Select Committee on Defence Minutes of Evidence

Examination of Witness (Questions 360 - 379)



Mr Jones

  360. The McKinsey Report raised quite a few issues but one of them was about the cultural barriers internal within the DLO. What are you going to do to take that point on board? Other issues it raises are matters like accurate time management in terms of accounts of people's time. It will be interesting to see what has been done about that. Also, it criticises quite heavily this inclination to hold on to excessive stock on the basis that you might need it at some later date. Have you actually addressed those specific criticisms raised in the report?
  (Air Chief Marshal Sir Malcolm Pledger) If I can try and take them in turn, the cultural issues are still a feature of a joint organisation, and I think McKinsey will also be careful to identify that the reasons for the formation of the DLO remain as accurate today—perhaps more important today—in our employment regime. The culture issue, of course, is not just what I will call an internal DLO issue, as McKinsey shows. This is a relationship with the myriad of customers that this organisation exists very definitely to serve. It is also a relationship with our suppliers, which varies according to the environment that they support. So there is no doubt it is still a significant barrier to what I will call the best—

  361. What steps are you taking to remedy that?
  (Air Chief Marshal Sir Malcolm Pledger) First of all, and I think you will see in here, there is a whole, new approach to procurement, to supplier base optimisation and to an engagement with industry that in particular areas will be more of a partnering solution, with risk management shared across the whole of the end-to-end process, rather than what I will call the horizontal out-sourcing type arrangements that have been in place already. I launched this with industry a couple of weeks ago, and part and parcel of that launch was, also, a very clear statement to industry that it required their perspective and approach to this to change as well, given the operational risk associated with what we deliver. So we have to work on that and we are already working on it with what I will call the integration of some of those suppliers into our organisation, the ability to data change but, also, to meet face-to-face to determine what the collective responsibility should be rather than the confrontational relationships of the past. At the same time I have a personal requirement to get a better understanding with my customers such that they understand that we live in the real world of military capability and that they have a role to play in setting those requirements with a clarity that today, perhaps, does not always exist, and that we have to, also, integrate those IPTs in a way that is not just environmentally based. One of the points from McKinsey was that best practice is there, the trick is to apply best practice when it was not necessarily invented here. So all those are on-going. We are trying to create different organisational structures, and the board has been reorganised to reflect that. As I said, we have got a change programme, we have champions in that change programme working across the whole of the DLO not just in the previous stove-pipes. So a whole range of endeavours on culture. You talked about accurate time management. I do not think that was one of McKinsey's, what I will call, real or significant findings.

  362. It was raised as an issue, which raises it in terms of public bodies that in industry know exactly what costs money, etc.
  (Air Chief Marshal Sir Malcolm Pledger) So it is mapping costs on to endeavour, not just time. I think, again, that is very fair, but I think that is why I have said that we have deliberately set out two parts of this regime: one to concentrate on delivering the product as currently constituted, and the second one deliberately to set up a change process that will identify the benefits and then prosecute. That is the means of getting that message across within the organisation and externally.

  Chairman: I think we will come on to more about McKinsey later, if that is okay. If there is anything that is rather sensitive we can always, if necessary, go into private session.

Patrick Mercer

  363. Sir Malcolm, good morning. You are grappling with a 20% efficiency target at the moment, with another £1¼ billion to be found in the next three years. I appreciate that it was set by your predecessor but can you shed some light on how that 20% was determined and whether you are confident it can be achieved or not?
  (Air Chief Marshal Sir Malcolm Pledger) I do not think I can shed too much light on the reason for 20%. I probably want to take refuge in saying that is the way that any large organisation, when it looks at rationalisation and bringing together significant output-oriented organisations, would want to start. There has to be rationalisation of considerable extent across that organisation. The 20%, of course, was an output target, not an input one. I would suggest that one of the motivators to that was to try to create a culture in the organisation that was focused on delivering the outputs rather than simply maintaining the current arrangements for provider regimes. But why 20%, I think I would probably have to come back to you with the reasons, other than to say that it is, of course, a stretch target that is entirely consistent with the principles of Smart Acquisition.

  364. It is not plucked from the air, surely?
  (Air Chief Marshal Sir Malcolm Pledger) When you put three organisations together and you have got a balance sheet of £22 billion and a total operating cost that is, even now, of the order of £9 billion a year, I am not sure it is not a reasonable aspiration to identify targets of that kind of proportion.

  365. Might it not have been that 20% was the sort of sum that would make the SDR programme affordable?
  (Air Chief Marshal Sir Malcolm Pledger) I have no doubt that a recognition that we could do things with better value for money within the DLO helped the SDR process, but I have got no reason to believe that it was the, what I will call, arrangements to make the bottom line match.

  366. How confident are you about achieving it?
  (Air Chief Marshal Sir Malcolm Pledger) Again, as I think I have said so far, one of my largest disappointments on taking over was the inability to show how far, really, we had gone along that path and, therefore, the fragility of the information systems that were in place to identify, prosecute and then measure the change that resulted. We currently believe that we are probably nearly a third of the way towards that target. I would have to say that the process changes and assessments that have come out of the best practice and its extrapolation across the DLO should go at least halfway, if we are successful, to achieving those targets. What we have also identified in here is the means then to move up that staircase from traditional logistic support into the availability or the contracting for output regimes. That is a very powerful tool to incentivise industry in a way that I believe will get us further along that path. So, certainly not complacent and a very stretch target remains, but I think we now have the identification of at least a large proportion of the savings that we do need to make, whilst improving effective logistic support to that military capability.

