Examination of Witnesses (Questions 180
WEDNESDAY 21 MAY 2003
21 MAY 2003 SIR
Q180 Jim Knight: Your memorandum
envisaged those sorts of adaptations, deep strike, ISTAR, (Intelligence,
Surveillance, Target-Acquisition & Reconnaissance) roles.
Are these the limits of the other roles? Are there others which
Nimrod could satisfy?
Sir Peter Spencer: I could not
think of any off the top of my head, but I am not the expert.
I am not trying to get out from under. We can provide you with
an answer, but that seems to me to be a pretty powerful agenda
Q181 Jim Knight: Would expanding
Nimrod's role in such a way have implications for what other ISTAR
or deep-strike platforms would be needed?
Sir Peter Spencer: No. One thing
which has come into play very recently is the recognition of the
need, in the context of the way warfare is moving and the whole
approach to network-centric operations, to integrate each component
in the battlespace, to integrate it into the whole, the original
systems of systems context. One of the key areas of work which
has been really pushed through from the EC community, with support
from the DPA and others, is the need to have an integration facility,
which we are looking at now, so that we can not only demonstrate
with experiments the enhancements which a particular platform
will bring to the overall battle group, or try out various ways
of using it, but also help to de-risk some of the material aspects.
Integration is a big issue and integrating something like the
Nimrod into all the other assets would be important. It is a huge
scaled up version of what used to be done at the Admiralty Surface
Weapons Establishment at Portsdown, the land-based test site.
If you had a new bit of kit to fit into the Type 23 frigate, you
had to prove that it could work with the rest of that system and
obey the protocols. This, on a much grander, bigger scale, is
the way this will work in the future.
Q182 Jim Knight: It sounds as though
these additional roles would be quite a priority on the Nimrod.
The impression I received from your answers to Syd was that if
you did have further problems with Nimrod then you would perhaps
have to scale things down.
Sir Peter Spencer: That was a
hypothetical discussion. We both agreed that.
Q183 Jim Knight: Hypothetically then,
if that were to happen, do you currently have a take on where
the priorities lie in terms of which roles you would want to hang
Sir Peter Spencer: They are issue
for the defence staff, the equipment capability staff to determine.
They are still thinking that process through and we are not paying
yet. Clearly we will work with them because partly it will be
operationally driven and partly it will be a function of what
you can afford and how quickly you can do that.
Chairman: You are not out of the wood
yet, Sir Peter. We are now moving on to another system which is
not quite a 100% success as yet, putting it mildly.
Q184 Mr Crausby: Your organisation
has recently been forced to re-negotiate the contract for the
Astute submarine to the point where the MoD have had to plough
in an additional £430 million and BAE have written off another
£250 million of their own money. Is this not a disaster?
What exactly has been the problem with BAE Systems? Why have they
had so much difficulty using computers to design this submarine?
Surely they have enough expertise in computer-aided design?
Sir Peter Spencer: Is it a disaster?
It would be strange if against performance, time and cost I did
not recognise that it was a huge disappointment. In terms of putting
it into context, even with the amount of money which is being
negotiated, we will be purchasing these submarines at a considerably
lower price than the Americans say their nuclear submarines cost
them. I just put it in that context. The question is: was the
ambition we had when the contract was priced misplaced and was
the company's ambition in terms of their ability to use computer-aided
design, computer-aided manufacture, too great? I think the answer
to both questions is yes, with the benefit of hindsight. It is
a worked example of a point we have raised several times already.
We were in an era of believing that we could negotiate very highly
incentivised contracts and transfer risk hugely in one direction
and both sides at the time thought it could be done. The particularly
disappointing aspect of the Astute programme is the fact that
the difficulties had not been recognised at the senior levels
in the company. It is a story I am still looking into really,
but by way of example, somebody said to me that since the contract
has been let there have been seven different managing directors
of the company which was created to run Astute. That gives you
a feeling of lack of continuity. Certainly the metrics which you
look for in terms of design and build of submarines, when you
do them the old-fashioned way, are easier to spot than when you
are putting together a hugely complicated piece of design in computers
where you almost cannot fit it into your head and you only see
little bits of it on the screen. As other people have found, the
potential benefits are huge.
Q185 Mr Hancock: What are the benefits?
Sir Peter Spencer: The benefits
are that you reduce the time line.
