Examination of Witnesses (Questions 280-299)
Sir Peter Spencer KCB,
and Lieutenant General Rob Fulton, examined.
Q280 Mr Davidson: I would accept
that but there is clearly a distinction to be drawn between a
warship and something that is literally bolted on, when you could
clearly go out to competition elsewhere and deal with it differently,
as distinct from something that is integral which is essentially
an upgrade rather than an addition. Surely, in the context of
upgrades, you are then a prisoner of the supplier? You indicated
earlier on the difficulties you might face in letting a contract
if a supplier knew you were up against a tough restriction, because
then they could just hold on. When you said that, I thought that
that was not the most trusting of relationships. Surely, by this
iterative process you are placing yourself in a substantially
weakened position?
Sir Peter Spencer: Not if we follow
through in the way which I described earlier of having a better
engagement with industry in the first place and going for contractual
arrangements which are more mutually beneficial. I talked about
benchmarking with the North Sea oil and gas sector and construction
industry. The fact is that with open book accounting and with
more appropriate contracting arrangements whereby you positively
incentivise a supplier to get a better return on his outlay by
meeting your project aims, which can include driving the price
down—if you get a better profit, as happened on some of
the big North Sea oil projects, you get a better return from the
supplier by driving the cost down, and then you have got mutually
beneficial behaviour. However, it does mean a more trusting relationship
as we have established with a number of companies. You might have
recognised that we have not quite got there with all companies,
but we are on the case.
Q281 Mr Davidson: We did detect that
actually! I am just wondering about how in future meetings we
will be able to assess how successful this relationship has been.
Will it be possible for us to receive material which identifies
incremental changes and how each of them were dealt with, in order
that you can establish that you have not been gouged unnecessarily?
Sir Peter Spencer: We are looking
at what we can do to identify the metrics for measuring supplier
performance. It is bound to be a highly sensitive piece of information,
but for our internal use that is precisely what we shall be doing.
I ought to say by way of clarification of my earlier remark about
BAE on Monday that there are contracts with that company where
we do have very good and open and transparent successful relationships,
so it would be wrong of me to say that it is symptomatic of everything
in that company.
Q282 Mr Davidson: I am aware of that.
Can I come back to the question of trade-offs that you mentioned
earlier between cost drivers and performance. I have always been
under the impression that there is a great tendency amongst MOD
people to overplay, over-engineer and all the rest of it. I am
not clear how an iterative process is going to avoid that taking
place and how you are going to avoid therefore cost escalation,
because then there is a mutual interest between those who are
doing to play with these things and those getting paid for it
to upgrade everything all the time. Are you, or your office, going
to be the people that hold these things down?
Sir Peter Spencer: If I could
give General Rob a chance to speak, it is mostly in his interests
that we do this together because he has to put together the budget
that I have described earlier, and it is no help to him if people
are over-engineering because it wrecks the overall programme consistency.
He has a very strong vested interest in making sure that all the
people working for him are driving my people in the right direction.
Lieutenant General Fulton: You
will have seen from the Report that there is a very high percentage
of requirements that have been met, as opposed to cost and time.
We are responsible for owning that requirement, and we do so on
behalf of the frontline commands, who are the ultimate end-users.
What my people are pushing for is not gold-plating, but the maximum
capability that they can get out of that piece of equipment. There
is a very strong difference between that and gold-plating. It
is the maximum amount of capability that we can get out, but,
clearly, you can push that too far because you can be too demanding.
That will then put at risk cost and time. There is a balancing
mechanism between what my people are pushing for, which is the
maximum requirement that we can deliver ultimately to the front
line, the amount of money that we have got for that programme
and the time within which it can be delivered. There is no sense
in sticking to one at the expense of the other. You will see from
the imbalance between meeting key user requirements on the one
hand, a high figure, and cost and time performing rather less
well, that we have got this out of balance. What might be helpful
to do as part of this change that you have heard about from Sir
Peter is to understand that those key user requirements have to
be banded. We have to make sure that we understand what is the
minimum capability that it is worth putting into the field, and
then we have to have a hard target or a stretch target that shows
that actually we would like it to be able to go a bit faster,
fly higher, engage more targets, or whatever it may be. Once again,
it is not gold-plating, just more capability. Within that band
is the area within which we seek to work, and within that band,
in conjunction with Peter's team, we need to make sure that we
get the balance between cost, time and performance.
Q283 Mr Davidson: At what level of
the organisation are these decisions taken, because presumably
they are not only a major decision but they are a variety of small
ongoing decisions, and I am not quite sure whether or not all
of these go upwards or whether they are left at the level of the
project head?
