House of Commons - Defence

Select Committee on Defence Sixth Report

2 Smart Acquisition

Procurement performance in 2002-03

9. The first indication that 2002-03 had been a particularly poor year in terms of procurement performance was provided in the Defence Procurement Agency (DPA) Annual Report and Accounts 2002-03, published in November 2003.[14] In the foreword to the Annual Report and Accounts, Sir Peter Spencer, Chief of Defence Procurement, acknowledged that it had not been a good year for the Agency as measured by its corporate performance:

The agency…. failed to achieve its targets on programme slippage and cost growth…. overall performance was seriously damaged by major cost and time delays on a number of legacy[15] projects…. In general, progress on newer projects [Smart Acquisition projects] has been better, although there have been some worrying delays and cost growth on those also.[16]

10. The DPA's Annual Report and Accounts provides details of performance against its Key Targets. Performance against the Key Targets relating to time slippage and cost variation was as follows:[17]

Target: average cumulative slippage of in-service date not to exceed 12.1 months for 2002-03.

Outturn: 19.0 months for 2002-03. Average in-year slippage was 7.2 months.

Target: average cumulative cost variation not to exceed 2.2 per cent for 2002-03.

Outturn: 8.1 per cent. Average in-year cost growth was 5.4 per cent.

11. A more detailed analysis of the problems experienced in 2002-03 was provided in the National Audit Office's (NAO) Major Projects Report 2003,[18] published in January 2004, which covers the top 20 defence equipment projects in the Demonstration and Manufacture phase. The NAO reported:[19]

Projects have slipped an average of 18 months beyond their expected delivery dates, twice the average delay recorded in the Major Projects Report 2002. Legacy projects account for 114 months (79 per cent) of the 144 months slippage in the last year.

With the exception of two projects, the costs of which have been excluded because of their commercial sensitivity, total current forecast costs are £51.9 billion, an increase of £3.1 billion in the last year and some six per cent over approval. Legacy projects account for £2.7 billion (87 per cent) of the £3.1 billion cost increase.

12. We and our predecessors have, to some extent, become accustomed to the too familiar story of time slippage and cost increases on major defence equipment projects. The performance of the Defence Procurement Agency in 2002-03 can only be described as woeful. On the somewhat optimistic assumption that no further slippage is experienced, major equipment projects will on average be delivered to the end user a year and a half late. The substantial in-year cost increases of some £3.1 billion will have a major impact on the current equipment plan and must inevitably lead to cancellations or cuts in equipment projects, or delays in ordering equipment. Such substantial cost increases are also likely to have an impact beyond defence procurement and result in cuts elsewhere. Given the recent pressures on our Armed Forces we believe such impacts would be unacceptable.

13. As we noted in our recent report on the Defence White Paper,[20] we believe the UK's future security challenges require the existing scale of forces to be retained. Otherwise, the Armed Forces will be unable to operate without again placing unsustainable demands on service personnel. We also consider that a policy of reducing the existing number of platforms in advance of acquiring the new capabilities is potentially dangerous. We note that the settlement announced by the Chancellor on 12 July 2004 raised the Defence budget by £3.7 billion between 2004-05 and 2007-08, a real terms increase of 1.4 per cent a year. The increase is welcomed, but MoD needs to manage the budget effectively to ensure that the Armed Forces see the maximum benefit.

Assessment of the Defence Procurement Agency

14. Shortly after taking up the post of Chief of Defence Procurement in May 2003, Sir Peter Spencer consulted widely with industry, other Government Departments and within MoD to identify areas of the DPA's business which were working well and areas which needed further development. He also commissioned McKinsey & Co. to undertake an analysis in order to gain an independent assessment of where improvements were needed. Sir Peter wrote to the Committee in January 2004 and provided a copy of 'A Stocktake of Smart Acquisition in the Defence Procurement Agency—The Agreed way forward' (subsequently referred to as 'Stocktake of Smart Acquisition').[21] This sets out the DPA's proposals for re-invigorating Smart Acquisition.

