House of Commons - Defence

Select Committee on Defence Eighth Report

3 Performance

Key Targets

25. The MoD Annual Report and Accounts 2005-06 summarises Dstl's performance against its Key Targets:

2005-06: 7 of 10 Key Targets achieved;

2004-05: 7 of 7 Key Targets achieved; and

2003-04: 7 of 7 Key Targets achieved.[46]

2005-06 Key Targets

26. Dstl's performance against its Key Targets for 2005-06 is set out in Table 2.

Table 2: Dstl's performance against its 2005-06 Key Targets

Target Outcome

1. Maintain and by the end of a three-year period show an increase in score for scientific and engineering capability in the technical benchmarking exercise from 67% in 2002/03 to 72% in 2005/06—moderated by external assessors agreed with MoD's Chief Scientific Adviser (CSA) Achieved

2. Identify and agree with MoD's CSA the top 10 Dstl capability needs, their alignment with the future programme and the required MoD funding by March 2006 Achieved

3. By the end of the three-year period show a linear improvement of at least 1.5% on the FY2004/05 customer satisfaction score of 75.4% for service provision Not achieved

4. Implement a process for identifying and publicising Dstl's major achievements during the year Achieved

5. Achieve Health and Safety Executive approval of the category 4 microbiology containment facility by 31 October 2005 Achieved

6. Define the scope, structure and funding requirements of a new defence and security research and development centre and, subject to new funding being available from customers, prepare a specific proposal for its creation Achieved

7. Achieve planned progress within budget to meet the completion date of 2008 for the transfer of Dstl onto three core sites at Porton Down, Portsdown West and Fort Halstead. The key milestones for 2005/06 are: appoint the preferred bidder (August 2005); negotiate with the preferred bidder a reduction in facilities management costs of Dstl of at least 15% from August 2006; sign the contract (March 2006) Not achieved

8. By December 2005, complete the detailed design and build phases of the new Integrated Corporate Applications System (iCAS) that will deliver Dstl's business information requirements from 2006/07 Not achieved

9. Maintain the average charge rate for staff for 2005/06 and beyond below that for 2001/02 uplifted by GDP deflator Achieved

10. Achieve a ROCE of at least 3.5% averaged over the period 2004/05 to 2008/09 and an MoD dividend of £3 million in 2005/06 Achieved

Source: MoD[47]

27. We asked about the 2005-06 Key Targets which were not achieved and what action Dstl had taken. MoD told us that:

for Key Target 3, the 2005-06 customer satisfaction score for service provision was 74.7%—a decrease of 0.7% on the baseline 2004-05 score. An investigation showed that the main cause was a "notably reduced score from customers in the Research Acquisition Organisation" (RAO).[48] Steps were being taken to improve the relationship with MoD Head Office and RAO science staff;
for Key Target 7, the rationalisation project to consolidate Dstl's activities onto three core sites achieved two of its three key milestones, but it was not possible to sign the Facilities Management (FM) contract in March 2006. Serco had now been appointed as the FM provider. The handover of Facilities Management took place, as planned, on 1 August 2006. We examine the Dstl site rationalisation project later in this report (paragraphs 58-63); and
for Key Target 8, the target to complete the detailed design and build phases of the new Integrated Corporate Applications System (iCAS) by December 2005 was not met. A decision was taken to delay the project to incorporate the latest version of the Peoplesoft 8 software into the design. Work was progressing well and the project was scheduled for completion in February 2008.[49]

28. Dstl achieved seven of its ten Key Targets in 2005-06. Action is in hand to address those targets which were not fully achieved in the year.

29. The CSA told us that the MoD was constantly evolving the Key Targets.[50] Mr Trevor Woolley, MoD's Finance Director, told us that

some of the targets are harder than others. Some of the more qualitative targets in this area are inevitably going to be difficult….The targets are evolving. We are trying to reduce the number of targets to try and make them a little more relevant and in some respects they have got tougher over the years.[51]

2006-07 Key Targets

Table 3: Dstl's Key Targets for 2006-07

Area Target

Delivery 1. Achieve a level of overall customer satisfaction in our delivery of at least 76.4% for FY2006/07 against a three-year target of 76.9% (FY2007/08)