Sir Peter Spencer: Let me make
it clear. We need to ensure at the point of approval that there
is a three-dimensional space of performance time and cost which
is big enough for the IPT leader and his military customer—who
is called a director of equipment capability; and they can end
up anywhere in that box they so choose without referring back,
because they are living within their time and cost approvals and
they are working within their performance band, which would be
accepted as good enough, albeit we are trying to push it higher.
My judgment at the moment is that we have more two-dimensional
space and not much room to manoeuvre some of these performance
areas, so people are a bit boxed in. There is an unwillingness
to recognise the fact that the best is the enemy of the good,
and that you can get to a point where you get an exponential rise
in resource required to get margins of performance. The devil
is in the detail. Some of these very fine areas are amongst thousands
of lines describing what the performance is, and it is making
sure we guard that process properly and spot the signs of problems
before they damage the programme.
Q284 Mr Bacon: Sir Peter, can I ask
you to start on page 37 with the diagram about the Smart acquisition
lifecycle, appendix 1. Can you say what system of metrics you
have for measuring and controlling risk in the early concept stages—in
other words, on the left-hand side of this chart?
Sir Peter Spencer: We start with
the capability that is needed and the options for meeting that
capability and seeing if there is anything available that we could
buy off the shelf to do it. If there is not, we then take a look
at what the performance drivers are and understand to what extent
that translates in the need to have new technology. We then look
at the maturity of the technology that is available to us. Some
of it will be emerging from the corporate research programme in
the early conceptual stage; some of it will be in the form of
the applied research programme that General Fulton's team runs;
and some of it will be in the form of technology demonstrators
where we start to prove things. We are now using, as is reflected
in this Report, a systematic way of judging the technical maturity
in the form of technology risk levels.
Q285 Mr Bacon: What metrics do you
use?
Sir Peter Spencer: We use what
is called TRL, technology readiness levels. For example—
Q286 Mr Bacon: It is quite a complicated
area. Could you send us a note explaining it in more detail?
Sir Peter Spencer: Yes.[4]
Q287 Mr Bacon: Thank you very much.
As a general statement, do you think it is fair to say that you
would recognise you have been under-investing at this end of the
graph and that this is now changing?
Sir Peter Spencer: Yes.
Q288 Mr Bacon: On page 199, appendix
7, it is talking about whole-life costs. In paragraph 9 at the
bottom right-hand corner, it states: "The year 2002-03 saw
cost of ownership data being captured from stakeholders for the
first time." Why was it for the first time? I will give you
an example. I have just changed my car. I bought a new car in
August 2001, so it was three years old, the finance was up and
I had to hand the keys back or keep it or buy it off. I built
a model on a spreadsheet, and it was quite a shocking experience
to know how expensive it is to run a car. I wanted to analyse
the true whole cost of ownership, which was common sense really,
which was everything from the purchase cost itself and the capital
to the maintenance and the fuel, which was a combination of the
number of miles that I did and the performance of the car, and
then the depreciation. I came up with a model that enabled me
to figure out the whole-life cost. It is so blindingly obvious
that that is what you do, I just cannot understand this sentence.
Why was cost of ownership data only being captured for the first
time two years ago or even a year ago?
Sir Peter Spencer: It is a particular
description of how we are doing cost of ownership in terms of
the totality. It is not therefore valid to infer from that that
we were not making estimates of whole-life costs of ownership
in the past. We were using slightly different terminology and
we were certainly failing to capture all of the components. To
give an example, we were certainly capturing the costs of initial
acquisition and the cost of ownership in terms of forecasts or
what it would cost to maintain, refurbish, and all the rest of
it through life until disposal. Where data was less accurate and
not systematically collected were all of the other bits of through
life cost of ownership including any infrastructure that we need
like jetties for nuclear submarines, and particularly in terms
of manpower. Because I used to do manpower in my last job, it
was a particular interest of mine because the lead-time for a
capability—the longest pole in the tent—tends to be
the specialist skills you need to achieve in the military. It
was therefore very important that we captured all of this information
so that when we made these investment decisions we did not just
do it on the initial costs of acquisition but with a much longer
term view in mind of what represented value for money over the
whole of the lifetime. In other words, it points to where I should
invest more money upfront to ensure the costs of ownership that
will be incurred by the Chief of Defence Logistics are going to
be lower, so long as we do a proper investment analysis and appraisal
and make sure that we are getting the return, because spending
money earlier is always a disadvantage as opposed to spending
the money later.