15. Given the poor performance in 2002-03, we were particularly interested in Sir Peter's assessment of the DPA, the factors which had contributed to the poor performance in 2002-03, and how well he thought Smart Acquisition had been working. Sir Peter told us that he found the underlying causes of poor performance to be 'endemic',[22] and that 'Smart Acquisition reforms which have delivered a lot of benefit compared with the previous arrangements…. still have some way to go'.[23] He added that the 'result of the analysis demonstrated that we really had quite a lot to be concerned about'.[24] Most worryingly, he told us that of the seven principles underlying Smart Acquisition:

One had been implemented in full and is working extremely well, and that is the fund holding central military customer…. Of the other six, none of them had been implemented fully and in some cases had hardly been implemented at all.[25]

16. We asked Sir Peter if he had been shocked by the scale of the time slippage and cost increases experienced in 2002-03. He told us that:

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…. 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 that 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 original 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".[26]

17. We were particularly concerned that some Smart Acquisition projects were starting to show signs of problems. Sir Peter told us that 'they are indications that Smart Procurement in some of these projects has not been implemented as it should have been'.[27]In addition to bringing improvements to new projects, it was also claimed that Smart Acquisition would bring improvements to Legacy projects (those projects which started before the introduction of Smart Acquisition). We were dismayed to learn from Lord Bach, Minister for Defence Procurement that 'there have been greater problems with the legacy projects than perhaps we had anticipated…. perhaps we overestimated then the effect Smart Procurement would have on dealing with those legacy issues'.[28]

18. We asked Sir Peter if similar in-year time slippage and cost increases to those experienced in 2002-03 were expected for 2003-04. He said that, in his judgement, there would be a problem in 2003-04, but it was unlikely to be on the same scale as 2002-03. He added that, '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'.[29]

19. We find it immensely disappointing that the Smart Acquisition initiative, launched some six years ago, has yet to deliver its aim of procuring equipment faster, cheaper, better. We are particularly concerned that it will still be some time before poor performance is reversed and the expected benefits from Smart Acquisition delivered. We are forced to conclude that our Armed Forces have been let down by the organisation tasked with equipping them.

Failure to act earlier

20. The sorry picture outlined by Sir Peter, particularly the failure to implement the principles of Smart Acquisition, some six years after it was introduced, point to long-running problems. We asked Lord Bach when he had first become aware of the long-running problems within the DPA. He told us that he was not 'naïve enough to think that everything was absolutely fine and rosy in the garden up until that particular point [when Sir Peter had completed his assessment of the DPA]'.[30] We asked him what had happened before Sir Peter had taken up post in May 2003. He said that 'What I learned during those first two years, or nearly two years as it was before Sir Peter was appointed, was that Smart Acquisition principles were appropriate principles; putting them in effect was a good deal more difficult than the principles themselves',[31]and he added that 'there comes a moment when a new face comes in to head the DPA and decides that something decisive has to be done, and I am delighted that Sir Peter has done that'.[32] Lord Bach highlighted the changes to procurement that had taken place since the Strategic Defence Review in 1998 and stated that he was 'absolutely content with the way in which things have gone'.[33]

21. The Chief of Defence Procurement's assessment of the Defence Procurement Agency identified long-running systemic problems and a failure to implement the principles of Smart Acquisition. We regret that both his predecessor and the current Minister for Defence Procurement failed to act earlier to address, what even the latter referred to as, 'some things which have been endemically wrong for some time that we still haven't sorted out'.[34]

Areas to be addressed

22. Sir Peter provided us with an overview of his assessment of the DPA and of the implementation of Smart Acquisition. We were also interested in the specific areas where improvements were needed and the proposals for addressing them.