  367. Your new Strategic Plan identifies an "immediate priority" of "defining an output cost baseline and understanding cost drivers and levers". How can you be confident that such large savings are achievable when such a fundamental, first step has yet to be reached?
  (Air Chief Marshal Sir Malcolm Pledger) As I say, it is an output regime but it does not stop us still counting the input inefficiencies that we will make. So we do have the means to do that. The new performance regime that is also in here shows you how I believe we can do it. Nonetheless, the Ministry as a whole, of course, is committed to move to an output costing regime. The customers are already embarked upon that, and we need—certainly with our major customers—to accelerate that. We have targets to achieve by 1 April, but deliberately we have to measure on an output basis if we are to achieve this target from 1 April.

  368. Once your integrated project teams have sorted out their "costs of ownership", you expect them to achieve 30% savings over the next four years. Do you expect each and every integrated project team to find such a level of savings, as the Strategic Plan seems to suggest?
  (Air Chief Marshal Sir Malcolm Pledger) No, absolutely not.

  369. How are you going to balance that?
  (Air Chief Marshal Sir Malcolm Pledger) What we are embarked upon, as it says in here, is a clear process-based evaluation. Each of the business units are championing some of these streams and they then, because of their stewardship of the IPTs, engage with them to determine where the benefits accrue. I think, again, if you look at McKinsey, it becomes plain and apparent very quickly that the 80/20 rule applies, with some of these large IPTs potentially delivering the savings much more quickly than others. Therefore, we have to concentrate our resources and our efforts in those particular areas. That is already in place.

  Patrick Mercer: I know Kevan is begging to come in.

Mr Jones

  370. If you do not achieve this 20% target, it is legitimate for ministers to sack you?
  (Air Chief Marshal Sir Malcolm Pledger) Fine.

  371. That is what I find very odd. Whenever I set targets for the people I used to manage, one, I used to actually have some control over them. One of the rationales I always used to set was the fact that they were achievable. If you are saying you do not know, one, why the rationale was set and, secondly, it is not achievable, I think in your position I would be very concerned that if somebody does come round and say "You have not met these targets" you are going to have to have some damned good excuses and reasons why. Surely, it would have been better to start off by saying "This is not achievable". Frankly, we could have picked any figure out.
  (Air Chief Marshal Sir Malcolm Pledger) I do not think I said that. I think I said that I did not know why, necessarily, 20% was picked. I think I said I thought it was—

  372. But you are in charge of actually meeting this target. If I was in your shoes I would want to know exactly why it was picked. If I have got to meet it.
  (Air Chief Marshal Sir Malcolm Pledger) You may. I simply said that we are currently at a point in the transformation where we have recognised we have made 6%, that is 14% left. That is a stretch target that I accepted on taking up the appointment.

  Mr Jones: Why?

Patrick Mercer

  373. Did you challenge that at all?
  (Air Chief Marshal Sir Malcolm Pledger) No.

Mr Jones

  374. Why?
  (Air Chief Marshal Sir Malcolm Pledger) I did not see a reason to challenge it. We had already embarked upon that journey.

  375. Can I ask another question, then? If 20% is a figure you cannot justify—which I find remarkable that you take responsibility for—what is to say, then, that the figure for efficiencies could be higher than 20% and therefore it could be leading to inefficiencies? Could it not?
  (Air Chief Marshal Sir Malcolm Pledger) The second point you have made twice is that it is not achievable. I think I went through an explanation of the means that we have identified to achieve it. I think that is a fundamental difference from where we were a year ago.

  376. I am sorry, I think that is absolute nonsense. If you are actually going to achieve a target, first of all you need to know whether it is achievable and on what basis it is set (you have not got a clue, you said); secondly—okay, you are working towards it—from the public purse point of view, or an efficiency point of view, how do you know, if you do not know why it was set, if that is the ultimate figure? You might be able to save 20 or 30%. If you are only going to get a situation whereby you get 20% and then you lay off, is that not bad news for the taxpayer, if you can actually get, say, 30 or 40%?
  (Air Chief Marshal Sir Malcolm Pledger) I think you are trying to bring what I will call a black and white perspective to this. I seriously still think that we have shown what we have achieved so far, and I have given you reasons why 20% is a legitimate target.

  377. You do not know if it is.
  (Air Chief Marshal Sir Malcolm Pledger) In the constituency of what is available to me from the tools that I have and the time-scales in which we are going to try to produce that. I think I had also said to the Chairman when we started that this will be a vehicle to do so, which we will update each year. I have no doubt whatsoever—

  378. I am sorry, you do not, because you have actually said to this Committee, one, you do not know why the target was set in the first place. Therefore, you have not a clue whether that can be achieved or whether a higher figure can be achieved. All I am saying to you is that 20% was chosen but we could have pulled any figure out of thin air—30, 40, 15 or 5, whatever. I would have thought a fundamental question that you should have asked is whether you can actually achieve this. I will say this as well: if I was sat in your shoes I certainly would have done.
  (Air Chief Marshal Sir Malcolm Pledger) As I say, I think I have answered that question, and I think I have given you the means whereby we can get to 20%.

  379. Or higher?
  (Air Chief Marshal Sir Malcolm Pledger) I think I also said to you that as we develop through the programme management arrangements and through further Strategic Plans, if there are subsequent opportunities for us they will then be reflected in the update of this document.

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