Examination of Witnesses (Questions 69-79)
MR STEPHEN
HILL
29 NOVEMBER 2005
Chairman: Good morning, Mr Hill.
Mr Hill: Good morning.
Q69 Chairman: Thank you very much
for coming to give evidence on the inquiry that the Defence Committee
is doing into delivering front line capability to the RAF. You
have kindly provided us with written evidence[1]
and we would like to ask you some questions about that and about
other things. One of the things, which is in paragraph 3 of your
evidence, was that the rationale for forming DARA as a Trading
Fund was to do three things: provide a benchmark and competitive
alternative to industry; deliver a more competitive service and
better value-for-money support to the front line, and concentration
of all deep maintenance, and expand into wider markets, increasing
overall volume of business and reduce prices to the MoD. As a
person closely involved with DARA, can you tell us how you believe
DARA fulfilled those original intentions?
Mr Hill: Yes, I
can. Back in 1998 there were two separate agencies, the Royal
Air Force's Maintenance Group Defence Agency and the Naval Aircraft
Repair Organisation, which I had been heading up as Chief Executive
for a period of two years. The two agencies had developed separately
and independently, one under the auspices of the Navy, one under
the Royal Air Force, and there was huge duplication within both,
and the aim of bringing them together was to shake them down and
rationalise them into a single facility, and then, with the cutting
edge of moving to Trading Fund, where we would have to survive
by the services that we sold, change the processes into real commercial
processes that would help us to get into, ultimately, wider markets.
As part of the rationalisation, we significantly reshaped the
business. We inherited very large estates which were under-utilised,
had too many buildings and many of the buildings were in a very
poor condition. So we set about forming what we termed centres
of excellence: we had two major engine facilities which we rationalised
into one at Fleetlands; we had three avionics centres which we
rationalised into one at Sealand, and we had five machine workshops
which we rationalised into two—one at St Athan and one at
Almondbank. Those are examples of the significant rationalisations
that we went through. The early years of the agency, as we were
running up to Trading Fund and the first year of Trading Fund,
were very much focused on getting the business shaped right. So
all the energy of the board and of the senior people was in shaping
it up for the future. We did not only concentrate on the production
side, we also concentrated in the support areas, and we established
an HR support centre on one site instead of having four separate
entities around the country. We formed a finance shared service
centre for all transaction processing down at Fleetlands. Just
to give you an example of the impact on the business, we had 168
finance people when we formed and we went down to 58 ultimately
after we shaped it down into one single centre. Those are the
examples. They are all about rationalising, taking cost out, re-engineering
processes, utilising a smaller number of buildings and getting
better value for money out of the assets that we had.
Q70 Chairman: So you did all these things.
How do you think your primary customer, the RAF, reacted to that?
Do you think they were satisfied with the changes that you made?
Mr Hill: There was always a tension
at the interface with the Royal Air Force—less so with the
Army and the Navy. They were our major customer. We worked very
hard to establish a good customer/supplier relationship. We put,
for instance, a sales team in both the major sites involved in
running the business at Wyton and down in Yeovilton, but we had
to change the business processes in what was formerly a government
organisation purely operating on the vote where everything was
"free" to the customer, we had to put in hard-nosed
business processes, and part of the process of driving that through
generated quite a bit of difficulty because people said: "We
did not have to do this before and now it is more work for us
in the IPTs in order to deliver the business." There were
also tensions because of a lack of understanding on the true costs
of the business. Nobody, prior to moving to Trading Fund, knew
the true cost of deep maintenance in the military arena. It is
only by moving to Trading Fund and going to a full-cost basis,
communicating and hard charging, effectively, all the costs between
customer and supplier that you really get to the point where you
understand what the prices really are—what the real cost
is. Many customers baulked at the seeming increase in prices but,
in fact, they were seeing the real prices for the first time.
By paying for services that we bought from the customer base as
well as them buying from us, you end up with a true cost; the
true cost of facilities, the true cost of delivering services
and all the overheads associated with running a business.
Q71 Chairman: Do you think you delivered
a more competitive service?
Mr Hill: Absolutely unquestionably.
We went through massive rationalisation and change, and with quite
similar volumes we halved our operating costs in three years.
We also halved the workforce and that was the pain that they had
to take. Part of that cut down was reducing the level of Service
personnel in the agency for particular reasons, which I am very
happy to explain. However, we significantly drove down cost, and
the rationalisations that we achieved also took masses amounts
of inventory out. By streamlining and speeding up processes on
one site alone we took nearly £1 billion of inventory and
that enabled us to take that out of the system and to close the
warehouse facilities. So, if you take Sealand as an example, 338
acres when we took it over, we drove it down to 40 acres; from
70 buildings to 20 buildings, and by making the savings, part
of the savings were reinvested in the business to give us more
modern facilities. So if you go to Sealand today you will see
very excellent, open-plan offices that were fed from the savings
we generated from changing the business.