Q289 Mr Bacon: It is a complicated
question. Could you do a note setting out the various stages you
think we need to go through to get to realistic estimates of whole-life
ownership costs and what each stage covers, and when you get to
the next further stage of the sequence and cycles, that would
be extremely helpful. Perhaps you could add in to that note how
you expect the variations in estimates, which obviously affect
things like depreciation and carrying costs, are changed by resource
accounting and budgeting?
Sir Peter Spencer: Yes, indeed.[5]
Q290 Mr Bacon: In regard to non-competitive
contracts, I have here something from the Acquisition of Management
System Commercial Manager's Toolkit, which is the report on the
2002 annual review of the profit formula for the non-competitive
government contracts, and it says in appendix E on page 25: "The
Government's consideration of the Review Board's report on the
1999 general review of the Government's profit formula has been
suspended pending the outcome of the review by Government of whether
the profit formula continues to offer the best mechanism for rewarding
contractors undertaking work on non-competitive Government contracts.
That was in September 1999. Can you say how this review has been
resolved?" It says "pending the outcome". What
has happened?
Sir Peter Spencer: A set of proposals
was discussed, and there was a period of negotiation while we
agreed some key principles. Those proposals are now being discussed
across other government departments. In fact, my Commercial Director
is talking to the Treasury about them this week. The proposals
will soon go through to ministers, which will, we believe, produce
a more appropriate way of—
Q291 Mr Bacon: What you are saying
is that three and a half years after this was suspended pending
the outcome of the review, there is still no conclusion. That
is what you are saying.
Sir Peter Spencer: Formally there
is no conclusion. There has been a great deal of movement in terms
of agreeing with other Government departments and with industry
the direction in which we should go, and we are now going through
the formalities of getting that endorsed and then announced.
Q292 Mr Bacon: What I do not understand,
whether it is Smart or whether it is conventional or whether it
is non-competitive, is why it is so difficult to get some consensus
with industry about what it will all cost and in particular what
an acceptable level of profit for industry is. For example, when
we look at PFI buildings, some of which are very complex, it is
generally understood that the rate of return will be for 14% 15%,
16% or maybe 17%. That is the parameter, and it is understood.
People sit where you are sitting and say through gritted teeth,
because they have to admit it is a bit higher than it was originally
going to be, that it is going to be 17% or a bit less. Why is
that so impossible in the defence area?
Sir Peter Spencer: It is not impossible.
Q293 Mr Bacon: In that case, why
have you not got further along the line on it?
Sir Peter Spencer: Because we
have been determined not to yield to proposals from industry to
reward on a flat percentage basis a cost incurred in a non-competitive
contract. We are much more interested in having a formula which
rewards good performance, and under those circumstances we need
a more selective tool than the one that is in place at the moment.
Q294 Mr Bacon: You referred earlier
to the article in the Times today, saying that there are
significant inaccuracies in that article. Can you say what the
significant inaccuracies are?
Sir Peter Spencer: We are not
about to sign a contract.
Q295 Mr Bacon: It mentions in the
Report on page 176 "the current forecast for Main Gate approval
February 2004". What is the absolutely current forecast of
Main Gate approval now?
Sir Peter Spencer: There is no
absolute forecast because—
Q296 Mr Bacon: That is wrong, I take
it.
Sir Peter Spencer: That was the
forecast which was made at the time in good faith and which was
a reasonable estimate of expectation. The progress to maturing
the decision has not been as planned.
Q297 Mr Bacon: Can I check what things
are clear and decided, because I have read that it is 65,000,
55,000 and 50,000. Is the tonnage decided?
Sir Peter Spencer: No.
Q298 Mr Bacon: Is the length decided?
Sir Peter Spencer: No, nothing
will be decided finally.
Q299 Mr Bacon: Until you get to Main
Gate.
Sir Peter Spencer: There is a
spectrum. What I can tell you is that these ships will be very
much bigger and very much more powerful than the current ones,
and to me arguing about a few thousand tonnes or a few metres
frankly misses the point. The real point is that if we were to
have allowed ourselves to have been driven by a misconceived notion
that it was more important than anything else to make this decision
on the date, we would have made the wrong decision. What I have
now made clear is that Main Gate is not an anchor milestone and
is not a date. It is obviously a date to aim for because we need
to get on to it sometime, but it is a point of maturity, and that
point of maturity needs to be independently verifiable so that
people know we have got the right amount of understanding of the
risks and we have decent three-point estimates based on proper
collateral.
4 Ev Back
5
Ev Back
| 
