Memorandum by the Defence Engineering
Group
SMART ACQUISITION—UNFINISHED BUSINESS?
INTRODUCTION
In 1998, as part of the Strategic Defence Review
(SDR), the Ministry of Defence (MoD) launched the Smart Acquisition
Initiatives (originally known as Smart Procurement) to address
some of the perceived problems besetting its programme of defence
equipment acquisition. These problems included:
Overlong time-span from a project's
concept to its entry into service—the Eurofighter Typhoon,
for example, was first approved in 1984 and will not enter service
till 2006, or later.
Overruns in cost and delays in timescale—the
1998 Major Projects Report from the National Audit Office (NAO)
showed overruns up to 60% and delays up to 10 years.
Failure to balance properly project
performance, cost and timescale—projects appeared to be
locked into their original system requirements and annual budgets.
Undue transfer of technical and commercial
risk to contractors, some of which lacked the resources to manage
them adequately.
Insufficient delegation of authority
to project managers, and a lack of personal incentives for MoD
personnel.
The Smart Acquisition Initiatives introduced
to address these problems can be divided into two categories.
Some of the Initiatives are widely accepted to be advantageous;
they had often been recommended and accepted in the past, but
had not yet been implemented effectively. This category includes:
Rigorous early testing, analysis and
planning.
Accurate forecasting of project cost
and timescale.
The Initiatives in the other category were in
1998 new to MoD and their benefits were unproven, including:
Reorganisation of procurement, logistics
and research
A new, shorter acquisition cycle called
CADMID.
Partnering with industry.
Integrated Project Teams (IPT).
A capability-based approach to Service
requirements.
Personal incentives for MoD personnel.
SMART, BUT
NOT NEW!
Through-life approach
The through-life approach to project management
involves taking account of all the costs and benefits associated
with the project through its complete life cycle from concept
to disposal. This approach was praised by the House of Commons
Defence Committee (HCDC) in 1988 and by the NAO in 1992, as well
as by the SDR in 1998, and has been mandatory for all public sector
projects since 1991 but it is actually quite difficult to implement.
Forecasting the through-life cost of a defence project over more
than half a century of development, production, operation, support
and disposal is a challenging task, and the resulting forecast
is inevitably subject to considerable uncertainty. Some MoD engineers
and accountants are accustomed to precision and find such through-life
cost forecasts unhelpful or "really too difficult".
Since this approach was reinforced in the SDR, a Cost of Ownership
(COO) methodology for calculating through-life cost has been formulated,
but not all IPT have yet applied it and the data assembled so
far are immature and unable to support decision-making. Even six
years after the SDR, no forecasts of through-life costs of the
MoD's major projects have yet appeared in the annual report on
these projects from the NAO.
Even where credible forecasts are available,
it can be difficult for Ministers, officers and officials (whose
tenure in post may last only a few years, and whose reputations
depend on the progress of a project within that period) to give
due regard to prospective costs and/or benefits many years later.
A through-life approach to any project is also inhibited by the
bureaucratic divisions of responsibility and budgets between the
various MoD stakeholders involved.
Preliminary work
Defence equipment projects in their initial
phases need to undertake considerable testing, analysis and planning
in order to manage the technical and other risks, to balance project
performance, cost and timescale and to formulate a coherent plan
for the project to progress smoothly and uninterrupted through
its later phases. MoD accepted earlier recommendations in 1961,
1968 and 1988 that sufficient resources should be allocated to
the early phases of its projects, and it has been demonstrated
that projects which neglect to do enough work in those phases
are more likely to encounter problems later, but in practice many
pre-Smart projects failed to do the necessary risk reduction and
planning and proceeded blindly into difficulties.
The amount of work required in the early phases
of a project before its definitive financial approval (at what
is now called Main Gate) depends on the complexity of the project
and on the technical and other risks involved. Off the shelf procurement
of an existing product needs less preliminary work than the development
of a bespoke design using unproven technology and unconventional
management arrangements. Smart Acquisition recommends that a project
should spend up to 15% of its planned procurement cost in the
assessment phase preceding Main Gate, but the expenditure appropriate
to each particular project must be determined in the earlier concept
studies.
