House of Commons - Defence

Select Committee on Defence First Report

3 Merger of the DPA and DLO

19. On 24 January 2006, at our evidence session on the MoD's Annual Report and Accounts 2004-05, MoD's Permanent Under Secretary (PUS), Mr Bill Jeffrey, told us that he thought he needed to apply a lot of attention to the "whole question of how we procure and acquire equipment for defence…. although improvements have been made, there is still a great deal to do".[22] He also told us that:

We are also up for serious and significant improvement in the way in which procurement is managed by the Department, but, as part of the follow-through to the Defence Industrial Strategy, there is a project which I instituted myself shortly after I arrived in which we will be looking hard at the way in which the procurement function operates, how it is structured, how the processes work, and looking at ways in which we can generally make it work better, and I am utterly committed to that.[23]

20. The outcome of the review commissioned by the MoD's PUS was published on 3 July 2006—'Enabling Acquisition Change, an examination of the Ministry of Defence's ability to undertake Through Life Capability Management'.[24] The report examines the current structures, organisations and processes with the aim of maximising the MoD's ability to deliver a key objective of the Defence Industrial Strategy (DIS), Through Life Capability Management, which focuses on the costs and capabilities of equipment throughout its life, not just the purchase price.

Merger of the DPA and DLO

21. The Enabling Acquisition Change report recommends the merger of the DPA and the DLO to form a new integrated procurement and support organisation, a single entity responsible for the procurement, maintenance and containment of military capability. The aim is to improve financial planning by ensuring that new equipment and its in-service support costs are planned more coherently. The merged organisation will be known as Defence Equipment & Support (DE&S). On 21 September 2006, the MoD announced that the current Chief of Defence Logistics (CDL), General Sir Kevin O'Donoghue, would become the first Chief of Defence Materiel, the head of the new organisation. CDP and CDL would work together to merge the DPA and DLO on 1 April 2007.[25]

Progress on the merger

22. At the evidence session with CDP we asked how the merger of the DPA and the DLO was progressing. He told us that:

The organisation has been set up and announced, and in broad outline we have described the purpose, the aims and the objectives, and we have named the key players that we can who will be in board level positions. There are a number of other work strands which are at varying degrees of completion which are going to focus in on the detail of how the performance metrics will be set, both for the organisation and for Ministry of Defence as a whole.[26]

23. There are four phases to the project:

Phase 1 was to define what the organisation would look like and set out in broad principles how it would operate. It was completed at the end of September 2006 on time.[27]
Phase 2 had begun and included defining in outline what "two star board members" would be expected to deliver and the changes needed in their areas to deliver the targets set. The completion date for this Phase was the end of December 2006.[28]
Phase 3 was to commence after Phase 2 had been completed. Phase 3 is the next level of detailed work of engaging with the workforce in a much more detailed way to explain what it means for them. The completion date for this Phase was 1 April 2007. The new organisation vests on 2 April 2007.[29]
Phase 4 was the first year of operation of the new organisation. During this first year "there will then be the first of the post-project evaluations to take a look to see to what extent the organisation is going to be delivering what is needed and then to be prepared to make any further adjustments at the end of the first year".[30]

24. Work to merge the Defence Procurement Agency and the Defence Logistics Organisation is underway and, on current plans, the new organisation will begin operating on 2 April 2007. The MoD is managing the merger as a project with four phases and target dates for the completion of each of these phases. Given the importance and scale of the merger, we recommend that the MoD provide us with quarterly progress reports.

Measuring the performance of the new organisation

25. The DPA and the DLO have their own performance targets. Given that the aim of the merger was to improve Through Life Capability Management (TLCM), we were interested in how the expected improvements in TLCM would be tracked and whether there would be new Key Targets covering this. We also sought clarification as to whether the current DPA Key Targets would continue, to allow future performance in equipment acquisition to be tracked. On the issue of measuring performance, CDP said that:

During that first year the intention is to measure the performance publicly by the existing PSA targets for delivery of projects and by the same targets that are in place for the current Defence Logistics Organisation, but to shadow trade in a new set of targets which will be optimised to measure the organisation's ability to deliver year-on-year improvements and through-life capability management and some other performance metrics as well, including agility in terms of responding more rapidly than we do at the moment to the needs of the Armed Forces.[31]

26. A key objective of the new Defence Equipment & Support organisation is to improve the management of acquisition on a through-life basis. We are pleased to learn that there will be new targets to measure the performance in this area and a target covering how quickly the new organisation responds to the needs of our Armed Forces. Given some of the substantial cost increases and time slippage experienced by some equipment programmes in the past, we expect the MoD to continue to monitor its performance at procuring equipment to time, cost and quality, and for the performance data to be published on an annual basis as it is now. Otherwise, there is a risk that poor procurement performance could be buried in long-term project management data.

Training of staff

27. Given that the focus of the new organisation will be on improving Through Life Capability Management and being more agile in responding to the need of the Armed Forces, staff will need to be trained in a range of skills to ensure that the expected improvements are delivered. CDP told DPA staff that:

We need to put our money where our mouth is, invest more in training in important areas like project management but also in finance, commercial skills and certain deep technical specialist skills where we're lacking strength in depth and living on the fruits of a former era.[32]

28. CDP acknowledged that there had not been enough training in the DPA. Work was underway to identify the current level of capability among staff and put in place training programmes to increase the ability of the workforce. The Defence Academy was to be used to deliver the training or to act as a portal to direct staff to other providers of training to best meet their requirement. We asked whether the financial commitment to fund the training had been identified. CDP said that he could not answer the question at the time, because he did not have "a complete answer to the gap analysis". He recognised that there was a risk that enough investment would not be earmarked and this risk had to be managed.[33]