Q186 Mr Hancock: You have not done
Sir Peter Spencer: I said the
potential benefits, if used well. The potential benefits, if used
well, are that you reduce the number of man hours hugely on the
design process and you actually produce a quality of drawings
out of design, which does not then have to go through a separate
iteration to produce production drawings in order to be able to
build it. So the expectation in the early days was that you were
going to virtually transfer from the electronic drawing office
to the shopfloor the detail you needed to construct a very complex
piece of machinery. I believe people honestly believed that could
be done. They under-estimated the skills which were required.
They under-estimated the difficulty. In terms of measuring progress,
it would appear with hindsight that there was some misunderstanding
over the fact that you had done an awful lot of design hours work
meant you had actually got that far through the programme. Let
us suppose hypothetically you said it was going to be 100,000
man hours to design and you had done 60,000, you might think you
were 60% of the way through the design process. With the benefit
of hindsight, if it took you 240,000 hours, you were actually
only one quarter of the way through the process. It was the ability
to understand that which was lacking and the fact that it came
out so late. They had already started the construction and they
realised that the design work was not keeping pace with the construction,
which then really brought this thing home to roost. There had
to be a point at which they stopped and took stock to decide how
they were going to get through it. The question was then raised:
to what extent is this wholly a problem for industry, which needs
to be sorted out or to what extent was there some part which the
Ministry played in this? This has been declared in the minute
which was given to you. It was recognised that to an extent, without
any liability being accepted one way or the other, this was an
agreement between consenting parties where both parties were working
against assumptions which turned out to be incorrect. In that
context there was a reasonable argument that the Ministry should
make a contribution to this. Importantly, we needed to make sure
that, as with Nimrod, confidence was restored in the company that
they had actually capped that risk, so they could then get on
more positively moving forward to finish off the design of the
submarine as opposed to damage limitation, worrying about cost
overruns and nobody being sure how it was going to end up. This
very damaging period of uncertainty needs to come to an end as
soon as it can and that is the process we are managing.
Q187 Mr Crausby: It is difficult
to understand why it will end up so much cheaper than the Americans'
when the Americans still appear to be so much further in front
of us from the point of view of computer-aided design. For instance,
the Americans claim that they can produce between 80 and 90% of
the submarine or modules outside the submarine, whereas BAE seemed
to be aiming for around 50%. It is difficult to understand how
in the end that will be the case that we will end up producing
a cheaper submarine than the Americans, especially when BAE are
now turning to the Americans for help. If this is the case, why
did the MoD not just use the US as a prime contractor who had
real experience in this field in the first place? May I just say
that I am not advocating that? It is just a question and not something,
as a British engineer, I am advocating.
Sir Peter Spencer: The fact that
they have run into this problem does not mean to say that they
are uncompetitive and unproductive in everything that they do.
Far from it. The productivity gains which have been achieved at
Barrow over the years, particularly in terms of production, are
admirable. I would not myself be prepared to associate with a
view which said that British ship building, or British submarine
building, was uncompetitive compared with the United States. What
I am giving you is a view which has been given to me from industry
having talked to international counterparts. They are genuinely
curious as to the sort of sums of money we are talking about.
We can look at that very positively, to say that in all of the
bits, other than this CAD-CAM, the thing was being done well and
efficiently and we are getting very good prices out of it. The
fact that General Dynamics are now involved is sensible: there
is a company which believes and can demonstrate that it has mastered
the art of this very complex and difficult CAD-CAM and it would
be very advantageous to us and to BAES to be able to employ that
expertise to get this thing moving. What we want to do is get
the thing moving and get to the end of the programme.
Q188 Mr Crausby: The Barrow workforce
do not feel too pleased with all that in the sense that they have
delivered lots of productivity over the years, yet as a result
of this they are now being told that they cannot produce surface
ships any more, they have to concentrate completely and absolutely
on submarines and that means another 750 redundancies or in that
region. The Barrow workforce, quite naturally, not producing surface
ships, wonder about the future. Are you satisfied that BAE's decision
not to produce surface ships at Barrow will help the Astute programme?
Sir Peter Spencer: Yes, I am.
I know Murray Easton well. He is a hugely capable, well experienced
ship builder with a fine track record of success. It is a great
relief to me that he is actually in the programme in the position
he is in. He is also somebody who passionately looks after his
workforce. I first met him when he was working at Cammell Laird
at Birkenhead in 1984 and I saw him address the workforce there
when they had a similar issue about the future of the yard. There
was no doubt about the leadership he brought to bear in terms
of winning the confidence of some pretty hard-bitten welders and
electricians, people who had heard a lot, been through a lot;
he actually related to them in a way which was tangible. They
trusted him to drive this thing through. He is not somebody who
does not look after his workforce. He does. He also needs to deliver
this programme. In terms of moving it around between one site
and another, we do have to leave these key strategic decisions
within the company if we want them to achieve the success on the
programmes and disentangling the knock-on effects is quite important.