2. Deliver high-quality outputs that have impact on MoD customers' top ten priority issues

People 3. Achieve an overall score of at least 72% for scientific and engineering capability in the technical benchmarking exercise. Develop, and agree with CSA, a robust process for assessing the quality of Dstl's evolving technical capabilities for the period 2007-2011

Environment 4. As part of the strategic aim to bring Dstl onto three sites by 2009, agree the overarching construction and facilities management contract and achieve key milestones on programme to time and cost, including delivering predicted efficiency gains

5. To enable greater knowledge sharing, improved management and operational efficiencies, by meeting agreed in-year targets to ensure Dstl has in place an integrated corporate business environment by the end of FY2008/09

Business Essentials 6. Achieve an average Return on Capital Employed (ROCE) of at least 3.5% over the period 2004/05 to 2008/09

Source: MoD[52]

30. Dstl's Annual Report and Account 2005-06 states that Dstl had "set out three overarching key result areas to focus the whole organisation's efforts on achieving results". The key result areas are: delivering high-quality output on the really important issues; enabling people to realise their full potential; and creating an environment in which excellence can thrive.[53] Dstl's Key Targets for 2006-07 are set out in Table 3.

31. The number of Key Targets for Dstl has reduced from ten in 2005-06 to six in 2006-07. The six Key Targets in 2006-07 are now more aligned to the areas where Dstl is seeking to deliver results. It is important that targets should reflect an agency's central functions and not just its financial performance, but identifying targets which measure quality of output in a meaningful way can be difficult. Dstl's targets try to measure the quality of scientific and technical advice by setting as a target a percentage score for scientific and engineering capability in a technical benchmarking exercise. We note that Dstl plans to develop, and agree with the CSA, a robust process for assessing the quality of technical capabilities for the period 2007-2011. We look to the MoD to review the Key Targets set for Dstl to ensure they are challenging and reflect their central function: providing expert advice to Government.

Financial performance

32. The MoD Annual Report and Accounts 2005-06 provides the following summary of Dstl's financial performance in 2005-06:

Although turnover remained static during 2005-06 at £353 million, net profit for the Dstl…. rose from £20.2 million in 2004-05 to £21.8 million in 2005-06. The ROCE [Return on Capital Employed] fell from 9.4% for 2004-05 to 8.8%. Manpower charge rates continued to be held below the target for the fifth consecutive year indicating a reduction in real terms of the cost to customers. Dstl's wholly owned technology management company, Ploughshare Innovations Ltd, successfully completed its first full year of operations.[54]

The MoD received a £3 million dividend from Dstl in 2005-06 (£3 million in 2004-05).[55] As a Trading Fund, Dstl is allowed to retain profit to fund future investment. In 2005-06, Dstl retained £18.8 million.[56]

33. The MoD considers that Dstl has had a strong financial track record since its inception. It has never failed to meet its financial targets, which include Return on Capital Employed (ROCE) and the MoD dividend.[57] A summary of Dstl's financial performance over the last four years is set out in Table 4.

Table 4: Dstl's financial performance over the last four years

2002-03
£ million
2003-04
£ million
2004-05
£ million
2005-06
£ million

Turnover 343.5 358.1 353.3 353.4

Operating profit 13.3 19.8 23.2 18.7

Profit for the financial year 14.9 20.5 20.2 21.8

Retained profit for the year 8.9 17.5 17.2 18.8

Fixed assets 109.8 125.5 122.9 124.6

Cash and cash equivalents 29.7 26.6 61.9 78.7

Net Assets 140.5 176.5 198.9 218.18

Source: MoD[58]

34. Turnover in 2005-06 remained the same as in the previous year. MoD considered that this performance reflected the confidence placed in Dstl by its customers. Work for the MoD declined marginally during 2005-06, but work from "other government departments and non-exchequer customers increased".[59]

35. We asked whether Dstl would see any increase in MoD income, if the MoD were to increase its investment in defence research. Dr Saunders told us that Dstl's forward projections of its income were relatively flat and it was only likely to see a possible rise to cover inflation. She considered that "at the moment we are not expecting to see any big increase in investment in Dstl".[60]