De-risking of projects

23. Sir Peter told us that major MoD procurements include the management of huge uncertainties and that 'whether or not we actually invest enough time in de-risking before we make a major capital investment'[35] generally determines whether a project does or does not go astray. Historically, MoD has spent as little as two per cent of the total procurement budget for a project on the assessment phase—the average figure considered best practice is some 15 per cent,[36] although this figure would vary depending upon the specific project. In its Major Projects Report 2003, the NAO found that the average Assessment Phase expenditure as a percentage of the total procurement expenditure for the 10 Assessment Phase projects (Smart Acquisition projects) in the Major Projects Report 2003 was 4.4 per cent,[37] and concluded that some projects which have recently passed through Main Gate (the approval point between the Assessment Phase and the Demonstration and Manufacture Phases) had been insufficiently de-risked and had consequently incurred early cost increases and delays.[38]

24. A good example of successful de-risking was the 2087 sonar radar where some 14.8 per cent of the budget was spent in putting a prototype to sea and making certain that all the risks, such as those relating to maturing individual technologies and system integration, were understood.[39] Sir Peter told us that 'when you look at the reasons given for cost overruns it is because we did not understand the technological risks'.[40]

25. John Howe, Vice-Chairman of Thales UK, also highlighted concerns about risk reduction during the Assessment Phase. He told us that:

if there is one error, if you like, which has led consistently to setbacks, disappointment and difficulties in procurement, it is because the whole community—industry, the MoD and, if I may say, at the political level and the press—has conspired to be optimistic about the cost of military capability and has conspired to neglect the degree of risk that is involved in major defence projects where one is actually buying equipment that does not yet exist and it is what McKinsey's I think called a conspiracy of optimism in their work on Smart Procurement. I think we still suffer from it. The figures still show that there is insufficient investment by the customer in risk reduction in the early stages of projects before they reach their main stage of approval and that fact, I think, has led us into a lot of the difficulties that individual projects have run into.[41]

26. We asked Sir Peter what changes he was proposing to make to the Assessment Phase, and he told us that, in future, 'the assessment phase will have more resources devoted to it and compared to the way it had been done previously it will take longer and we will not through thick and thin hold on to a pre-declared date for making a main gate decision come what may and regard it as a sign of failure if we do not make it'.[42] Lord Bach stressed that 'if there is one message I want to get across today…. it is our commitment, my commitment, to ensuring that we keep the assessment phase of projects going and do not move too quickly to main gate before de-risking design and design maturity have actually occurred'.[43]

27. Spending more money and time on the Assessment Phase will require a shift in the current culture within the DPA and MoD. However, there are signs that some changes are taking place, although the impetus for doing so appeared to have come from industry. Sir Richard Evans, Chairman of BAE SYSTEMS, told us that on the Future Carrier programme the original aim had been to go through Main Gate in March 2004. However, BAE SYSTEMS and Thales UK had advised the MoD that there had been insufficient de-risking. He said that 'additional funding had been found to keep pre-main gate funding running forward and that will enable a lot more work to be done'.[44]

28. It comes as no surprise that a key underlying cause of poor performance, in terms of delivering projects to time and cost, has been MoD's failure to invest enough money and time to sufficiently de-risk projects in the Assessment Phase. This is a concern which we, our predecessors, and the National Audit Office, have highlighted over the past 20 or so years. MoD now proposes to spend more money and time in the Assessment Phase. We welcome this intention, but given past failures to address this longstanding problem we are still to be convinced that it will be implemented in practice.

Trade-offs

29. One of the key principles of Smart Acquisition is the routine trade-off between performance, time and cost. However, Sir Peter told us that this is another principle of Smart Acquisition which 'we have not been applying properly'[45] and that 'Performance, time and cost trade-off…. was very patchy'.[46] He said that:

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 of this because we could add that at some later stage in the life of the equipment if it is really that important.[47]

30. We explored why trade-offs had not been applied and identified two reasons. Firstly, individuals with 'vested interests' in a project. Lord Bach told us that 'In any organisation people sometimes have a vested interest in what it is they have set up and what it is they want, and are reluctant to compromise that for what they may see as not particularly good reason'.[48] In terms of addressing this problem, he told us that 'we really have to be…. more strict and strong about insisting that trade-offs take place in order to achieve the results we want'.[49]

31. The second reason why trade-offs have not been applied related to insufficient information. General Fulton told us what is needed is 'the visibility of what it means—visibility for my people on "If you trade this performance then it can come in at this cost and this time". I think what we have not always had up until now is that full cost/time/performance visibility to enable us to do it'.[50] He accepted that the 'customer' was one of those responsible for the patchy use of trade-offs. This had been widely recognised and he considered that now 'we are doing better'.[51]

32. It is, again, very disappointing that another principle of Smart Acquisition—the routine trade-offs between performance, time and cost—has not been implemented as intended. Without such trade-offs, time slippage and cost increases occur. We expect the Defence Procurement Agency and MoD to address the reasons which have, to date, limited the use of trade-offs, and to monitor the use of such trade-offs.