Q189 Mr Crausby: I suppose when you
have to put in £250 million you have to do something. I am
sure that Murray will do what he can there. It is not a personal
attack on anybody but the workforce is going down and down and
down and is obviously very concerned about the long-term future
of Barrow shipyards, particularly as far as the surface ship facilities
Sir Peter Spencer: We will be
building more submarines.
Q190 Mr Crausby: Is it absolutely
certain that we will produce more submarines?
Sir Peter Spencer: We have given
a statement in that report as to what the current plans are.
Q191 Rachel Squire: May I pick up
your earlier comments about the alliance in respect of the future
carrier programme, something which, the Rosyth dockyard being
in my constituency, I have taken a keen interest in? May I ask
you whether there are any particular aspects of the alliance which
has been formed between the MoD, Thales and BAE Systems over the
future carrier that you think would be particularly helpful in
avoiding the sort of difficulties you have been describing in
respect of Nimrod and Astute?
Sir Peter Spencer: For one thing,
we have the combined intellectual energy of two companies. We
have more understanding of the risks in this programme than we
would have had with any one of them. We also have in the aircraft
carrierand I know that you interviewed Ali Baghaei, the
team leadera very well designed process of identifying
the risks of the various components of the carrier and the very
clear process of assessing the technology readiness levels in
each case to aim to get them to the levels now which we require
of level 6, ideally level 7 but perhaps level 6, before we make
the main-gate decision and in those areas where that looks to
be a difficult call, to have a clear fall-back position. I think
he mentioned to you the soft radios. So you go for very modern
radio equipment, but if by the time you place the contract you
cannot go for it, there is other stuff you can put in instead
and you just design it in such a way that you can have those enhancements
at some later stage. We already know that at the point at which
we place this contract, the design maturity of the carrier will
be more advanced that for any other warship we have placed. On
top of all of that is the sort of thing I referred to earlier,
creating your own luck. Of course things can go wrong and that
is why you have development programmes, but there is great conscientiousness
in looking at all of those things which could go wrong and at
what is in place to do it, so that at the point at which we place
a contract we are confident that the level of risk is containable.
Part of the discussion will be the value that industry puts on
that risk. If they are not persuaded that the level of risk is
containable, then the risk contingency will be unaffordable. We
will be very careful to ensure that we get the right sort of balance
between a manageable amount of risk when we fire the gun at the
beginning of the demonstration and manufacture contract and an
affordable amount of contingency to cover those risks and much
greater transparency and involvement between a real integrated
team with the MoD project team being part of it. We can then understand
how these risks get dealt with as we go through time and applying
the sort of techniques I referred to earlier of how we get a real
measure on progress in terms of earned value management and we
keep on looking forward to cost of completion, time to completion
in a way which flags up the moment something starts to wobble.
Then, if it is an issue that senior management needs to be involved
with because there is not sufficient design expertise, for example,
we pick up that signal as soon as we can and we head the problem
off, as opposed to trying to react to it after it has happened.
None of that will convince the sceptic that it will be all right
this time, because it is what we said the time before and the
time before that. All I can say is that we can demonstrate much
greater maturity of thinking at this stage and much greater proof
of the maturing of the technological solutions to the requirement.
Q192 Rachel Squire: On the basis
that this alliance model does work well, do you think it could
then be looked at as a useful model for other equipment programmes?
Sir Peter Spencer: If it does
work well, the answer of course is yes. If I am candid, we are
still learning what partnering actually meansbecause this
is a form of partnershipwhat it actually means in a grouping
where you have a public sector component which is a net donor
and a private sector component which is a net recipient. It is
how we draw up the arrangements to ensure that success rewards
each of the components equally. It is terribly easy to do these
theoretical models: it is turning it into a working arrangement
which is robust enough to cope when things start to go wrong.
