2 Understanding and managing risk
7. One of the principles underpinning Smart Acquisition
is to spend the right amount of time and money to reduce programme
risk to an acceptable level before a project commits to the Demonstration
and Manufacture Phase. The Assessment Phase is crucial to the
successful delivery of the project to time, cost and performance.
How much time and money should be committed in the Assessment
Phase will vary from project to project depending on factors such
as the maturity of the technology being purchased and the proposed
procurement strategy (off the shelf; collaborative, non-competitive,
PFI or Public Private Partnership). As a broad guideline the Department
has stated that up to 15% of the initial procurement cost of a
system should be spent in the Assessment Phase. At present the
Department is spending on average less than 5% on the Assessment
Phase.[17]
8. In some cases, spending more money or time in
the Assessment Phase than originally planned may be the correct
thing to do if it results in better risk mitigation for the post-Main
Gate phase of the project. Figure 3 summarises how the
Department is now measuring and controlling risk to provide it
with confidence that the Assessment Phase activity is achieving
this desired outcome. Several of the measures which we have previously
recommended, including Technology Readiness Levels are now in
regular use.[18]Figure
3: How the Department assesses risk in the early stages of projects[19]
9. One apparently good example of risk reduction
is the Airborne Stand-off Radar aircraft programme which has successfully
completed its design stage and is now entering what will be a
challenging integration phase. Sir Peter Spencer attributed the
success of the programme to date to spending the right amount
of time to ensure the available equipment options were understood
and the risks fully analysed.[20]
10. Optimism continues to influence the initial appraisal
of projects and the Major Projects Report 2003 clearly shows that
the Department and industry do not always sufficiently understand
risk when the Main Gate investment decision is made. The costs
and in-service dates for more than two thirds of projects have
drifted away from those planned. In a few cases such as the A400M
aircraft and Type 45 destroyer, projects have exceeded the highest
acceptable figures agreed at the time they were approved. The
Department admitted that the figures showed that some projects
had not been properly de-risked in the Assessment Phase and this
was an indication that Smart Acquisition was not been applied
thoroughly or consistently.[21]
11. Sir Peter Spencer, Chief of Defence Procurement,
assured us that he was determined to resolve the problem of de-risking
projects fully before approval was given to proceed to demonstrate
and manufacture equipment. What was needed was an effective corporate
governance system which ensured that forecasts were accurate.
There were however still some projects where the damage done by
inadequate de-risking had not yet been flushed out, which he was
intending to do in the coming financial year.[22]
12. Smart Acquisition principles were not fully applied
to the Support Vehicle which is currently predicted to be a year
late entering service. The Department decided to proceed without
a formal Assessment Phase on the basis of three years work done
to examine the suitability of the project for a Private Finance
Initiative solution and because potential solutions were already
available in the commercial sector. In retrospect, the Department
accepts that it made a mistake in omitting the Assessment Phase
and that both its and industry's understanding of the requirement
was immature.[23]
13. The Department decided against PFI procurement
for the Support Vehicle project, concluding that a conventional
approach offered better value for money. The principal reasons
for this were difficulties in defining an output based specification;
the limited opportunity for risk transfer; minimal potential for
third party revenue; and little scope for either operational or
technical innovation due, in part, to a demanding mobility requirement
and operational readiness. The decision not to pursue a PFI solution
for this programme did not preclude its use in other combat support
areas.[24]
17 C&AG's Report, para 2.3 Back
18
ibid, paras 2.6-2.11 and Appendix 1; Q 284; Ev 41-42 Back
19
Ev 41-42 Back
20
Qq 302-304 Back
21
Qq 239, 246, 275-276 Back
22
Qq 239-245 Back
23
C&AG's Report, Figure 18 and paras 3.38-3.43; Qq 187, 249,
307-314 Back
24
Qq 308, 318; Ev 43-44 Back
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