36. Dr Saunders told us that Dstl currently receive around 37% of the defence research budget and expected to receive "roughly about the same proportion into the future".[61] Mr Starkey said that, as Dstl only did those things which needed to be done in government

that in itself determines the volume of our work…. we receive a particular proportion of most of the research programme—37% of that—but that depends on our role. We do not go up and down with the general volume; we look just at our role.[62]

37. During our inquiry into the Defence Industrial Strategy (DIS), the Minister for Defence Procurement told us that the MoD would open up more of its research spending to competition.[63] We asked how this would impact on Dstl, as it was unclear whether the work Dstl undertook would be opened up to competition, and whether Dstl would be allowed to compete for defence research work currently undertaken by others. Dr Saunders told us that Dstl's Framework Document said that Dstl did not compete, so the proportion of the research budget that was opened up to competition was not open to Dstl.[64] She reiterated that Dstl received 37% of the defence research budget and there had been no indication that "anybody is going to change that percentage at the moment".[65]

38. We asked whether Dstl's work might be reduced by QinetiQ expanding the defence research it undertook, thereby squeezing out Dstl. Dr Saunders considered that Dstl had "done pretty well over the last five years…. we have not been squeezed". In her view, Dstl had carved out a "niche" for itself and it was doing something "distinctively different" from QinetiQ and others.[66]

39. Since it was formed Dstl has demonstrated a strong financial track record increasing its profits and its net assets. However, Dstl's income is very dependent upon the amount of work which the MoD considers must be done within Government, which is some 37 per cent of the MoD's defence research budget. Dstl is not expecting any increase on this percentage and does not see it as its role to compete for other research work funded by the MoD. We consider that there could be benefit in Dstl operating in a more competitive environment and look to the MoD to assess whether there is scope to open up to competition some of the defence research budget currently allocated to Dstl and scope to allow Dstl to compete for defence research work currently carried out by others.

Trading Fund status

40. Dstl is a Trading Fund agency of the MoD. The other Trading Funds are: ABRO (Army Base Repair Organisation); the Defence Aviation Repair Agency (DARA); the Met Office and the UK Hydrographic Office.[67] In its memorandum, the MoD states that it has re-examined the status of its Trading Funds. The MoD had reached the following conclusion:

The confines, within which Dstl operates…. meant that the options in the Dstl review were restricted to either maintaining the status quo or returning the agency to "on-vote" status. The review concluded this summer and recommended that Dstl should retain Trading Fund status pending a further review once the "i lab" change programme has had sufficient time to become firmly embedded.[68]

The '"i lab"' programme is a major change programme intended to transform Dstl into an integrated laboratory ("i lab"). We examine the change programme later in this report (paragraphs 55-66).

41. Given that we had been told that Dstl only undertakes work which has to be done within Government and does not compete for other research work, we asked why Dstl was a Trading Fund. Dr Saunders told us that reviews undertaken in 2004 and 2005 had concluded that "there were a couple of quite big advantages of [Dstl] being a trading fund". The most important was "the customer/supplier relationship and the real focus on the customers". Another advantage for Dstl was being in charge of its financial future: the Trading Fund status had allowed Dstl to retain profits to invest in the major change programme. Also, the Trading Fund status meant that the Chief Executive was more accountable for making sure that the infrastructure and skills were maintained than if it was "an on-vote organisation".[69]

42. Dstl is a Trading Fund, but only undertakes work that has to be done within Government and does not compete for work. There are advantages to Dstl remaining a Trading Fund, notably its ability to retain profits for future investment in the business. However, given the constraints under which Dstl operates, we look to the MoD to review, on a regular basis, whether Trading Fund status is the most appropriate option.

46 Ministry of Defence Annual Report and Accounts 2005-06, HC 1394, p 263 Back

47 Dstl Annual Report and Accounts 2005-06, HC 1163, p 24 Back

48 The RAO is part of the MoD and is responsible for ensuring effective delivery of the MoD's non-nuclear Science and Technology research Back

49 Ev 29 Back

50 Q 171 Back

51 Q 174 Back

52 Dstl Annual Report and Accounts 2005-06, HC 1163, p 25 Back

53 Dstl Annual Report and Accounts 2005-06, HC 1163, p 25 Back

54 Ministry of Defence, Annual Report and Accounts 2005-06, HC 1394, p 264 Back

55 Ibid., p 215 Back

56 Ev 25 Back

57 Ev 24 Back