Examination of Witnesses (Questions 60
- 79)
WEDNESDAY 14 NOVEMBER 2001
MR KEVIN
TEBBIT, SIR
ROBERT WALMSLEY
KCB AND MR
STAN PORTER
60. How is the efficiency measure and monitored?
Have you got a software programme? Do you feed this into a system?
Are you comparing a system job after job? How do you know if there
is efficiency?
(Mr Porter) In essence this is what the post-costing
exercise tells us. It tells us how efficient the contractor was
in undertaking the work. For example whether he introduced new
processes that made him more efficient, whether he was able to
complete the task for less manhours than was the case previously.
To the extent that we identify those issues, then the staff in
the Directorate of Pricing who, as was said earlier, have a detailed
knowledge of the company, of the sector of industry that they
are dealing with will register that information to inform their
future estimating of work with that particular supplier.
61. These staff are they accountants, on the
financial side or do they understand the technical side as well?
(Mr Porter) The Directorate of Pricing staff include
both professionally qualified accountants and technical cost engineers.
(Mr Tebbit) But they are within our organisation.
62. We use this funny thing called NAPNOC for
contracts worth more than a million pounds. What do you use if
they are less than a million pounds?
(Mr Porter) In essence exactly the same procedure
but perhaps not with the same bureaucracy associated with it.
63. What is the total amount of contracts under
one million pounds, what does that total up to, do you know?
(Mr Porter) We place on average nearly 50,000 new
contracts each year and the vast majority of those will be under
a million pounds, certainly in excess of 90 per cent, by number.
I could give you a more accurate figure if you wish.
64. Does it work out that it is 8.5 billion
pounds under?
(Mr Porter) No. It will be a relatively small sum.
In terms of the contracts worth less than a million pounds, the
overall value would be about 10 to 15 per cent of the total of
our procurement activity.
(Sir Robert Walmsley) I have some figures here which
might be helpful. We segment contracts by the value appropriate
to the seniority of the person who is entitled to sign them, that
is the way we do it. As it happens we bridge the gap between £250,000
and £2.5 million, that is one segment. In the year when we
had 47,000 contracts, I just put it in round number terms, we
had just under 2,000 of these contracts between a quarter of a
million and two and a half million and they totalled up to £861
million.
65. Quite a large amount of money, is it not?
(Sir Robert Walmsley) Yes.
66. How much has this NAPNOC saved us since
1968? Have you estimated?
(Sir Robert Walmsley) It is very hard to tell because
we do not run a parallel universe. I often wish we could say how
much something had saved us. What I think it did was to introduce
this discipline of not placing a contract until you had agreed
a price. However hard you may find it to believe we used to let
contracts on a "price to be agreed" basis. What that
effectively means is that a contract is churning away and all
the costs that the company has incurred, when it comes to equality
of information, are there on the table; there is no argument about
those, and there is not much incentive on the company to keep
those down. I would guess (and it is a guess) that you would save
about ten per cent because that is the figure that we use as a
rule of thumb on competition. If you do not have a competition,
if you do not do anything, then it will cost you ten per cent
more and NAPNOC tries to replicate that pressure on companies
to be efficient. As Mr Tebbit said earlier on, settling the price
at the beginning is a fantastic incentive on the company to improve
their performance because the better they do the more profit they
make, subject to that ten per cent remark you made about post-costing.
67. Most industry costs as you say are falling
due to improvements within the manufacturing methods over the
last decade or more, probably greater than ten per cent, so why
should you not be looking for a greater fall then ten per cent?
(Sir Robert Walmsley) I was trying to compare the
price we had got from NAPNOC as compared with the price we would
have got if we had not done NAPNOC at that time.
68. So this ten per cent is additional to the
actual costs that have been falling anyway?
(Sir Robert Walmsley) I do not want you to get too
fixated on my ten per cent. I am saying that if we did not have
NAPNOC, if we just priced the thing at the end effectively on
a cost-plus basis, my instincts tell me that it would cost about
ten per cent more.
(Mr Tebbit) We are assuming at the same moment in
time in other words, whether it was ten years ago or now—both
at the same time.
69. We have progressed in general over time
and things change and that is one of our problems. It is a major
problem. You talk about partners and I notice when you involve
partners you go into a partnership arrangement. When you made
this decision to go into a partnership you must have undertaken
some quite extensive studies as to this as the way forward and
you must have had some methodology, some risk based assessment,
as to what you were getting into.
(Sir Robert Walmsley) Perhaps I can give you an example
which might help. We used to buy ammunition in three-year lots.
We bought enough ammunition to use for practice or for replenishing
that used in operations over about a three-year period. Exactly
as you suggest, we went to the contractor, who was quite often
Royal Ordnance, and we noticed that their export orders were really
good at the beginning of the three year period and then tailed
away as it came to the end of the three-year period. They explained
that to us in this way, that, as they got near the end of a contract,
they simply were not prepared to invest in new manufacturing machinery
to achieve the improvements that we talked about in case they
did not win the subsequent competition. We thought, with them,
this simply did not make sense. We ran a very big competition
for all our ammunition requirements which Royal Ordnance won.
We then said, "We would like to see if we can extend this
with you on a partnering agreement and the conditions of that
partnering agreement will be that we get a better price year on
year and you can imagine now that you have got a rolling three-year
contract." There is therefore always the incentive for them
to invest, and of course their performance has hugely increased.