Everybody is great friends when it is going well. It is when the
thing starts to wobble, when people start to worry about a time
or a cost overrun, that the test of whether or not you have something
different in place will take place. If it is a charade, it will
fracture into an old style finger-pointing exercise across a contract
"It's your fault, you pick up the extra money". If it
is done properly, everybody will say they do not want that to
happen, they want to solve this and they will be too busy solving
the problem so it does not degenerate into that. That may sound
rather idealistic, but you have to find some way of working more
like that more often. There are examples of projects where that
has happened and it has not all ended in tears and they have just
gone straight through it. It is just that because they are over
so quickly we do not have time to celebrate and we are too busy
chewing over the arguments in the ones which are staggering a
Q193 Rachel Squire: Sounds familiar.
To what extent do you consider that this alliance approach represents
a shift away from the sort of prime contracting which put risk
management in industry's hands and seemed to keep the MoD at arm's
length? How would you respond to the comments that this is the
MoD putting itself more in the position of having to share some
of that assessed risk?
Sir Peter Spencer: I would say
that is what we are trying to achieve, but we are still negotiating
the precise way in which it will be achieved. It is encouraging
to see the progress which has been made. We have taken two putative
prime contractors who were competing tooth and nail for a big
prize and suddenly said, "By the way, we're now all friends,
we're on the same team". To have come together so rapidly
has been a huge leadership achievement by the chief executives
of both companies, by Alex Dorrian and Mike Turner. That is reflected
in the working arrangements in the companies. Where we are all
feeling our way a little bit is how to involve the Ministry team
in that alliance in a way that everybody knows where the sensible
boundaries of responsibility are and where the liabilities are.
It is easy to have a feel in your mind as to how it should play,
but it is going to be very important to document in a way that
is unambiguous, so it does not end in tears later. I am not trying
to over-bureaucratise it, but you can see the point I am making.
Q194 Chairman: What is immensely
frustrating for us, and this Committee has been evaluating the
progress made by your predecessors now since 1979, is that screw-up
follows screw-up. We have been told endlessly that lessons are
being learned, we are now moving into Smart Acquisition, but some
of the foul-ups have a familiarity to them. Now you have been
in your job for three weeks, are you going to undertake some major
re-appraisal of each of the major contracts? All you have to do
is look at the National Audit Office reports and see where the
slippage is. Will you, in the next six, 12 months, however long
before any review you might make is published or at least is a
working document in the DPA, then when you come before us next
year be able to give us some assurance that we are not going to
go through what appears to be the inevitable cycle? A contract
is let, things start slipping, slipping again, you put it right,
it is not right, then the Armed Forces, and especially in your
case, because you have been on the receiving end of poor decisions
historically, get the stuff in, it does not work, it does not
work as well as it should, it is three years, five years, eight
years late. Do you think you will be able to have a real impact
on the process? It is in desperate need of reform.
Sir Peter Spencer: I agree that
it is in desperate need of further reform. Realistically with
projects which have contracts which were let a long time ago there
is a sensible limit as to the extent to which you can change.
You cannot retrospectively engineer reliability into a system
very successfully. You can do it up to a point. You cannot retrospectively
suddenly wave a magic wand over something which has been going
since the late 1980s and turn it into what you think a Smart Procurement
project would have out-turned. Unfortunately, we are still going
to be saddled with the painful consequences of these things as
they keep on registering slippage against the original agreed
in-service date and escalation over the original agreed cost.
What I do want to make sure is that we recognise two things. One
is that the people who are dealing with it today were not the
people who committed the original act. They are the people who
are mitigating the consequences and in many cases we have put
some of our very best people in there because it was so important
to get control of something which has turned into a monster. From
their point of view it is very easy for their efforts not to get
the recognition they deserve. They are actually rescuing all of
us from something which if it had not been tackled robustly would
have turned out far worse. In that respect, I am keen to make
sure that there is recognition of what they do and realism about
how long it is going to take to turn round the overall results
all the while they are being affected by programmes which continue
to come in late. All of the measures we have at the moment point
to the fact that the programmes which are being set up in a more
enlightened way are making measurably better progress. I go back
to my earlier point: is that measurably better good enough? That
is an important question to determine and to see how far we are
going to continue to put the bar up. If you looked at something
like Tomahawk, and I know that my predecessor has made this point
in front of this Committee before, it actually went through very
smoothly, very quickly, it delivered absolutely on time and in
budget. It was so successful it only ever scored once in any of
the big major project reviews and then it was in service. We know
we can do it. It is a question of finding out how we can do it
more often in the future.
