Examination of Witnesses (Questions 160-179)
RT HON
ADAM INGRAM
MP, AIR VICE
MARSHAL BARRY
THORNTON CB AND
MR NICK
EVANS
29 NOVEMBER 2005
Q160 Linda Gilroy: I want
to ask a question about the relationship with the contractor in
a minute, but just to follow through on the questions that David
has been asking on leaning and pulse line management, can you
clarify for me whether the investment appraisal of Marham versus
St Athan took into account the possibility of that leaning and
pulse line management taking place there? Also, when we visited
we saw what appeared to be a state of the art paint shop and also
machine shop that delivered parts made to order. Is that also
included in the investment appraisal of Marham versus St Athan?
Mr Evans: In terms of the investment
appraisal (and it does come down to the CMR again), it is not
so much a function of, if you like, how the logistic business
is done—the basis on which the IA was conducted was to look
at the differential costs between the rolling forward and the
rolling back options and what we called the hybrid option, which
was one which seemed one of the most likely outcomes that we can
come to, and the key drivers for the investment appraisal and
the reason why it ended up the way it did was that essentially
housing the CMR at St Athan, doing the infrastructure there, including
the married quarters and all the other investments that would
be necessary, was significantly more than it was for concentrating
forward at main operating bases, in the case of the Tornado aircraft
in particular. So that was the driver. The key number, in other
words, is the CMR number. The leaning number is something that
is a factor that will go into that, but it is this CMR number
that is the critical bit.
Q161 Linda Gilroy: I understand
that, but in working that out were the costs of the potential
for leaning and pulsing and paint shop and the machine shop weighed
in with that?
Air Vice Marshal Thornton: We
assumed that either location could deliver the output in the same
way and make the same efficiencies—so that was not a discriminator—and
the investment appraisal did take into account infrastructure
costs, including a paint bay.
Q162 Linda Gilroy: So
the answer is "Yes" basically.
Air Vice Marshal Thornton: Yes.
Q163 Linda Gilroy: You
have described how continuous improvement and working with partner
support solutions with the prime contractor can, in your view,
deliver lean principles and pulse line maintenance over time and
the costs and efficiency savings that go with it, but can you
perhaps explain to the Committee how that works through in the
arrangement with the contractor and the contractor relationship?
I understand that there is a gain sharing arrangement. Could you
explain to the Committee what that involves?
Air Vice Marshal Thornton: Certainly.
The previous way of delivering our support business would be that
we would integrate all the outputs from the various support base,
we would bear the risk, we would effectively incentivise industry
such that the more unreliable a piece of equipment was the more
they benefited from that. Moving to an output based contract where
industry, the design authority, has the responsibility for delivering
available and capable platforms to the front-line and is incentivised
to do so through improving their profit against reduced costs
whilst meeting the performance targets; that is the gain share
mechanism. They have better ability to use their design authority
knowledge to improve the performance of the aircraft and reliability
of the aircraft through life. They also have a better leverage
over the supply chain.
Q164 Linda Gilroy: Can
I ask you how frequently the partnered solution contracts with
BAE Systems and Rolls Royce will be opened up and looked at again?
Air Vice Marshal Thornton: Yes,
we would probably start from a five-year fixed period, but the
intent is to move on to what we call a "rolling contractual
basis". Providing industry performs in year one, you add
another year to the contractual period. That gives industry the
long-term business that they seek; it allows us not to approach
the cliff edge in terms of the next block of pricing negotiations
and so there are considerable benefits in that rolling contractual
approach.
Q165 Linda Gilroy: I think
I understand that, but can you explain to me how over time is
there a danger that things could become so lean and so efficient
that BAE Systems, Rolls Royce and their shareholders might lose
interest because what is left for them to take a gain share, in
the way you have described, is so lean?
Air Vice Marshal Thornton: I would
expect over time that it becomes more difficult to get to gain
share. I do not think, by any stretch of the imagination, we are
in the most effective position yet, as you would not be surprised
to hear me say. What this does is give to industry a long-term
business portfolio. It gives them long-term survivability, which
is vital to me in terms of supporting today's aircraft through
to their out of service dates.
Mr Ingram: The last bit of the
question has a general application across what we are seeking
to do with the new defence industrial strategy, which has not
yet been launched; but this new arrangement with industry, the
way in which I am advised it used to operate tended to be a bit
adversarial—two sides trying to knock the stuffing out of
each other—which was not effective and certainty in terms
of planning and planning for the long-term was not there. That
is not good for industry. It is not good for us, because again
the implication, some would say, is that we are walking away from
this. What the defence industrial strategy would seek to do is
put that type of philosophy in place, where it is more open, but
more transparency, more honesty between the partners so we have
a better understanding of each other. They know how much we have
got to spend but not as much as we want. Probably not about every
penny, because there are still negotiations that have to take
place on all of that, but trying to give them best predictability
of what our demand is going to be will then assist industry to
meet that. If they say, "We are not interested", then
we will have to look at another solution, but that always has
to be the case in terms of however it is being approached with
industry. Industry manufacture these platforms—they create
them in the first place—and, therefore, it must be of interest
to them to be part of the partner solution in the long-term maintenance
of it. It is finding the balance to be struck to our benefit in
terms of the MoD, to everyone's benefit as tax-payers and also
to the benefit of industry and the shareholders. It is a very
complex equation and there will not be a perfect answer to it.
