Examination of Witness (Questions 80-99)
12 MAY 2004
SIR PETER
SPENCER
Q80 Chairman: If 2002-03 has not been
a good year, are you expecting the DPA to meet the targets relating
to programme slippage and cost growth for 2003-04, or when we
see you next year when the NAO produces its annual report will
you be reporting similar in-year cost increases and time slippage
for 2003-04?
Sir Peter Spencer: My judgment
is that there will be a problem next year. It is unlikely to be
quite on the same scale as 2002-03. It would be surprising if
that were not the answer given that there is a systemic problem
and it is going to take time to sort this out. It is a bit like
if you have got a batting average of five and you have played
20 games, trying to increase your batting average with a few high
scores over the next four games is quite tough. You are carrying
the totality of the statistics with you. I am not trying to make
excuses here; I am just trying to create realistic expectations.
This is something which needs to be tackled very fundamentally.
We need to make sure that people give us honest forecasts because
the worst way of getting out of this is simply to hoard up bad
news until after you have gone and then somebody else comes along
and uncovers it inside a project. One of the things which I was
very clear on with the integrated project team leaders this year
was we effectively had an amnesty to say "If you have got
some things you need to get off your chest, this is the year to
do it" because I need to have a baseline against which I
can credibly start comparing performance as we go forward to see
if what we are doing here is genuinely delivering the improvements
that we believe that it will. If I can give you an example: I
would open a project and see that an in-service date might be
marked at December 2005 50 per cent, the 90 per cent would be
January 2006. I would say "That is not the world I inhabit.
Here is my £10, where is your £90" because that
is a 9-1 on bet. Do you see what I mean? It is an even bet if
it is 50 per cent, at 90% it is 9-1 on. What I then said was "Let
us have a look at the underpinning collateral. Is this a wet finger
guess because we have demanded three point estimating, or do we
actually have the real detail underpinned by the three point estimating
techniques which have been developed over some years now and has
it been independently verified by the people on the site who are
the experts in this?" We have had a year of confronting reality.
My mantra was first of all let us get real, then let us get engaged
and then let us get on with it, because it is urgent. That was
the get real. Getting engaged was talking it through and agreeing
what needed to be done and how fundamental those changes are.
Getting on with it was the sense of urgency because the thing
which worried me, which does not appear in my key targets, was
the failure to deliver against the planned value of assets in
monetary terms because we actually had a balance sheet which was
increasing each year because we were delivering by value considerably
less assets than we were actually investing in. No company could
exist like that for very long and we needed to focus the attention
on delivering to the front line, which is the real output as opposed
to key targets that measure our latest forecasts promised for
the future.
Q81 Chairman: It is very disappointing.
We can just look on and observe and make our comments, mainly
annually, but ministers appear to be committed to the concept
of Smart Procurement. You have got a fine new building down there,
you have got professional staff, and you have a competitive environment
where companies bid pretty fiercely to win competitions. We are
constantly being given assurances that things are more or less
working and it comes (a) as a bit of a shock and (b) as a disappointment
to know that things are not as hopeful as we were expecting, hoping
to get out of this cycle of failure that we have observed over
the previous 25 years.
Sir Peter Spencer: I think we
are getting out of the cycle of failure. Please do not misunderstand
me; I am not trying to denigrate the improvements which had already
taken place. But I cannot ignore the bottom line. I cannot ignore
those figures. These are independently audited by the National
Audit Office. They have to be understood and the only way to understand
them is drilling right down into the detail of finding what is
happening. It is clearly not a popular message either within the
Ministry of Defence, across the procurement community, within
industry, or within this place, but what is expected of me is
(a) to understand what is going on and (b) to bring it under better
control. It is easier to do the first thing than the second. The
better you understand it, the more honest you are with yourself
and the more persuasive you are with the people from whom you
need some corresponding support and the more likely it is that
we will get out of this. We have to put this in the context of
what it is we are trying to do here. Effectively we manage huge
uncertainties and the besetting cause in all of this is whether
or not we actually invest enough time in de-risking before we
make a major capital investment. That is the single most compelling
reason why things go astray. We delude ourselves too often that
we have actually understood a problem which we have not. There
is a strong correlation between projects that have spent more
time de-risking the technology, de-risking the supply side arrangements
and contractual arrangements and spending longer and more resource
doing that before setting firmly the performance time and cost
targets. I cannot ignore that. There are seven principles of Smart
Acquisition. One had been implemented in full and is working extremely
well, and that is the fund holding central military customer who
then is both the operation requirements person, in old speak,
and also the planner and programmer in old speak. He has to tailor
his expectation according to his budget and live within his means.
