Examination of Witness (Questions 76-79)
12 MAY 2004
SIR PETER
SPENCER
Q76 Chairman: Sir Peter, welcome. I do
not know what it is but whenever there is a sniff of money the
place fills up extraordinarily. You can talk about policy, Iraq,
nobody comes, but the moment procurement is on the agenda it is
like Wembley Stadium in the old days. Thank you very much for
coming. Is there anything you would like to kick off with before
we start with the questions?
Sir Peter Spencer: I guess just
one statement, which is that when I appeared before you last year
I had been in place for about three weeks and you asked me to
give an indication of what I planned to do, which I have done
in terms of a period of personal due diligence, examining the
performance of the Defence Procurement Agency, analysing the underlying
causes of poor performance, which I found to be endemic, and have
proposed a fairly major project to reinvigorate the Smart Acquisition
reforms which have delivered a lot of benefit compared with the
previous arrangements, but still have some way to go. I sent you
and the Committee a note to that effect earlier this year.[1]
Q77 Chairman: Sir Peter, I have been
on the Defence Committee since 1979 and every time we talk about
procurement, new initiatives are designed to solve things, and
then a few years later they are replaced by another new initiative.
If you say that poor performance was endemic, can you just outline,
because we will come on to it later, what you have identified
that has led you to conclusion that poor performance was endemic?
Do you mean in the Agency or among the defence contractors or
the Ministry of Defence, or all and sundry?
Sir Peter Spencer: I think if
you define "poor" as failing to meet our targets it
means a shortfall against that. It does not mean to say that it
was worse than it had been previously, and in fact it had got
better but it was not good enough. It is the whole of the procurement
process. I think the best way to start is to take a hard look
at yourself in the mirror, decide what needs to be done to put
your own house in order and then you are in a rather better position
to persuade other people that you cannot deliver the outcomes
independently of corresponding action both within industry and
within the rest of the Ministry of Defence.
Q78 Chairman: Have you charted a route,
a road map, although it is an abused term? Do you think you know
the route for better performance to break away from endemic poor
performance?
Sir Peter Spencer: Yes, I do.
I have grossed this thing up in terms of overall figures. That
conceals, of course, areas of quite outstandingly good performance
but, unfortunately, the impact that those projects have had has
been masked by problems elsewhere. My starting point was whether
or not the results which were declared for the Agency at the end
of 2002/03 were a blip or an indication of something more systemic
and more worrying. The result of the analysis demonstrated that
we really had quite a lot to be concerned about. There were some
warning signs there. We had a lot of corroboration from work done
by consultants in the form of McKinsey and also by the National
Audit Office, with whom we had been working very closely, and
my own people, who are very competent in this area and themselves
were frustrated by some of the problems that they faced. There
is a good level of consensus, which is encouraging. I think if
you remember your own remarks last year, Smart Acquisition from
time to time needs to be refreshed, so we are not trying to get
to a theoretical end state, just to say that the time has come
to move on and up our game fairly substantially and quickly.
Q79 Chairman: We wish you good fortune
in all of our interests. You said in the foreword to the DPA's
Annual Report and Accounts 2002-03 that: "2002-03 has not
been a good year for the Agency as measured by its corporate performance".
You said the DPA had failed to achieve its targets on programme
slippage and cost growth. On taking over the DPA in May 2003,
how surprised were you at the scale of the cost increases and
time slippage on major equipment projects? You will have read
National Audit Office reports endlessly, as we have, you were
successful in your interview, were you a little bit shocked at
what you saw and how long did it take before you felt you had
got a handle on what the problems were?
Sir Peter Spencer: I was not shocked
because I had seen emerging signs of this before I took up the
post. I was fairly clear in my own mind that we either had a one-off
problem with a year of bad results or we had something which was
more fundamental, so the focus of attention was really to examine
the underpinning evidence. I guess among the things that were
very telling, one was the fact that although you could draw a
conclusion that Smart projects were doing considerably better
than so-called Legacy projects, there was also an argument that
said the majority of those Smart projects were at a rather earlier
stage in their total cycle and that if you looked back on the
projects which had completed, very often a lot of difficulties
emerged as those projects had approached their originally planned
in-service dates, a point we had not arrived at on the Smart projects.
That was a very clear warning not to assume that the forecasts
to completion were going to be good for those youthful projects
simply because they had been badged as "Smart". One
had to look at the underlying collateral which supported those
forecasts. Secondly, I discovered that there was a misunderstanding
across the Ministry of Defence as to what project leaders were
expected to deliver. This was because the way an approval was
given for cost and time was to say that we approve the latest
acceptable or the highest acceptable, which was a 90 per cent
probability, and the understanding among too many people was as
long as you did that you were successful. The Department actually
plans on the 50 per cent, or expected values. To simplify it,
to say you had a project which was expected to run for five years
and you approved it at six years because you allowed one year
as the contingency or risk differential in time, people were tending
to say "as long as that comes in in six years that is successful"
but everybody else had planned on five. So the front line commanders
were expecting new equipment to arrive, the Principal Personnel
Officers were training people up for that new equipment, the Defence
Logistic Organisation were expecting to run down some old equipment
and get it out of service, so we had this sort of repetition of
the cycle. In cost terms it is even worse because that money which
was effectively put aside for a rainy day to cope with risks and
things that went wrong in too many cases was being used to fund
enhancements to capability, so it was being spent as pocket money
as opposed to being spent for the purposes for which it was intended.
If you have got that widespread misunderstanding that can only
be something which needs to be addressed by the leadership in
setting very clear direction. When people say "how do you
expect me to come in at 50 per cent?", the answer is very
simple, one of the key principles of Smart Acquisition which we
have not been applying properly is the routine trade-off between
performance, time and cost, and you should have a three-dimensional
trade here so that you understand what the cost drivers are and
the time drivers and, in conjunction with your military customer,
if things start to get difficult and something has come out of
the woodwork which you were not anticipating, you say "we
need to fall back here" and plan B is that we do a little
bit less of this because we could add that at some later stage
in the life of the equipment if it is really that important. It
is the need to get corporate financial discipline so we do not
have to keep on re-costing the programme every year because it
has gone over. It was those two areas, just as examples, but there
were a number more which I will not bother you with.
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