Chairman: Then came the End to End Review.
Q72 Mr Swayne: Did the End to End Review
destroy confidence in DARA?
Mr Hill: Absolutely unquestionably.
We were partnering with industry on a wide front and more and
more our whole focus was on survival; so my personal time, my
board's time and that of many of my senior managers, was all focused
on trying to save the business rather than capturing new business.
I cannot remember the number of times that I cancelled meetings
that were arranged to try to get business internationally because
I was concentrating on fire-brigading back home in the agency.
So more and more, as we tried to work up relationships with industrial
partners (let me tell you, we pioneered partnering with industry
in NARO and carried that into the DARA; we had 25 international
partnering arrangements in place, so we put a huge commitment
to partnering with industry) those partners lost interest in us—and
understandably so; they could see that the agency was under threat.
Why would they want to go into long-term partnerships with us
while they saw no future for the agency? Unquestionably, End to
End had a hugely damaging impact on the business.
Q73 Mr Swayne: You say DARA was not involved
in the study until after many protests.
Mr Hill: It was not.
Q74 Mr Swayne: By which time key decisions
had been made. What role did you have in the End to End Review?
Mr Hill: As far as the rolling
forward of Tornado and Harrier, and elements like that, that was
given to us as a fait accompli, effectively. We had all
sorts of inklings, even a year before End to End; we had all the
rumours coming out through the system that this was going to happen.
Indeed, I was approached a number of times and asked would we
be prepared to do more work on Front Line Bases? As an agency
we were delighted to do work on Front Line Bases with civilian
working parties and that was part of our holistic service, but
obviously you cannot have centralised facilities and then disperse
all your people all around the country—it does not make
any sense at all. DARA was formed as a centralised facility to
deliver cost-effective support to the front line, and by bringing
it all together there were huge economies of scale.
Q75 Mr Swayne: What factors, do you think,
lay behind this decision to reconsider the whole logistics principle?
Mr Hill: We understood that the
whole thing was driven by CMR (Crisis Manning Reinforcement).
If you go back to when the agency was formed we had something
like 1,800 Service personnel in the agency. However, the cost
of Service personnel is greater than their civilian counterparts,
for all sorts of good reasons; Service personnel have to do additional
things that civilians do not. The structure in the Services is
very different from a civilian structure, so there are added costs.
What we tried to do when we formed the agency was to resolve this
by trying to get agreement to the premium for holding Service
personnel in the agency being paid as a separate bill by the customer.
This was not agreed. So progressively then, in order to be competitive,
we had to take the numbers down. So that the 1,800 actually was
very helpful in some ways in that we did not have to make civilians
redundant because the Service personnel had a job to go back to
in their parent Service. So progressively we ran down and we managed
that between Strike Command, Air Secretary and myself in the agency.
The numbers required for CMR was always in contention. In 1999
we talked about CMR2000 giving us an absolutely definitive picture
on the numbers that had to be held, and we were very happy to
hold whatever that number ended up being—whether it was
200 or whether it was 1,000. However, that rolled on to 2001 and
then 2002 and then it just got lost in the mists of time, as far
as DARA was concerned. The rationale for End to End, as far as
we interpreted and was briefed to us, was that by holding that
CMR element on the main operating bases you could get greater
utilisation out of those personnel. There is an argument for that.
There is, however, a counter-argument that says when you start
splitting up a centralised service and you split it and replicate
it on a number of bases then your costs are likely to go up. Now
the RAF has very laudably, as we did in the agency, re-engineered
their processes themselves and they are continuing to do that,
as I am sure DARA is since I left. The CMR issue has always been
a contentious area, as far as I am concerned.
Chairman: We will come back to CMR in
just a few seconds.
Q76 Mr Swayne: Has the effect of End
of End been to undermine RAF capability?
Mr Hill: To undermine RAF capability?
No, I do not think so. No. I cannot see any way it would undermine
RAF capability.
Q77 Mr Havard: The End to End review
was about the whole of logistics activity, it was not just St Athan
it was fast jets—
Mr Hill: That is right; it was
Army and Air Force.
Q78 Mr Havard: What I have been concerned
about is understanding exactly what its driver was, in a sense.
It seems to me that what you are saying to me is that certain
decisions had been made and then the End to End review was done
in order to show something—presumably to show the efficiency
of that decision or show how that decision could be made efficient,
rather than it being a real examination of what you call true
costs?
Mr Hill: That is right. I absolutely
agree with that. I believe the decision was taken to move forward
to main operating bases prior to the End to End review being carried
out, and consultants will always give you what you pay them for.
You tell them the answer and they will make sure that you get
to that answer as part of their processes.
Q79 Mr Havard: No surprise in that. Effectively,
what I get a feel for is that no matter what you did in terms
of showing efficiencies at DARA, you could never, as it were "win"
in this argument.
Mr Hill: No.
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