
a two-year target for trying to get British industry to accept
the advantages of going along that route. Have they responded?
(Sir Robert Walmsley) I think it is best if I
do not know something to make it quite clear that I do not know
it. I simply cannot comment on BS 6079 because I am not aware
of it. I may know the subject but I do not know the number.
26. Earn-value analysis?
(Sir Robert Walmsley) Yes.
27. EVA is within that.
(Sir Robert Walmsley) I think this is very important.
Earned-Value Analysis seems to me to give us the prospect of an
objective way of measuring progress on projects. I am very keen
that we should follow the lead that the United States and, indeed,
Australia have taken in mandating its use on major projects. I
have recently been making clear at the few opportunities I get
to make public speeches on these sort of subjects that I am an
adherent of Earned-Value Analysis. I think it is a very valuable
modern project management technique which we will increasingly
adopt.
Mr Williams: Thank
you very much.
Mr Campbell
28. Good afternoon, Sir Robert. I wonder
if I could take you back to one of your earlier answers to the
Chairman. You list the causes of delay as specification changes,
programme alterations, budgetary adjustments and you mentioned
specifically inflation. How do you react to comments from the
Defence Manufacturers' Association that despite these problems
the industry is hugely successful in exporting its products and
by and large its customers are very happy?
(Sir Robert Walmsley) I very much welcome the
success of the British defence industries. I think that is a great
tribute to their marketing skills, to the products and indeed
to the support they receive from the Ministry of Defence, particularly
the armed services. I am hugely reassured when one of our suppliers
is successful in selling his products to someone else; that gives
me a good feeling that we are working with a good company. It
is also true to say that they very rarely undertake a major development
contract ab initio for a foreign customer. There are occasions,
but, by and large, they are selling products which either they
have developed for us or in some other way already exist. Therefore,
if technical difficulties arise in the course of development,
in the course of collaboration or as a result of inflation, a
lot of these are associated with the length of the R&D phase
of the project which usually is not characteristic of an overseas
sale. So I would say yes, off-the-shelf purchases, marvellous.
29. Nevertheless, they remain critical,
do they not, of the relationship still between the MoD and industry
in a wider sense? One example would be that Bowman had slipped
and I believe is not due until 2001 and yet outside in what one
might call private industry, there has been a revolution in communications
technology. Why is it that the MoD could not open up its practices
to take advantage more of what was going on outside?
(Sir Robert Walmsley) First of all, just to comment
on the suggestion that DMA criticised the relationship with MoD,
I think that is true, but I do not think it is by any means across
the board. I think we have a good relationship with our contractors
and I think it is increasingly one of trust and openness. I very
much hope that the DMA will not find any difficulty with what
I have said. As to Bowman, this is a hugely difficult undertaking
and I know I am accused of complaining that every single one of
my projects is unique, but with Bowman we have been trapped just
at the time of this huge explosion in the requirement for information
at the same time as we are introducing a communications system,
so there is no doubt that we have had to increase the capability
that Bowman is going to offer during the time of gestation of
this project. That has required greater investment and that in
a sense is what led to the collapse of competition because the
companies thought it was too big a risk that they would not obtain
the contract. It is actually March 2002 we are aiming at for Bowman's
introduction into service and that is a date which is constantly
in my mind and that of my senior staff, but I cannot pretend other
than that this is immensely difficult. What is unusual about Bowman
is that we are trying to combine voice and data on the same communications
network, but always giving voice a priority. That is not available
off the shelf in military communications. It is, I think, what
most armed services in advanced countries are seeking to achieve
and we rather expect that Bowman, if not the first, will certainly
be amongst the very first, so we are taking on a difficult task.
It is hugely important to the Army and I am acutely conscious
of that and we do have three very competent communications companies
working together on it, so I think we have got good people on
it, but I cannot say anything else than it is a challenge to deliver
this in time.
30. Can I move you on then from that to
another matter which I think was again raised earlier? The Ministry
of Defence, I understand, is receiving advice from McKinsey Management
Consultants and has been for the past few months. Could you tell
us how much that advice is costing?
(Sir Robert Walmsley) I will have to let you have
a note on that[13].
31. Could you give us an update on any of
the major changes that have either been suggested or have actually
taken place as a result of their advice?