Through life management/whole-life costs

33. Whole-Life Costing is an important concept underpinning Smart Acquisition—one of the key principles of Smart Acquisition is that investment decisions should reflect the whole-life cost implications rather than focussing solely on procurement costs. Whole-life costs are the cost to MoD of equipment throughout its life from concept to disposal. The importance of whole-life costs was emphasised by Sir Peter who told us that 'I talked about the cost of acquisition and said you obviously have to factor in not just the initial cost of acquisition, it is very important we do it on a through-life management basis and we are looking at the whole life costs'.[52]

34. Industry also considered it important for MoD to use Whole-Life Costing. Simon Frost, Chief Executive Officer of Claverham, told us that, in the case of bids from overseas defence companies, 'if big investments are being made in those countries' industries, they are hard-headed people and they will get their money back and the way they get their money back usually is in the cost of support'.[53] He stressed the need for MoD, in relation to such procurements, to 'look very carefully at what the life cycle cost in reality is going to be'.[54]

35. Further progress is needed before this key principle of Smart Acquisition is implemented. The Defence Manufacturers Association considered that, 'with regard to through life management…. there is clearly much still to be done before a really effective approach is found in the MoD to the challenge of funding and managing projects on this basis. Investment up front in procurement to achieve real support costs savings downstream is still a strong aspiration rather than a reality at present'.[55]

36. The NAO recently reported[56] that MoD had made some progress in producing whole-life cost data and intended to use the data as a strategic planning tool at an individual project level and at a capability level. However, the data currently being produced needed to be refined before it could be relied upon to support decision-making. The Defence Engineering Group also highlighted the NAO's concern that the through-life cost data so far assembled were currently immature and unable to support decision-making. They also considered that a through-life approach to any project was inhibited by the 'bureaucratic divisions of responsibility and budgets between the various MoD stakeholders involved'.[57]

37. Whole-Life Costing is another key principle of Smart Acquisition which has yet to be implemented. While we acknowledge that some progress has been made in this area, we expect MoD to ensure that the whole-life cost data currently being produced is refined further so that it can support decision making.

Decision making in MoD

38. A key aim of Smart Acquisition was to address a long running criticism that the process for acquiring defence equipment took too long and was too complex. A change introduced under Smart Acquisition was to rationalise the equipment approvals process. The number of points at which a major equipment programme was approved for continuance was cut from four to two. This concept of Smart Acquisition fits every procurement into a contractual strait jacket. A more flexible system might lead to better results in some cases. Despite the reduction in the number of approval points, industry remained concerned about continuing delays in MoD's decision making. John Howe told us that he considered that:

the slowness of the approvals process and the extent to which companies exist in a state of uncertainty for some time while they are waiting for decisions, a process which is often very expensive because bids have to be sustained, that is one of, I think, the industry's legitimate criticisms of the approvals process.[58]

39. In its written submission,[59] the Defence Manufacturers Association said that, at present, the single largest complaint from its member companies was excessive delays in MoD decision making which were both expensive and frustrating. Examples of projects where there had been delays included: the Future Rapid Effect System; the Airfield Service Support Project; and Armoured Vehicle Training Systems. The latter was said to be 'years late' and currently undergoing a third round of best and final bidding. These concerns were also echoed by Northern Defence Industries Ltd, who pointed to the 'time bidding takes both in bid preparation and the long lead times before orders are placed and fulfilled.'[60] This was a particular problem for Small and Medium Enterprises: during that timescale there was a real risk that such companies could be faced with financial pressures so that they were unable to maintain the necessary capability, or even went out of business.