There never has been. We are trying our best to get the best approximation
to that, and that is what we are trying to deliver in terms of
defence in this whole strategy.
Q166 Linda Gilroy: I certainly
understand the description of the benefits. I think this inquiry
is concerned with front-line capability and front-line capability
on a sustained basis. I think we were very impressed with the
enthusiasm that we saw at RAF Marham for implementing lean management
and how fast you were able to take the proceeds of that. I think
the concern I am expressing is: do you have a plan B? If you reach
the end of being able to so lean and make that process efficient,
that the profit that is in it for the prime contractors, the partners,
become such lean pickings that their shareholders look at other
opportunities that are available and say, "We are going to
go elsewhere", perhaps rather sooner down the line that you
might otherwise expect?
Mr Ingram: We do not plan for
failure.
Q167 Linda Gilroy: I am
sure you do not.
Mr Ingram: But what you have to
do is to define with industry. This is where the transparency
and the open book approach comes. If they are hitting that crisis
point, they should tell us well in advance, because it is in their
interests so to do, to make us aware of those dilemmas they may
be facing. We then have to test that: is this an attempt to squeeze
more out of us? That is part of the process. The plan A to Z is
to ensure that we continue to get the support which we require
and to deliver that output which is necessary in delivering front-line
capability.
Q168 Linda Gilroy: Can
I follow that point through with a last question. I think that
is exactly the point that I was driving at, that you then get
into the hands of what is effectively a monopoly supplier who
can put to you that they can only do it at a greater cost than
you have been taking from the leaning process. If I can finally
say, it might be worth looking at the experience that there is
in utility regulation as to setting the sort of partnership approach,
the gain sharing approach you have described, what happens over
time with that in terms of prices for consumers, you being the
consumers?
Mr Ingram: I do not know if your
recommendations are going to conclude there should be a review
of whatever it is, an "Of" or something like that. I
hope not.
Q169 Linda Gilroy: Ofmod!
Mr Ingram: I do not think that
would be the best way forward. If I was to tell you that in terms
of over land systems BAE Systems have 95% of volume, that is as
near in reality the support that you can get. What we are having
to do is work on new relationships with them in terms of the restructuring
that is going on with the sister organisation, ABRO, and I made
an arrangement that rationalised all of that to get the best structure,
best conditions to work in partnership with new industry needs
so we can get the long-term support mechanisms in place on that
principle. I do not think the monopolistic equation is critical
where you have the best partnering and open group and transparent
relationship, remembering that there are people employed in all
parts of the country by those companies as well, and so it is
in our interest as a government not to put crisis into the system
but to put stability into the system, and that is really what
we are seeking to do in all of this. The monopolistic approach
is already there. Are we now going to be asked to break up the
support to the supply chain in other areas?
Q170 Mr Havard: I have
been interested in what you say, Minister, about how some of this
will feed back into the defence industrial strategy which is going
to have to deploy our policy, which seems like a good idea. Can
I come back to the question about how all this is being done.
I visited Marham the other day. It seems to me the trade unionists
are saying that at DARA, for example, people were going to pace,
you know, and at a skill level that they question whether or not
the RAF personnel could do. If they cannot do that, then at certain
levels you have to introduce contractors, agency staff, and so
on. What level of contracting and agency staff is actually being
employed or planned to be employed in all these locations?
Air Vice Marshal Thornton: If
I may, at Marham the plan is, in addition to the military people
that we have got there, to move about 60 full-time BAE Systems
staff over. As,these are people that we have employed in the past,
they will move to where the actual work is being undertaken as
BAE Systems undergoes its own rationalisation process, in addition
there will be a maximum of about 45 agency staff.
Q171 Mr Havard: When I
visited there I got the impression that this was going to fluctuate.
There is this question that Linda was exploring about sustainability
and there would be a sustained number of contract personnel doing
it, because a number of the rationale explanations we have had
is that you have to have RAF personnel doing this. RAF personnel
are not going to be doing all of it all the time. There is a component
of contractors who are doing it all the time?
Air Vice Marshal Thornton: Yes,
and for the maintenance programme 45 agency staff is the figure
that we are working to. It is slightly below that at the moment.
It may have to peak for surges, but that is the way that DARA
have traditionally peaked and that is the way we will do it in
the future. If there is a capability insertion programme, we may
need to bring in more agency staff to do that, but in terms of
maintaining the GR4 at today's standard, it is a mixture of some
243 servicemen and 45 agency staff actually working on that hangar
floor.
Mr Ingram: I think there may be
a misunderstanding here, that somehow or other we designed a solution
and then we have modified it to bring in agency,—and in
this case BAE Systems—direct personnel. That was never the
case.