(Sir Robert Walmsley) Well, I hope you will understand
my position, and incidentally McKinsey's contract is completed,
but I hope you will understand my position that their work was
undertaken as part of the Strategic Defence Review which of course
is subject to decisions and indeed announcements by Ministers,
so I cannot preempt decisions. What I can say is that a number
of the ideas which McKinsey's have suggested have been put in
the public domain by Ministers and I have mentioned twice openness
with industry, and industry of course have been working with McKinsey's
to help us to develop new arrangements for procurement. This really
takes me on to the partnership idea, and this is not cosy partnerships,
but it is constructive, tough partnerships which I think will
be even more difficult than an arm's length, adversarial relationship
and capturing that new environment will be very much part of the
future. The third thing which I think has been highlighted on
several occasions is that we need to undertake the procurement
with teams which represent the interests of all the stakeholders.
We have, I think, been rather compartmented on the Ministry of
Defence side so that the operational requirement was handed down
on a tablet of stone and the Procurement Executive accepted it
gratefully, asked for the money, and the industry were delighted
to undertake it. That meant that we were almost pathologically
indisposed towards creating the sort of trade-offs that everybody
does in their normal life if something they seek to buy is simply
too complicated or out of their pocket's reach. So I think integrated
project teams, which allow representation by all the stakeholders
and allow these type of trade-offs particularly between the requirement
and risk and cost, will be very much part of the landscape once
we are through and into the implementation of the Strategic Defence
Review.
32. That is very interesting because it
partly answers the next point that I wanted to move on to because
you will probably be aware, if you take, for example, firms wishing
to compete for refits for RFAs, that there has been a criticism
in the past that there has been conflict between what one might
call the military and civilian wings of the MoD and firms who
have been very critical to me of the lack of forward planning
and the fact that tenders were put out at very short notice and
put some of those firms in difficulties to be able to tender,
but also it was very much a case of hit and miss as to which yards
were available to take those tenders, so, from what you say, hopefully
that is beginning to be addressed. It is not just the relationship
between the MoD and industry outside though, is it, but it is
the working practices of the MoD itself? How, for example, has
Abbey Wood, which you have said now has the consolidation of resources
and manpower there, how has that systematically or structurally
changed in order to get rid of this conflict or friction between
the different aspects of the MoD?
(Sir Robert Walmsley) I think it has made a very
good start, but I think the other side of the coin is that we
have quite a long way to go and I did perhaps not make clear when
I talked about stakeholder teams that I meant the range of stakeholders
inside the MoD, operational requirement staff, Procurement Executive,
the technical staff who advise them all whether it is a good idea,
the front-line user, and it is fundamentally important that they
should be content with what we are buying, and a range of other
stakeholders in MoD, so I absolutely support that. At Abbey Wood,
I think, we have made a very good start by taking perhaps the
most important group that is external to the Procurement Executive
and that is the staff and those officers responsible for supporting
the equipment in service, so the people, so to speak, who are
going to be given this equipment once it is in service and will
have a responsibility to maintain it already are represented in
all our major project teams at Abbey Wood. We want to build on
that now and get a wider range of Ministry of Defence stakeholders
routinely in what one might call integrated project teams, integrated
because they have industry where they are not in a competitive
phase, and all the Ministry of Defence stakeholders involved in
the team pulling on the same piece of string.
33. Can I just then finally go on to something
that you said to Mr Williams in answer to one of his questions
about project management at the European level and could I invite
you to perhaps comment on these reports this morning of the criticism
which has been made of the Horizon project which I understand
was to replace Type 42 Destroyers and has been described as the
"longest, most expensive and least effective international
naval project in history"?
(Sir Robert Walmsley) I think it was "becoming
a scandal" and it was described as that by the very distinguished
editor of "JANE's Fighting Ships" in his preface to
the new edition. The first thing I would say is that I do not
believe that the common new generation frigate is a scandal. It
does not cost any more now in our estimates than when the partners
first put this project together. I would also like to quite quickly
emphasise, contrary to the press report today, that very substantial
successful efforts are being made to ensure that the Type 42 Destroyers,
including their main armourment, the Sea Dart missile system,
are modified and improved to meet the threat that exists today,
but they will need replacing, that is absolutely undeniable. What
the article in the press did not comment on was that it is the
replacement for the Sea Dart missile system that is so fundamental.