Most of the MoD's major projects now in the
assessment phase plan to spend about 5% of their planned procurement
cost in that phase, though one plans to spend about 15% and a
few plan to spend only a few per cent. Half of the major projects
which have passed Main Gate in the past few years spent less that
2% in the assessment phase (and the Support Vehicle spent 0% by
omitting that phase entirely); the others spent varying amounts
up to about 15% (the notoriously-troubled Bowman project required
a protracted assessment phase in which it spent over 16%). Some
of the projects which spent less than 2% in their assessment phases
have already incurred significant cost overruns and/or timescale
delays (up to 10% and two years relative to their recently-approved
budgets and schedules) suggesting that their assessment expenditure
was insufficient and that this aspect of Smart Acquisition is
not yet being fully implemented.
Accurate forecasting
Accurate forecasting of project cost and timescale
has been desirable since Biblical times to permit judicious project
selection, realistic budgeting and efficient project management.
Accurate forecasts are also necessary for planning incremental
acquisition and for trading off project performance, cost and
timescale to obtain best value for money. But it has always been
difficult to generate accurate forecasts for large, ambitious
defence projects incorporating leading-edge technology (and equally
difficult for civil projects with similar scale and innovation)
where both customers and suppliers may be prone to mutually-reinforcing
optimism.
Accurate forecasts are best generated by a group
which is independent of both the MoD customer and the industrial
supplier, which has expertise in all the technologies and activities
involved, which can exploit effectively the appropriate models
and databases, which is large enough to provide critical mass,
and which has scope for preparatory analysis as well as customer-driven
tasks. MoD must ensure that its policies (on organisation, recruitment
and career management) can sustain an effective forecasting group
with these characteristics.
The average cost overrun on major projects has
actually increased in recent years (from £112 million in
1998 to £250 million in 2003) though most of that increase
can be attributed to Legacy projects approved before Smart Acquisition
was instituted. However the dozen major projects approved since
Smart Acquisition have already accumulated a total of £400
million cost overrun and 61 months of delay since approval, so
there is clearly still scope for improvement in the accuracy of
MoD forecasting.
NEW TO
MOD, BUT
ARE THEY
REALLY SMART?
Reorganisation
The Smart Acquisition Initiatives included several
high-level reorganisations to establish clear customer focus within
MoD headquarters, to create a Defence Procurement Agency having
formal customer-supplier relationships with its Service customers,
to merge the three Service support branches to form the Defence
Logistics Organisation, and to institute a Public-Private Partnership
(PPP) for most of the government defence research establishments
(formerly in DERA). These reorganisations have all been implemented,
though the post-SDR debate (fully described in earlier HCDC reports)
over the PPP for defence research was protracted and acrimonious.
The full effects of these Initiatives will only emerge after several
years.
The CADMID cycle
The new Concept, Assessment, Demonstration,
Manufacture, In-service and Disposal (CADMID) cycle for project
acquisition management has only two approval points, called Initial
Gate and Main Gate following the Concept and Assessment phases
respectively, whereas the previous Downey cycle has at least four.
By eliminating the delays associated with successive approvals,
the new cycle should (other things being equal) reduce the time
taken for projects to progress from concept to entry into service.
However, since Main Gate approval comes earlier in the project
cycle than the final Downey approval (just before manufacturing),
the cost and timescale forecasts at Main Gate must be based on
less-complete information and may therefore be less accurate.
Partnering
Partnering arrangements between MoD and its
suppliers were recommended by Smart Acquisition to replace the
taut, adversarial relationships with industry which were inaugurated
in the 1980s by Mr Peter (later Lord) Levene while he was Chief
of Defence Procurement. The Partnering Initiative recognises that
when customer and supplier are committed together for decades
on a defence project, in which success is very important to both
parties, their relationship should not be governed by the rules
of the bazaar. An ideal partnering arrangement involves mutual
trust and cooperation, with shared information and gain-sharing
contracts. When this Initiative was announced, some prime contractors
aspired to become MoD's trusted partner in the derivation of user
and system requirements, and to be recognised as its preferred
supplier of some classes of equipment. However, as long as MoD
retains competition as the cornerstone of its procurement strategy,
partnering arrangements on a project cannot generally begin until
a supplier has been selected and must conclude at the end of the
contract. This less-ambitious partnering on a project-by-project
basis can still be very beneficial, even though the customer and
supplier inevitably have some divergent goals, but it requires
both MoD and industry to overcome their traditional prejudices
and antipathies.