They can take a long term view. The workforce have an understanding
that there is a career there, not something which is going to
dry up the year after next or which has got these tremendous peaks
and troughs of good news and sad news. To a very large extent
we tried to do this to align their objectives, profits, competence,
exports, with our objectives, which are better quality and of
course a better price year on year. I think that is a real partnering.
I do think it is a very dangerous thing to imagine it is an easy
thing to do. It should be at least as tough a relationship as
a fixed price contract. There should be very clear reasons for
exiting from it too.
70. So is there a distinct difference between
a partnership arrangement and a sole source arrangements?
(Mr Tebbit) Oh yes, very different. The thing about
a partnership is that you are looking for a long term strategic
relationship between you and the supplier to sort out the requirements
more cost effectively than otherwise. The other thing has nothing
about this long term perspective and it is in the long term perspective
that you can get the innovation and the economy of scale and the
gain sharing between the supplier and the customer provided you
have got important things in place, like open book accounting,
transparency of information, transparency of their own supply
chain, things like this, so that you can see what is going on
in their own cost structure.
71. So when you have a partnership you are now
both involved. What mechanism is put in place to ensure that the
Department does not feel it needs to support the supplier, even
though it costs more and they are maybe not getting the best deal
at that point; otherwise they will walk away and say, "We
have got this wrong"? How many times have you got it wrong
and walked away?
(Sir Robert Walmsley) That is a really difficult question
to answer. Some of these are quite sensitive because the ones
I can remember are rather current. All I can tell you is that
we have walked away from suppliers and we are in the process of
walking away from another one. I do not think I would want to
go any further than that.
72. Is there a mechanism there to go back in
and check on the fact that this is working?
(Mr Tebbit) You can have break points, you can have
review points, all those sorts of things.
73. Who checks it?
(Mr Tebbit) We check it.
74. But you are the Department. You entered
into the contract to start with in this partnership.
(Sir Robert Walmsley) The conditions should be quite
apparent to a contracting authority which is what the Department
is, and we will as part of a partnering agreement set out what
you could call exit criteria or anything else which would cause
both parties to move away from a partnering agreement. If those
are not explicit then I think we would get into that sort of trouble,
but so long as they are explicit it will not be just our judgement.
It will be our partner's judgement as well.
(Mr Tebbit) We have had quite a lot of these. For
example, there is the Defence Fixed Telecommunications Service
which has been done by a partnering arrangement. It is worth about
1.2 billion over ten years and the NAO looked at this and said
it was a very good example of value for money achieved through
a partnering arrangement. The Committee has had these sorts of
examples drawn to its attention from the MOD.
75. So all your stuff is now IT, it is logged,
it is open to all areas of the Department, so people contract
in in different sections and have access to this system. Do you
go across government?
(Mr Tebbit) That is building up. I would not say that
that perfect world has yet been achieved. We are building up our
database of experience on that sort of thing.
76. Do you look at any other departments? The
one that springs to mind is the Health Department because they
have contracts within the Health Service with almost sole suppliers
etc. Are they better or worse than you at negotiating contracts?
(Mr Tebbit) You are absolutely right that we work
together more these days and benchmark each other and the Office
of Government Commerce now exists to get departments together
to look at these sorts of issues.
77. Which of all the non-competitive projects
which you handle has been the poorest value for money?
(Mr Tebbit) The one we pulled out of which was Bowman,
I should think. That is the one I can remember most recently.
We got out of it and then competed it and we got a much better
result.
(Sir Robert Walmsley) Or some of these ones where
we placed them without agreeing a price to start with. I remember
being given the most terrible time by previous ministers and them
making us promise that we would never do it again. That is where
NAPNOC came from. It was bad.
Mr Gibb
78. I want to come back on two of the questions
that the Chairman asked Mr Tebbit. The first one relates to this
75 per cent figure. David Rendel touched on this as well but I
want to ask you a kind of inverse question really which is, as
we do get a more concentrated industry surely that 75 per cent
figure will decline in the next few years? Am I right and, if
I am, what do you see that figure declining to?
(Mr Tebbit) It could decline. I must say I do not
see a trend so sharp as to be able to predict where it will go
to. It is true there is a lot more merger going on, but on the
other hand the international competitive environment is moving
in the opposite direction. I would find it difficult to give you
a prediction about that. Another aspect is that as we go to prime
contracting more we look to the prime contractor to sort out his
own supply chain and therefore we have to ask ourselves whether
he, in sub-contracting arrangements (which are just as important),
is going for competitive or non-competitive approaches. It is
very difficult to give you a clear judgement. I would not be surprised
if it went down. I would not be desperately unhappy if it did
provided we still had got all of the disciplines in place to ensure
that we still get value for money, but I do not see a clear trend
ahead or a sharp decline ahead. It is going to be quite hard,
I suspect, to keep it up at 75 per cent. That is one of the reasons
why I would like to keep that measurement in place. As I say,
it is not a performance target we put on the DPA but it is interesting
information on the way in which the overall environment in which
we operate is moving.
79. What impact do you see increased partnering
arrangements will have on that number?
(Mr Tebbit) As I say, it does depend on the subordinate
supply chain that the partner uses as much as anything else.
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