Select Committee on Defence Minutes of Evidence

Examination of Witnesses (Questions 275-279)


28 FEBRUARY 2006

    Q275 Chairman: Minister, gentlemen, welcome to the Committee to talk about the Defence Industrial Strategy. The Defence Industrial Strategy was originally expected on 20 December, and I think you produced it four days earlier. Minister, I ruined your career, I suspect, by praising you in the House of Commons and saying that it was the first procurement project that I had heard of that actually came in early, yet it was produced at quite a lick. Given that, do you feel that there were any areas which, perhaps because of the quick time scale, were insufficiently covered within the Defence Industrial Strategy? I ought to say in context that it has been generally well received, but, having put that in context, are there any areas which were not as well covered as you would have liked them to have been?

  Lord Drayson: Thank you, Chairman. Before answering your question, may I just say that it is with deep regret that I confirm the death of two British soldiers killed by terrorist bombs as they carried out their duties in Iraq this morning. Our thoughts and our deepest sympathies are, of course, with the families concerned.

  Q276 Chairman: I am sorry. I was not aware of that. Thank you for mentioning it.

  Lord Drayson: Chairman, I appreciate the comments which you have made about the DIS, and you are absolutely right that we set about delivering the DIS to a very tight timescale. The reason why we did that was because we had had clear feedback from industry that they were going to be making decisions towards the end of the year, into the early part of this year, where there really did need to be a clear framework as a good basis to take those decisions. We also knew that we had some important decisions to take on some of our key procurement projects, for example, like Carrier, which were far better taken in the context of the DIS. Therefore, it was important that we delivered it by Christmas. In terms of which areas do I feel were not sufficiently covered, I think we need to recognise that the DIS focused on the areas which we regarded as being the most high-priority in terms of the issues which we were faced with, and therefore there was a difference in terms of the depth into which we went in the different sectors reflecting the relative market conditions and the issues which we faced. Answering your question directly, we do see that there is further work which we need to do to build on what is in the Defence Industrial Strategy around areas such as research and technology—I am happy to go into the detail of what we are doing on that—in terms of areas related to small and medium-sized enterprises and the relationship between the Ministry of Defence and SMEs. These are areas which are covered within the DIS, but we certainly feel that they are areas which we need to further build on quickly this year, and we are doing so.

  Q277 Mr Havard: Can I pick up the whole area of SMEs. It seems that the Strategy is an overview strategy in a sense. Within it there are other strategies presaged, like the Marine Industrial Strategy, and so on. One of the things that interested us was which sort of sectors were involved or not involved. What you are saying is some are more heavily involved than others, but this question of how small and medium enterprises were involved is of particular importance. It has been suggested to us, for example, that some of the small to medium enterprises might look to gravitate to other sectors because they find it too difficult participate in the long term in the defence industry. What is your view of how SMEs are going to be given proper visibility and avoid that problem?

  Lord Drayson: I believe that it is vitally important that we do everything that we can to improve the way in which we work with SMEs. I have 20 years' experience of growing and building technology companies from start-up and beyond, and I know how challenging it can be. In this particular industry, because for my SMEs their route to market is through the larger companies, the primes, I think there is a dual responsibility, which is clearly set out in the DIS. There is a responsibility on Government, on the Ministry of Defence, to actively work to find ways to provide the clarity and transparency in an efficient way that small companies, who do not have the resources of larger companies, can digest and manage effectively, but there is an equal responsibility on the part of the larger companies, who are often their route to market, to provide that clarity too. The way in which we are actively doing that is to switch our focus from a specific focus around projects and about companies in terms of looking at the supply chain, and so one of the ways practically we are going to improve this is by assessing the larger companies on the basis of how good they are at having real knowledge of their own supply chains, how good they are at being able to explain to us the technology trees that they have in certain capabilities such that we can see the relative effectiveness of the larger companies in having a real understanding of which SMEs are vital to the production of the defence capability. Also within the Ministry of Defence—it is not published within the DIS, but a lot of underpinning work was done on the DIS in terms of fully understanding these supply chains—we have gone into a lot of detail in the individual sectors and asked ourselves the question: where are the really important areas of skills and knowledge, which companies are they located in and do we have proper visibility of the health of those companies and how they fit into the bigger picture? That is something which we have done in a considerable amount of detail and that is something which we are going to continue to build on. We also need to make the MoD easier for SMEs to deal with, and we have done that by issuing on our website a sort of "who's who" such that small companies can easily look up, if they think they have a service or a product which may be of interest to the MoD, who they need to contact. It is the first time we have done that. That is another example of how we are trying to make ourselves more user-friendly to the SME community.

  Q278 Mr Havard: It was suggested to us this morning that part of the difficulty that SMEs who would like to participate in these areas, and do (and some people do not understand that they do currently actually), is that they have national reach, they do not have international reach. There is a responsibility to involve them from that point of view. They cannot really get involved in an international defence market because they do not have the resources to do it.

  Lord Drayson: I have spent some considerable time looking at this, and I have been quite impressed when I have gone to see small companies. There are some excellent British small companies who successfully compete internationally in specialist markets—they are really good at it—and we need to make sure that we give them every support that we can. I think we have a very effective organisation in derisking which is pretty much unique within the international market, but when you look at these supply chains it is very clear that in many areas of defence capability there are some vitally important small and medium-size enterprises, and we need to make sure that we have got a clear focus on this, and I think we need to improve the visibility. One of the interesting things for me, coming from the pharmaceutical industry into this job and looking at the Defence Industrial Strategy, was some of the feed-back which we got from the stock market analysts about the defence industry and the lack of clear visibility in the mind of investors of how smaller, innovative, high-growth defence companies grow into larger ones because of the nature of the complexity of the systems, and so forth. I think we need to do more to help the industry have that visibility.

  Q279 Mr Havard: The accusation, if you like, that has been made by people who have given evidence to us is that the problem is that you have visibility to some degree of the first level of the supply chain but you are not so good at understanding the second, third levels. If your declaration is that these people are going to help them deliver the key industrial capabilities, you need to get underneath the first level and down to the second and third level. As I understand it, you have made speeches elsewhere and you talk about a commercial services group being established, you talk about work with the trade associations, and so on. Are these part of the mechanisms you are describing to do this work and how is this work going on, apart from what you have already described?

  Lord Drayson: I have a personal commitment to make it happen. I have some experience in helping people at the other end in terms of running these sorts of companies. I know some of the challenges from my own personal experience, and what I am driving in the Department is a real emphasis on looking at the way in which we do business, coming up with specific actions to make it easier—I have mentioned some already. We also need to recognise what the Department is already doing. If you look at government policy in terms of the proportion of contracts which the Government would like to see placed with small, medium-sized companies, the MoD spends way more than that, so we are already spending a considerable amount of our defence contract with the small, medium enterprises. We have got a range of initiatives in place. The DIS sets out how to do this, if you like, for 2006 and all the things that we are doing, and it is my job, in terms of being accountable for the implementation of the DIS, to see that these things happen. What I am looking for is that next year (2007) we are starting to see evidence that it is making a difference. I am actively spending amounts of time talking to that community, getting that feed-back to make sure it is making a difference.

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