40. In terms of addressing these concerns, Sir Peter told us that 'the Investment Approvals Board and the Ministerial Steering Group…. are very supportive in bringing forward ideas which are going to streamline those arrangements so there is much more confidence when we put the proposition forward that it is going to go through in an acceptable timescale'.[61]

41. Delays in MoD decision-making result in a great deal of uncertainty and expense for defence companies. For some companies, particularly smaller ones, there is a risk that such delays can lead to them going out of business. We expect MoD, to consult with industry on this matter, and to push forward with its efforts to identify and implement quicker decision making processes.

Contracting arrangements

42. Problems experienced on a number of equipment projects, for example on the Astute and Nimrod programmes, have highlighted shortcomings in the contracting arrangements used by MoD. Several of the submissions we have received from industry also highlighted the need for new approaches to contracting:

The VT Group stressed the need for both industry and government to take full advantage of the opportunities provided by new business models being introduced in the commercial sector. They pointed to the UK offshore oil industry where a new partnering approach to project delivery had been developed and 'typically resulted in savings of 20%'. They also considered that new incentive structures which enhance supplier profitability through profit sharing schemes needed to be considered.[62]
Intellect, the trade association which represents the interests of the IT, telecommunications and electronic industries in the UK, also highlighted the need to manage contracts in a more coherent way—'this means contracting with new commercial arrangements'.[63]
QinetiQ Group plc referred to the approach in the United States, where more flexibility had been introduced through greater use of competitively placed IDIQ (indefinite deliverable, indefinite quantity) contracts which permit the customer to buy as required from a limited selection of suppliers.[64]

43. Sir Peter told us that MoD was looking at 'much better contractual arrangements which …. will deliver better outcomes, not only for the Ministry of Defence but also for our suppliers',[65] and he also referred to the arrangements used in the petro-chemical industry.[66] MoD was also looking at partnering arrangements, not only in terms of providing services, but also partnering arrangements in terms of having less taut contracting arrangements than had been used in the past. These included target cost incentive arrangements, whereby a target is identified and contractors have an incentive to beat the target as they share in the cost under-run with MoD and get a higher percentage return as profit. Such arrangements, were 'not always easy to set up but in the main…. they lead to much more harmonious relationships and much better outcomes'.[67]

44. We consider it essential that the Defence Procurement Agency's approach to contracting, and procurement generally, aligns with best practice. Although action is now being taken, we find it surprising that, some six years after Smart Acquisition was introduced, the Agency has only recently made concerted efforts to identify best practice elsewhere and reflect this in its own arrangements. We would expect a major procurer, such as the Defence Procurement Agency, to be constantly abreast of best practice elsewhere and to update its arrangements accordingly. We recommend that the Agency do so in future.

Direction from senior management

45. Integrated Project Team leaders within the DPA are tasked with delivering defence equipment projects to time, cost and specification. To do this, they require a clear understanding of what they are expected to deliver to the end user—the Armed Forces. We were concerned to hear from Sir Peter that 'there was a misunderstanding across the Ministry of Defence as to what project leaders were expected to deliver'.[68]

46. Sir Peter explained that the misunderstanding arose from the way in which time and cost estimates on projects were approved.[69] He said that the approvals for time and cost estimates were at the 90 per cent confidence level—the latest acceptable or highest acceptable. The understanding among many DPA staff was as long as you achieved that you had been successful. However, Sir Peter noted that MoD actually plans on the 50 per cent probability.[70] He provided the following example in relation to time:

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 everyone 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 the 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.[71]

In other words, MoD and the Armed Forces planned on the basis of 50 per cent probability of delivery at five years, but DPA was allowing itself to plan the procurement against a 90 per cent probability of delivery at six years, and was doing so without apparently realising that it was out of step with the customer.