Q172 Mr Havard: You planned
them in, did you?
Mr Ingram: No, if you hear the
answer, it was designed on a partnering approach with the design
authority. There would always be non-uniform personnel, and the
figures were given in the investment appraisal, and, indeed, were
the agency staff figures. I think, indeed, Marham was 48, and
you have heard the figure that we are now working to. It may be
below that. Agency staff of all sorts are probably currently engaged
at DARA St Athan, and so that has been part of the process anyway.
It is a balance between the CMR, the requirement to have those
skilled war fighters who can go off on expeditionary roads, and
we need that number and that is the number which are then the
defined requirement for RAF, and, no matter where the work was
to be done, that would have to be the case, and that is why we
set up the investment appraisal. I must say that I was a bit concerned
that people were not hearing the message that we were coming to,
that 1,150 was the total number of personnel across the two platform
types and that if they went to DARA St Athan that would be the
displacement number of civilian personnel. Really what we are
doing is taking a big tranche of people out of the system, both
RAF personnel and civilian personnel, and delivering the same
outputs at a significantly reduced cost to the MoD overall and
to the RAF as a front-line service no less. To do otherwise would
have been failing.
Q173 Mr Havard: That is
part of the point. The argument seemed to be that this work needed
to be done by RAF personnel, but it is not all being done by RAF
personnel?
Air Vice Marshal Thornton: It
was never the intention that it could all be done by RAF personnel,
and that was in all the investment appraisals, and the Recommendation
40 investment appraisal that you have got recognises the figure
of 48 civilians to work on the Tornado GR4 maintenance; we are
in line with that figure.
Mr Evans: We did a lot of sensitivity
analysis in the investment appraisal if those assumptions had
not been fulfilled, as it looks as though they are being, which
still showed that there was a considerable advantage in favour
of rolling forward.
Mr Havard: Essentially what you have
done is you have introduced, I do not know how much, but a simpler
cost to contractors who advised you on introducing the Toyota
processes, because when I went into Marham I said to them, "This
looks familiar to me. This looks like Toyota to me", and
as an old trade union official, I have seen it before, I have
seen the Canban systems and all of that sort of stuff, so the
continuous improvement thing is not new in that sense. It is now
being employed in a different way and in a different place—I
understand that—but there are also dislocation costs; there
are also questions about now you maintain skill levels within
that. You talk about the need to be war fighters—which I
do not accept, by the way. They could not be war fighters in Wales.
Most war fighters have to come to Wales to be war fighters, but
that is a different subject.
Chairman: Can we make that into a question
please?
Q174 Mr Havard: The question
is: from what I saw the RAF personnel were going to be working
at certain times for very short periods on all of the parts of
the pulse, but the major part of their activity was at the front
end and the back end, which is stripping it down and putting it
back together again. They are not factory workers. As you said,
they are war fighters. They do not join to be factory workers.
Where does this leave you in terms of retention, recruitment,
and are we going to see holes appear and they will have to be
filled by extra contractors?
Air Vice Marshal Thornton: I think,
as we have said, servicemen have always been employed in depth
organisations throughout the history of the Armed Forces. This
is not new. Today we have over two and a half thousand servicemen
employed in depth organisations in the second-line hangars and
bays round the Air Force, so there is no new argument here. What
we have to do is to make sure that when we operate the pulse line
that we do move people around the pulse line, we do develop their
skills appropriately; and that is a management task for those
operating maintenance facilities on the stations. I do not think
there is anything new. Some people prefer the cut and thrust of
a front-line squadron, some people prefer the greater stability
you get from a depth organisation. We want people to be able to
work in both, and we are developing a personnel policy that determines
how long people should spend in each organisation. It will be
dependant upon the particular aircraft type and the demand, to
be quite honest.
Q175 Mr Havard: Could
I ask one last question. On the question of sustainability, which
is what I am really driving at, you have got a plan. What is the
sustainability of it? Also what is the transition here? There
are predicted efficiencies coming, is what is said to us by the
MoD. You have a plan to make all these changes in a particular
period of time. There is a risk in that. There has to be some
assessment of the risk. What reassessment, reappraisal, of that
risk is happening on a continuous improvement basis that might
examine whether or not pace of the change that you have already
predicted will prove to be true or not true?
Air Vice Marshal Thornton: As
I mentioned before, we have just done an audit of the Harrier.
Q176 Mr Havard: You did
it?
Air Vice Marshal Thornton: An
independent person from my organisation together with . . . .
Q177 Mr Havard: An independent
person from your organisation did it, who was under your control?
Mr Ingram: Was the implication
that the people who carry out this work in the RAF, because they
are in uniform, do not use objectivity in their analysis? Is that
the accusation?
Q178 Mr Havard: It is
not an accusation, it is a question.
Mr Ingram: That was the implication,
and I think it is wrong to say that. It is wrong to imply that.
Q179 Mr Havard: Who did
it?
Air Vice Marshal Thornton: It
was led by two RAF group captains, one who works in my organisation
but not part of any of the project teams that manage the aircraft.
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