It is the weapons system in a sense and not the ship. The weapons
system is called the Principal Anti-Air Missile System (PAAMS).
We are procuring it with France and Italy just as we are procuring
the ship. PAAMS depends on the Aster missile largely being developed
in France and Italy and more than half of those Aster missiles
will eventually come to be used by the French and Italian armies
and, indeed, they will be deployed in the Charles de Gaulle
aircraft carrier by France. So that programme is progressing and
in my view it will be the timetable for bringing PAAMS to full
operational capability that will dictate the timetable of the
ship. We are getting very close now to placing the full-scale
engineering development and initial production contract for PAAMS.
We hope to do that in the autumn of this year. We also hope that
if we do that we can move on to order the three first of class
ships in the first part of next year. Building frigates is not
difficult. Designing, developing and improving their weapon systems
is what has consistently caused us difficulty in recent years.
That is why PAAMS is the key to this and the common interface
between PAAMS and the three ships will allow the three countries
to share the non-recurring costs associated with developing the
equipments along both sides of that interface. I think it is the
best way ahead. I think the article was slightly ungenerous, but
if you are writing a preface to "JANE's Fighting Ships"
that runs to eight pages and one paragraph is on this then it
is not surprising it hits the headlines when the word "scandal"
appears in it.
Mr Campbell: Thank
you.
Chairman: This Committee
is very interested in score keeping and since you were born in
Aberdeen you might be interested to know the score is 1-1!
Mr Clifton-Brown
34. On that note, Sir Robert, can I ask
you a slightly more technical question and take you to paragraph
2.21 and talk about the new Hercules replacement C-130J and quote
the report and say, "... the extent of the projected delay
is not yet clear". Could you tell us what the up-to-date
position is?
(Sir Robert Walmsley) The up-to-date position
is we expect the first aircraft to be delivered to the United
Kingdom by the end of July. There are 25 aircraft in the order
and the first seven cover the period up until the end of May next
year, with the remaining aircraft coming in the year thereafter.
So we get them all by May 2000. The first one comes next month;
I think the second one comes at the end of September. In other
words, the first seven are in the country by May and the remainder
come in the following year.
35. Can I take you on to the bottom of paragraph
2.27 on page 24 and quote to you paragraph 8: "BAe's position
as the design authority for the aircraft meant that the Department
could not easily award the integration work to an alternative
contractor. As a result the Department were unable to bring full
competitive pressure to bear on the costs of the integration phase.
The Department are now conducting a review into the issues relating
to design authority status." This has been a problem before,
the difference in costs between the updates on the Jaguar where
your Department held the design authority as opposed to the Tornado
where it did not. The cost difference was huge. Would it not be
possible in future contracts to hold the design authority with,
say, DERA holding all the detailed drawings and possibly subcontract
out any detailed design authority problems when it came to updates
and thus save a considerable sum of money when these things came
along?
(Sir Robert Walmsley) I think we should always
bear that option in mind, but I think it would be more applicable
to relatively simple updates than it would be to something as
complicated as this programme here, the JTIDS, Joint Tactical
Information Distribution System for the Sea Harrier. The problem,
as I think the report makes clear, is that we have run into the
usual computer capacity difficulties. There is more processing
power required than can be sensibly managed on the aircraft's
existing computers. This is an issue in which I would not feel
comfortable with handing the design authority to DERA because
the totality of the aircraft's fighting capability is an immensely
complex issue with issues for air worthiness for which BAe are
the competent authority, there is no doubt about that, and for
which I feel very much more comfortable having at least the prospect
of a taut commercial contract between me and an industrial organisation
rather than having, so to speak, our own fingers very close to
the turning mangle.
36. What is the MoDPE doing to ensure adequate
liquidated damages clauses are included in contracts so that the
affected service is fully compensated for any overrun on costs
or late delivery?
(Sir Robert Walmsley) First of all, I think we
need to pay more attention to it. Part of that depends on us understanding
the costs that we incur as a result of non-delivery of whatever
it is we have asked for. That sounds a simple question, but the
moment you start to look at the costs of running the equipment,
particularly when the replacement is planned to take several years
so there are no fixed costs of ownership which you get rid of
when the first replacement article is a little bit late, it becomes
quite difficult to ascertain the costs. I think it is true, it
had better be true, that when we move into the new resource accounting
and budgeting regime we will get a better handle on those costs.