47. A widespread misunderstanding about what project leaders are expected to deliver, signifies to us a failure by DPA senior management to set clear direction. The organisational changes being introduced at the DPA include the creation of three Operations Directors 'to provide the challenge and the advice and support to ensure that programmes are on track'.[72]

48. The NAO's Major Projects Report 2003, refers to the difference in how Legacy and Smart Acquisition projects are measured—'Legacy projects are measured against a 50 per cent approval; Smart Acquisition projects are measured against a 90 per cent approval'.[73] Sir Peter told us that there is to be a change in the reporting of performance. Whereas in the past the DPA had been reporting against the 90 per cent estimates [for Smart Acquisition projects] they are 'now going to report movement against the 50 per cent estimates because that measures the heart of the problem in terms of getting defence right'.[74]

49. It is unsatisfactory that Legacy projects are measured against a 50 per cent approval while Smart Acquisition projects are measured against a 90 per cent approval, and we therefore welcome the move to reporting project performance against the 50 per cent estimate for all projects. This should eliminate any misunderstanding among project leaders as to what they are expected to deliver. Time will tell if the new organisational changes at the Defence Procurement Agency provide the clear direction to project leaders which has been lacking to date. We recommend that the Agency's senior management monitor the effectiveness of the new organisational arrangements in this regard.

Internal review process

50. Given the scale and extent of the problems highlighted by Sir Peter, it appears astonishing that they had apparently gone unnoticed until his arrival in May 2003. Our concern was also shared by Sir Peter who asked, in respect of the substantial problems experienced on a number of projects, 'why did they suddenly come out of a clear blue sky? Somebody must have known.'[75] Smart Acquisition is not a straightforward process. We have previously expressed doubts over some of the claims made for it. Nonetheless, we were surprised at the apparent extent of the failings identified by Sir Peter, and that they had been so little recognised before his arrival.

51. We found it worrying that Sir Peter has effectively had to introduce an amnesty for the DPA's Integrated Project Teams whereby they have been asked to provide 'honest forecasts'[76] and told that 'If you have got some things you need to get off your chest, this is the year to do it'.[77] There appears to us to have been a cultural problem within the DPA which prevented problems from being disclosed. Simon Frost, Chief Executive of Claverham, referred to a 'fear culture'[78] in the DPA.

52. It is of real concern that the DPA's internal review process failed to pick up on the problems experienced on projects. We note that a more rigorous process of assurance, in terms of examining the status of projects at all stages of their cycle, is to be introduced. In future, once a project is in its Demonstration and Manufacture Phase, there will be a performance review process held on a quarterly basis against a standardised set of parameters which are, in the main, to be independently verified by experts on site who will then provide that independent assurance both to the Integrated Project Team leader and to the Operations Directors.[79]

53. A combination of what has been called a 'fear culture' at the Defence Procurement Agency and an ineffective internal review process has resulted in problems on projects being hidden and going undetected. The Chief of Defence Procurement must ensure that there is a culture change at the Agency which encourages problems on projects to be disclosed. We also expect senior management at the Agency to have accurate and timely information on the status of projects. The proposed new assurance arrangements should, therefore, be introduced as a matter of urgency and regularly reviewed to assess their effectiveness.

Defence Procurement Agency change programme

54. Details of the change programme identified to re-energise Smart Acquisition are set out in the 'Stocktake of Smart Acquisition'.[80] The areas where changes are being introduced are:

Project review and assurance
Project reporting
Financial management
Key supplier management
Changes in the Equipment Programme
Joint working with the Defence Logistics Organisation
People and skills
Organisation

55. Sir Peter told us that while organisational, personnel and cultural changes were needed, the most important were the process changes.[81] Details of how the recommendations from the 'Stocktake' are being taken forward are set out in a memorandum provided by MoD.[82] In terms of the improvements in procurement performance that are expected, the memorandum states that the changes are designed to improve the DPA's ability to deliver military equipment to agreed performance, cost and time parameters.