Integrated Project Teams
Partnering should be promoted by the creation
for major projects, and for groups of similar minor projects,
of Integrated Project Teams (IPT) incorporating all the project
stakeholders from Service customers through the various MoD specialist
branches to the industrial suppliers. Each IPT should be empowered
to manage the project throughout its life cycle (to encourage
a through-life approach) and achieve agreed performance, cost
and timescale targets without being constrained by a hierarchical
bureaucracy. In practice not all of the IPT could be provided
with staff having all of the required knowledge and skills, many
staff have been reluctant to relocate when the project transfers
from DPA to DLO, and the independence of an IPT Leader is inevitably
constrained by the need to take account of the project's interdependence
(in a modern networked battle-space) with other equipment projects,
both contemporary and legacy. Furthermore Ministers and senior
officials, who may have to defend the Leader's decisions in public,
are bound to take a close interest in (and occasionally overrule)
any of those decisions with political, diplomatic or industrial
consequences beyond the Leader's immediate responsibility
Capability-based approach
This approach to acquisition requires that the
Service user's need should be expressed in terms of the required
enhancement of military capability, without any preconception
about the class of equipment which might provide it. In particular
this approach precludes the assumption that an existing and obsolete
design should be replaced by a modern design of the same class.
In former times such assumptions were often tacitly justified
by the logic that withdrawal from service of, for example, an
obsolete class of submarines tended to leave a multi-dimensional
gap in the capabilities of UK forces which was inevitably submarine-shaped,
and so could best be filled by a new class of submarines. However
that logic has become unreliable in an era characterised by rapidly-advancing
technology and by dramatic changes in the threat to the UK and
its interests.
The capability-based approach requires a rigorous
and comprehensive definition of the capability enhancement required
and a comparative review in the Concept phase of a varied range
of alternative equipment concepts. For this review the MoD needs
access to expert advice on all of the technologies associated
with each concept. This seems incompatible with MoD's decision
to reduce its defence research budget substantially over the past
decade, just as the Revolution in Military Affairs is driving
a transformation in warfare. In some cases the capability-based
approach may identify an innovative concept which is significantly
more cost effective than that which MoD had originally preferred.
In such cases the cost saving would far exceed the cost of the
concept studies. However in most cases the capability-based concept
studies merely confirm the original preference of the MoD staff
responsible, and thus serve only to introduce additional time
and cost into the acquisition process (thereby worsening one of
the problems Smart Acquisition was supposed to alleviate).
Personal incentives
Smart Acquisition recommended that MoD's acquisition
process would operate better if its personnel could benefit from
personal incentives. Incentives (such as ransom, prize money and
plunder) were an accepted part of military operations in former
times, but these practices have been recognised as damaging to
operational efficiency and have therefore been terminated. Incentives
remain common in commercial affairs and work best where the advantages
from an individual's effort can be identified promptly and unambiguously.
However in defence projects which extend over several decades
it is difficult to devise an incentive scheme which would not
distort the priorities of acquisition personnel towards immediate
(and possibly spurious?) achievements which attract reward and
away from the longer-term benefit of the project. At worst, incentives
might discourage realism in favour of rose-tinted assessments
of the project's progress.
MoD has compounded the likely damage from incentives
by adopting an unpopular scheme whereby each year half of a Team
receives a bonus while the remainder does not. Under this scheme
an official who gives a colleague good advice or assistance and
thereby increases the colleague's chance of a bonus correspondingly
reduces his own prospects (unless he demands some sort of receipt?).
This hardly promotes effective teamwork.
CONCLUSION
Smart Acquisition was originally presented as
a wondrous revelation whereby all of the perceived problems in
MoD's organisation and processes would be eliminated, or at least
drastically reduced. But it is now increasingly perceived as the
start of a long struggle by MoD and its suppliers to attain greater
efficiency and to avoid costly errors. Although most of the stream
of bad news over the last few years can be blamed on Legacy projects,
it is disappointing that these projects do not appear to have
obtained much benefit from the Smart reforms. It is equally disappointing
that some projects which recently passed Main Gate, and which
should have incorporated Smart principles, have already encountered
unexpected difficulties just as their predecessors did. It must
be expected that in any programme of many high-technology projects
a few will proceed less well than expected (and some will go better)
but the number of Smart projects which are already in difficulties
suggests that the Smart culture changes in government and industry
have not yet been accomplished.
If MoD were to assess the effectiveness of Smart
Acquisition in delivering "Faster, Cheaper, Better"
defence equipment (and it certainly should make this assessment),
it would probably discover that some IPT and support groups have
raised their game more effectively than others. Since some MoD
officials are today describing their problems in language which
is virtually the same as was used in the SDR, it is evident that
the transformation which Smart Acquisition hoped to deliver is
still incomplete.
Dr David L I Kirkpatrick
Professor of Defence Analysis
April 2004
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