Of the other six, none of them had been implemented fully and
in some cases had hardly been implemented at all. Performance
time and cost trade-off, which I mentioned earlier, was very patchy.
We just needed to refresh people's understanding of what we are
trying to achieve here. One of the people on the site said to
me, "Your problem, boss, is you do not seem to believe in
Smart Procurement" and I said, "Your problem is that
I do, I just cannot find enough of it". What I find is too
much which is badged as Smart Procurement and actually gets in
the way.
Q82 Chairman: It is a huge responsibility
for you, Sir Peter, and we wish you very well. At the end of the
day when you retire, you will be judged on how successful you
have been in carrying the process forward and if tough decisions
have to be made, tough decisions have to be made. Obviously the
Government is cognisant of these—I am not saying do they
know—rather pessimistic views that you have been expressing.
It would be unfair of me to ask you about confidential discussions
that you have had with ministers, but do they recognise that tough
measures will have to be taken?
Sir Peter Spencer: They would
not describe it as "pessimistic"; I think they would
accept it as realistic. I have absolute engagement with Lord Bach,
who has been extremely supportive both in terms of what I have
needed to do at Abbey Wood and what also needs to be done in the
relationships between the DPA and other parts of the Ministry
of Defence on the one hand and with industry on the other. To
that effect, he chairs a monthly meeting which effectively oversees
the implementation plan of this reinvigoration of Smart Acquisition.
The first bit looks at how far I have got in rolling out each
of the strands of work and how far I have got in measuring the
benefits; the second bit looks at how far the rest of the Department
has got in adjusting to some of the changes which will need to
be made.
Q83 Chairman: Will you need to make any
organisational changes, personnel changes, cultural changes?
Sir Peter Spencer: Yes to all
three. The most important has been the process changes.
Q84 Chairman: That is just a prelude
to the questions that will be asked. I will ask just one more
question. In the foreword to the Annual Report and Accounts you
said that: "progress on newer projects", ie Smart Acquisition
projects, "has been better, although there have been worrying
delays and cost growth on some of those also". Are these
early indicators that Smart Acquisition is failing in its aim
of procuring equipment faster, cheaper, better? Are we going to
get there?
Sir Peter Spencer: They are indications
that Smart Procurement in some of these projects has not been
implemented as it should have been. Under those circumstances
you can see quite clearly the signs of it. Once the projects have
gone past the Main Gate approval there has been rapid consumption
of the risk differential, both in time and cost in some cases.
In some of those cases they are still forecasting to come inside
their approvals. The question is, if you have moved off the target
so much earlier on, how confident are you that you are not going
to move off further and come outside them. That is really the
point of what I am looking at.
Q85 Mr Roy: Sir Peter, the stocktake
of Smart Acquisition which you commissioned has recommended a
new organisational structure. I understand that currently there
are six members of the executive board of directors and three
of those directors will take over operational duties and the other
three will take over functional duties. However, there is also
an addition of six newly created deputy operations directors.
I am a bit worried, for example, that it could be perceived that
the management of DPA will now become extremely top heavy looking
or, worse, an accusation could be made that it is a `jobs for
the boys' exercise insofar as we have got another six to 12 and
on the face of it that does not look like very Smart Acquisition
to me. How would you allay my fears?
Sir Peter Spencer: Two fold. If
I start where we were before 1 April this year: 75 integrated
project team leaders were reporting directly to me and that is
a very large span of management. If you recall, the Committee
asked me last year whether or not I felt there was enough senior
management attention being given to the performance of these project
teams. My judgment was that the key to all of this was performance
management and strengthened corporate governance because, as I
said earlier, we basically manage uncertainty. We have to have
an integrated process which manages programme and risk as an integrated
activity for each project, and also at the Agency level. We started
off by recognising that the executive directors had a very large
number of cross-cutting capabilities, so many that they were hardly
ever available to discuss things with the integrated project team
leaders when they needed somebody to go to and talk to as a sounding
board. The construct we have at the moment is the delegation of
performance required and the resources which are given still flows
from me directly to the team leader, but the role of the operations
director is team mentor.
Q86 Mr Roy: Can I just stop you there.
There are still 75 team leaders?
Sir Peter Spencer: Yes.
Q87 Mr Roy: Still the same amount.
Sir Peter Spencer: Thereabouts.
It might be 74.
Q88 Mr Roy: Do not worry about it.
Sir Peter Spencer: The role of
the operations director is not David Beckham being the captain
of the team; it is Sven-Göran Eriksson being the team coach.
Mr Roy: Who is he?
Q89 Chairman: If we are not careful we
will hear a Scottish success story being told.
Sir Peter Spencer: I did not want
to offend you by getting into rugby and cricket, so one struggles.