Given that, I think we then need to be very careful, wherever
possible, to relate the liquidated damages to the costs which
the late appearance of the article forces us to incur. That is
the purpose of the liquidated damages. The second thing is that
we need to be careful to collect them. We have, and I certainly
take the responsibility for this, allowed ourselves to wait until
the delayed article eventually appears before agreeing some of
the liquidated damages and this is a matter of practical convenience
in a sense because if the liquidated damages clock up at such-and-such
a rate per month, perhaps half a per cent, how do you know how
much you are eventually going to require? We have now changed
our procedures, as I think is implied in the report, and we do
now as a matter of routine have instructions in place to require
the collection of liquidated damages as they occur, even if it
means asking for a new cheque every month, to ascertain the costs
and then make sure we collect them.
37. So, for example, in the case of the
original Challenger 2 tanks which were 2.5 years late and technically
unsatisfactory there was a potential claim for extra costs of
£38 million to MoD sacrificed in a £3 million liquidation
damages indemnity claim. Can you assure this Committee that that
sort of leniency on suppliers will not be the case in the future?
(Sir Robert Walmsley) I hope it does not sound
like reversing my previous position if I say that we took a different
route with Challenger 2. We had the potential to levy substantial
liquidated damages on the contractor, but what we wanted was reliable
tanks and I took the view that we should attempt to modify the
original contract and impose more onerous conditions in the original
contract relating to retaining some of the payments on every tank
until a proportion of tanks, as they came off the production line,
had passed a reliability trial and waiting until all the support
arrangements were properly in place. We wanted to do that without
increasing the total price of the contract because we did not
have the resources to do that and it seemed to me far more sensible
to incentivise Vickers to produce reliable tanks at the earliest
possible date with the proper support equipment without varying
the price of the contract and delay liquidated damages, so we
took that different option. I cannot pretend I am proud of it
because the original contract could have done more to incentivise
reliability in the first place, but I think it was a practical
reaction to a difficult circumstance and I am very happy to say
that the tank is arriving in service this month.
38. I am sorry to appear slightly myopic,
but I am going to ask you one more question about the liquidated
damages. I am not a lawyer, but it is my understanding in contract
law that the contractor, the purchaser, is responsible for reducing
liquidated damages wherever possible. I do have information that
your Department is not always as co-operative with suppliers as
it might be in trying to resolve problems in order to reduce liquidated
damages. Can you assure this Committee that you are looking into
that aspect in order to try and expedite these contracts in the
best possible way?
(Sir Robert Walmsley) I am not aware of a detailed
problem in relation to that, but I absolutely recognise that where
you are going to claim money in compensation from somebody, one
has a duty to minimise one's own costs. That is a very simple
and reasonable proposition and I think it is well recognised by
my people. If they do not, they will not be able to successfully
claim back all the money which they think they are owed, so for
me openness with our contractors, but tough negotiations and doing
it as quickly as practicable are all part of better procurement.
39. What is your MoDPE doing to use its
commercial position in negotiating with suppliers under the fitness
for purpose and durability tests under the Sale of Goods Act and
what is it doing, as a normal commercial contractor would do,
to withhold payment where there are clear breaches of contract,
in other words, using MoDPE's position in a more commercial manner
than a normal contractor in industry would do?
(Sir Robert Walmsley) We have relied for years
on our rights at law. We have termination clauses in our contracts
and if things are not working, we execute those and we have immense
squabbles with contractors in the years that usually follow such
an unhappy event. I think there is something to be said, rather
than the Sale of Goods Act provisions, for looking very carefully
at the possibility of what one might call "no quibble guarantees",
and the reason for that is that you do not spend years arguing
about who gets the money, but it is quite clear that if a defect
occurs within the first X years, it is the contractor's duty to
correct it and perhaps to correct it, as in the case of TUL/TUM,
across the entire fleet of vehicles regardless of whether the
design fault has actually translated into an actual breakdown
of equipment. We sometimes call that an "express warranty".
It does seem to work well because you do not have arguments and
you get the kit fixed. I am keen on it and I try to incorporate
more of that type of thinking across the Procurement Executive.
13 Note: See Evidence, Appendix 1, page 19 (PAC 343) Back
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