56. The impact of the changes are to be measured through year-on-year improvement in results against the DPA's Key Targets—performance against which is currently validated by the NAO. As part of the new arrangements, the DPA has proposed a revised set of Key Targets. Sir Peter told us that the revised Key Targets 'are tougher and more representative of the work we are doing'.[83] The targets for cost and time slippage will no longer be limited to the top 20 projects, but will cover 65 per cent of the value of the work managed by the DPA.[84] A new target will address the delivery of assets by value against the delivery schedule for the DPA as a whole. There will also be targets covering more conventional commercial efficiency performance parameters, which are measures of productivity.[85]

57. The new Key Targets for the Defence Procurement Agency should provide a better measurement, and be more representative, of the work that it undertakes. We welcome the addition of a new target covering asset delivery, which should ensure that the Agency focuses its attention on delivering to the front line—something which has often been lacking in the past. We consider it important that the National Audit Office continues to validate the performance of the Defence Procurement Agency against the new set of key targets, particularly as the targets for cost and time slippage will now cover a much larger number of projects.

58. The changes set out in the 'Stocktake of Smart Acquisition' are to be implemented over the next 12-18 months and are being driven by a small project team.[86] Sir Peter told us that Lord Bach had been extremely supportive both in terms of what he had needed to do at the DPA, and what needed to be done in the relationships between the DPA and other parts of the MoD on the one hand, and with industry on the other. Lord Bach chairs a monthly meeting, which effectively oversees the implementation plan of the 'reinvigoration of Smart Acquisition'.[87]

59. The new organisational structure for the DPA was established on 1 April 2004.[88] Key milestones for the change management programme are set out in the 'Stocktake of Smart Acquisition',[89] together with outline success measures covering the five main areas—improved agency performance, improved people management, improved business processes, improved project maturity at Main Gate, and improved organisational effectiveness.

60. We support the changes set out in 'A Stocktake of Smart Acquisition in the Defence Procurement Agency—The Agreed way forward'. But they appear to us to go well beyond a 're-invigoration' of Smart Acquisition. Instead, they represent a fundamental overhaul of an initiative which, after some six years, had not been implemented as intended. We plan to monitor both the progress in implementing the changes and the improvements which are expected. In order to do so, we recommend that regular reports on the implementation of Smart Acquisition are provided to Parliament.

Savings from Smart Acquisition

61. MoD's Annual Report and Accounts 2002/2003 states that 'Smart Acquisition improvements are estimated to have produced reductions of some £2bn in the cost of MoD's planned equipment programme between 1998 and 2008. Smart Acquisition is now an integral part of MoD business and it is no longer possible to attribute savings directly to Smart Acquisition'.[90] No explanation of how this figure has been calculated is provided.

62. The fact that only one of the seven principles of Smart Acquisition has been implemented in full, must cast doubt on the scale of the savings which MoD have estimated Smart Acquisition has delivered. We asked whether MoD had quantified the cost to the taxpayer of the non-application of the other six principles. Lord Bach told us that 'It would be impossible to quantify that cost…. Perhaps some of those 7 principles should have been put into effect more clearly before Sir Peter arrived. I accept that. Whether that has cost the taxpayer any quantifiable amount of money I would somehow doubt'.[91]

63. MoD estimates that Smart Acquisition has resulted in savings of £2 billion. However, given that the Chief of Defence Procurement has acknowledged that only one of the seven principles of Smart Acquisition had been implemented, we have no confidence in the reliability of this estimate. Indeed the programme of Smart Acquisition was created and named by government, but does not necessarily define the ultimate standards in defence procurement. Success in defence procurement should be measured by objective standards and not just by reference to the seven principles that the MoD has itself adopted. In future, we expect estimates of savings resulting from Smart Acquisition, or indeed resulting from other MoD initiatives, to be independently validated.

14 Defence Procurement Agency, Annual Report and Accounts 2002/2003, HC 2 Back

15 Legacy projects are those which started before the introduction of Smart Acquisition, launched as part of the Strategic Defence Review in 1998. Back

16 Defence Procurement Agency, Annual Report and Accounts 2002/2003, HC 2, p 3 Back

17 Ibid., p 9 Back

18 National Audit Office, Ministry of Defence Major Projects Report 2003, HC 195, Session 2003-2004 Back

19 Ibid., para 8 Back

20 Defence Committee, Fifth Report of Session 2003-04, Defence White Paper 2003, HC 465-I, paras 74 and 79 Back

21 Ev 65-76 Back

22 Q 76 Back

23 Ibid Back

24 Q 78 Back

25 Q 81 Back