We need to be very clear here. This is not reinventing the old
multi-layered structure of the old Procurement Executive before
it became an Agency, it is actually defining the role of those
three operations directors to provide the challenge and the advice
and support to ensure that programmes are on track because you
have to ask yourself with some of these very big failures which
occurred, why did they suddenly appear to come out of a clear
blue sky? Somebody must have known. Why were we not actually asking
to see the collateral which supported a series of satisfactory
estimates in terms of time and cost of programmes? We needed to
provide that level of support to the team leaders. It still gives
people a big span. If you are running 25 projects, and some of
them are the size of medium-sized businesses, they have their
own sets of accounts, their own budgets of billions, you need
somebody there who is going to provide the support.
Q90 Mr Roy: Were there not enough people
there beforehand? You have just said you are keeping 75 and there
are going to be six directors and six deputy operations directors
which seems to be extra.
Sir Peter Spencer: No, those are
not extra. We used to have people called support directors who
had grown out of the previous system which was a bit of a hybrid.
The function of support directors was in part to assist the team
leaders but they did not feel any personal accountability for
the performance of the projects they were supporting.
Q91 Mr Roy: How many were there?
Sir Peter Spencer: There were
six. They are not the same people because we re-competed. One
is the same.
Q92 Mr Roy: Have you still got six support
directors as well?
Sir Peter Spencer: No, the support
director function has disappeared. We got rid of those on 1 April.
We had six deputy operations directors and we competed each of
those posts. As it happens, one support director was successful
in winning a post.
Q93 Mr Roy: Just allay my fears here.
Those six support directors, as they used to be called, are not
the same people who are now called deputy operations directors?
Sir Peter Spencer: We had the
resource, we had the funding, for six posts which were called
support directors. We got rid of those and we used the money to
fund six new posts. As it happens, one individual used to be a
support director and was successful in winning.
Q94 Mr Roy: He is now an operations director?
Sir Peter Spencer: Yes.[2]
yn
Q95 Mr Roy: This is not jobs for the
boys?
Sir Peter Spencer: No. We had
39 people competing for these jobs and we went for people who
had a track record of success in delivering projects, so they
had something to bring to the party. In other words, they knew
how difficult this job would be and they would be people who team
leaders would want to go to and use as a sounding board and talk
through issues and listen to.
Q96 Mr Roy: Now we have got the party,
specifically how will the reorganisation that you are now going
to have lead to improved performance in the delivery of projects
and when can we expect improvements to be seen?
Sir Peter Spencer: The reason
we expect to get better performance is because there is a much
more rigorous process of assurance now in terms of examining the
status of projects at all stages of their cycle. In other words,
once a project is actually in its main demonstration/manufacture
stage, there is a much more rigorous performance review process
held on a quarterly basis against a standardised set of parameters
which are, in the main, independently verifiable by experts on
the site who will then provide that independent assurance both
to the team leader and to the ops directors. For example, the
technical risk areas merit a particular level of assessment because
they have been looked at. We will look at a whole range of these
parameters, both in terms of technical, financial and commercial
aspects. This will be particularly important in leading up to
a submission to go into the Main Gate in order to make the capital
investment decision because there has been too much variability
in terms of the level of evidence that has been forthcoming to
support the fact that a project was mature enough to go through
the Main Gate.
Q97 Mr Roy: My question is when can we
expect to see it?
Sir Peter Spencer: In terms of
how long it takes, we have put forward a revised set of key targets
to Lord Bach, who will announce them shortly, which are designed
to track the improvements over the next four years. I would hope
to see some improvement starting next year in terms of the value
of the assets.
Q98 Mr Roy: Just to be clear in my own
mind, that announcement that will be made shortly? When?
Sir Peter Spencer: I think it
is the end of this month. It is part of the routine process by
which the Agency targets are laid in the library of the House.
Under those circumstances, in conjunction with the National Audit
Office, we have looked at getting a more appropriate set of key
targets, which are not easier, they are tougher and more representative
of the work which we are doing. The end of May or early June is
the normal time of year they are actually formally posted. I am
sure Lord Bach will not mind me telling you the sorts of things
which we are looking at. One is instead of the targets for slippage
being limited just to the top 20 or so projects, which is not
entirely representative of the volume of business we do, it will
be all of the Cat A, Cat B, Cat C projects. In other words, 65,
66 by value of the work which we manage will now be measured by
those targets.
Q99 Mr Roy: Is that 65 per cent of the
work you do will be measured?
Sir Peter Spencer: Yes.[3]
2 Note by Witness: A Deputy Operations Director Back
3
Note by Witness: The targets for cost, time and performance will
be based on the 63 largest projects by value which have passed
their main investment point (Main Gate) but not entered service
at the start of the year. Back
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