Q195 Chairman: We managed to produce
Trident under cost. If we are capable of producing Trident, then
we ought to be able to produce Astute. This Committee decided
during the SDR that we would monitor the carrier programme on
an annual basis. We have had some excitement up to this point
in time, we still have nine years to go for the first and 12 years
to go for the second carrier before it enters service. What can
you do to ensure that this Committee, ten years down the road,
15 years down the road, is not going to be lamenting the fact
that the slippage date of 2012 is growing to 2015 and 2019 and
that 2015 will not be slipping to 2021? The Royal Navy, the Armed
Forces, want these carriers pretty quickly. I know you are taking
a rather novel approach to producing this aircraft carrier. I
know it would be futile for me to ask for assurances, but it would
be really helpful if you could just tell us the next time you
appear before us, that things are moving in the direction of successfully
producing these carriers to the quality required and to the timescale
and cost demanded. Do you think you will be in a position to give
us a good progress report next year that things are moving successfully,
no slippage and everything is hunky-dory?
Sir Peter Spencer: That is certainly
Chairman: We will have you here every
year, every single year, because this is too important to see
old mistakes being re-made. I know it is a difficult problem for
you. I am sorry we are giving you a hard time; we could be giving
you a far harder time. We will be watching.
Q196 Mr Jones: May I ask about the
Thales/BAE alliance. Some perhaps would describe it as a shot-gun
marriage. Certainly in the press over the last few weeks, there
have been various unattributable sources from both sides, though
one side in particular, arguing that the process is not working.
We heard when we had Ali Baghaei before us that he is quite happy
with the way things are going on. What do you see as your role?
Is it as a marriage guidance counsellor to ensure that it works?
Is it as somebody who is going to step in and ensure that the
couple do get on? This goes on for many years, so what do you
see your role as being? Is it going to have to be, as we are led
to believe, that some of the relatives on both sides are not happy
with the process still, that you are going to have to take an
aggressive stance to force them to live together?
Sir Peter Spencer: If we get to
aggressive stances, it is because plan A did not work out.
Q197 Mr Jones: Plan A being . . .?
Sir Peter Spencer: Plan A being
that the alliance works in such a way that both companies are
highly motivated to succeed. In that context, the arrangements
which the companies are forming between themselves and have already
formed are pretty familiar to me. They are not a million miles
away from forming a joint venture company, from doing a contract
that they would do for any one of their customers. They know how
to do this. The only thing which slightly caused a pause for breath
is whether or not they will be able to do it so soon after being
so hard in contention in competition. I believe that, all things
considered, they have made remarkable progress. The real test
is yet to come. The real test is when we actually enact this in
the form of an agreed contract.
Q198 Mr Jones: Is it not very hard,
when, for example BAE Systems, and certainly people like Mike
Turner, have made some very vociferous comments against the French,
suddenly then to find out that they have to go into partnership,
in this case marry a French partner, to ensure that the partnership
works? Is there not a possibility that BAE Systems are still hankering
after the fact and that if they make the relationship so difficult
somehow you will draw a line and say it has not worked and therefore
BAE Systems will become the prime contractor?
Sir Peter Spencer: I cannot speculate
as to what may or may not be in BAE's senior managers' minds.
I have seen no sign of that and I have talked to Mike Turner.
I did not detect any overt, anti-French feelings, in fact his
company deals with the French in all sorts of arrangements. They
have perfectly successful everyday co-operative arrangements with
French industry in a whole range of areas in that company, as
they do with other European nations, as they do with the Americans.
The key to this is to recognise that the in-service date is very
important, as the Chairman has just emphasised. We are not going
to have the time to achieve success against that in-service date
if this thing does not settle down into an harmonious relationship.
Will I be the marriage guidance counsellor? Yes, in a sense I
will, because, in the same way that if marriages fall apart there
is more cost to the taxpayer in supporting the wreckage that results
from it, if this falls apart there would potentially be more cost
to the taxpayer. Of course I will be engaged in that, as I would
expect Dorrian and Turner to be engaged, but then in fact the
three of us already are and that is within 21 days of joining.
That in itself is demonstrable proof of where I see this in my
order of priorities.
Q199 Mr Jones: At what stage will
you come to the conclusion that it has not worked or that there
are problems in the relationship?
Sir Peter Spencer: I have no cause
to think that would be the case. I could not speculate on that.
I am expecting, on the basis of the assurances that have been
given by those two companies and on the basis of evidence that
they are perfectly capable of forming harmonious and constructive
and successful partnering arrangements in other contracts, there
to be no reason they should not do this on the carrier; in fact
there is every reason why they should want to do it. They recognise
that this is such a huge slice of business for both of the companies.