29. The MoD has subsequently provided us with details on the progress being made in identifying skills gaps and how these have been, or are being, addressed. This evidence states that the MoD did "not underestimate the substantial change programme required and while the level of investment required to deliver this is still being assessed it is likely to be significant".[34]

30. Some posts are to be filled by external candidates. There are to be further competitions to fill some new posts in the new organisation, "so there is ample scope for bringing people in, not only to do the work but also to explain and bring people with them to do things in a totally different way than they have been used to". One of the big cultural changes for the new organisation would be holding people accountable for their results and a real focus on outcomes.[35]

31. The success of the Defence Equipment & Support organisation will depend on whether the new organisation has the staff with the required skills to improve Through Life Capability Management and provide more agility in responding to the needs of the Armed Forces. Much work is being undertaken to identify the current skills gaps and to address these through training or external recruitment, and we welcome this. It is essential that the MoD commit the investment required to address the skills gaps identified.

Staff reductions and collocation

32. As a result of the merger, the DPA will reduce from 4,600 staff in October 2004 to 4,150 staff in March 2008, a reduction of almost 10%.[36] We asked CDP in what areas staff reductions would fall. He explained that part of the reduction was because there would be fewer new projects to manage in the future. A number of large and complicated platforms had recently been procured, so the main focus in the future would be on technology insertion on such platforms. Also, the DPA had to accept its part of the Gershon efficiency savings.[37]

33. The DLO will reduce from 27,000 staff in October 2004 to 21,600 staff in March 2008. The combined strength of the new organisation is expected to be smaller than the DLO in October 2004 (25,750 against 27,000).[38] On 29 September 2006, the MoD announced that the DLO was to collocate a number of its key activities alongside the DPA in the Bristol and Bath area. The DLO was to withdraw from a number of sites around the country over the next five years.[39]

34. We recognise that collocating the Defence Logistics Organisation with the Defence Procurement Agency is a sensible step, given that the aim of the merger of these two organisations is to improve Through Life Capability Management. The merger will result in a substantial number of job losses and the collocation will have a major impact, particularly on those who work for the Defence Logistics Organisation and their families. We expect the MoD to continue to consult with the Trades Unions during this period of change and to provide appropriate support to those affected.

Efficiency savings

35. The MoD expects the collocation of the DPA and DLO to release around £200 million for the front line over a 25 year period.[40] The MoD Annual Report and Accounts 2005-06 provides details of the efficiency gains relating to 'procurement and logistics'. As part of the Spending Review 2004, the MoD agreed that it would realise total annual efficiency gains of at least £2.8 billion by 2007-08. £1.66 billion relates to procurement and logistics, including £374 million from equipment procurement and £951 million from the Defence Logistics Transformation programme.[41] We asked whether these efficiency gains took account of the merger of the DPA and the DLO. The MoD told us that "the future planned efficiency gains for procurement and logistics do not take account of the DPA and DLO merger.... Although the merger is likely to bring about more effective and efficient working, it is too early to predict the efficiency gains".[42] We would expect the merger of the Defence Procurement Agency and the Defence Logistics Organisation to deliver substantial efficiency gains. We look to the MoD to identify what efficiency gains are likely to be delivered, and to monitor whether these gains are achieved.

Status and scrutiny of the new organisation

36. The DPA is a Defence Agency; the DLO is an organisation within the MoD and does not have agency status. The Enabling Acquisition Change report recommended that the merged organisation should not have agency status.[43] CDP told us that the decision had been taken that the new organisation would not be an agency, but a "top-level budget arrangement".[44]

37. One of the requirements of agency status is that the agency has to produce an annual report and accounts, which allows Parliament to scrutinise the agency's performance. The Defence Procurement Agency was a major business spending some £6 billion a year and we found its Annual Report very helpful. The new Defence Equipment & Support organisation will be a huge organisation, in terms of manpower and expenditure. We asked if the new organisation would be required to produce an annual report. On 24 October 2006, at our evidence session on the MoD's Annual Report and Accounts 2005-06, the MoD's Permanent Under Secretary, Mr Bill Jeffrey, told us that:

Its activities will certainly constitute a very substantial element of the report that we have before us here [MoD's Annual Report and Accounts 2005-06]. I do not think we have finally decided whether or not there should be a free standing annual report.[45]

He added that:

it is no part of the purpose to reduce parliamentary scrutiny.... We need to arrange ourselves so that, whether or not there is a free-standing annual report, there is a full and informative account of the business and activities of the new organisation.[46]

38. The new Defence Equipment & Support organisation will be huge, in terms of both manpower and expenditure. Its roles of procuring equipment and managing equipment through-life are key to ensuring the effectiveness of our Armed Forces. We are concerned that, as the organisation will not have agency status, its activities may lose transparency. We recommend that the new organisation publish an annual report so as to allow proper public accountability, and parliamentary scrutiny in particular.

22 Defence Committee, Sixth Report of Session 2005-06, Ministry of Defence Annual Report and Accounts 2004-05, HC 822, Q 1 Back

23 Ibid., Q 31 Back

24 Enabling Acquisition Change-An examination of the Ministry of Defence's ability to undertake Through Life Capability Management, June 2006 Back

25 Ministry of Defence website, Defence News, General Sir Kevin O'Donoghue will be first "Chief of Defence Materiel", 21 September 2006 Back

26 Q 113 Back

27 Qq 114-115 Back

28 Qq 116-117 Back

29 Qq 117-118 Back

30 Q 118 Back

31 Q 118 Back

32 July 2006 issue of Preview, the journal for defence equipment acquisition, p 4 Back

33 Qq 137-138 Back