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DSTL 01
Memorandum from the Ministry of Defence
The Defence Science and Technology Laboratory
1. Role of the Dstl
1. Dstl is a trading fund agency of the Ministry of Defence (MOD). The organisation undertakes a wide range of defence focused research, modelling, simulation, and analysis activities and uses the results of this work to provide science and technology-based knowledge, expertise and advice to the UK Government. 2. The overall objective of the Dstl Trading Fund is to deliver value to the UK taxpayer, by using its assets and capabilities to deliver timely advice and solutions to the Government's most important defence and national security-related problems in the most efficient and effective manner. Value is created and delivered by focusing Dstl efforts on the following areas: · meeting the requirements of MOD · meeting the defence and national security-related requirements of other governmental customers · exploiting Dstl's intellectual property, in line with government policy for technology transfer in order to generate value for money for the taxpayer. 3. Dstl only undertakes work for MOD and other government customers that must be done within government. Dstl does not directly compete with industry in any of its activities unless specifically requested by the MOD or Other Government Departments (OGDs). In addition, Dstl only undertakes commercial work when specifically requested to do so by MOD or an OGD with the permission of the owner. Such cases are relatively infrequent but can arise where there are opportunities identified to share costs or create additional value from commercial arrangements with third parties. In those cases, as a Trading Fund, Dstl is also required to maximise the financial return to the taxpayer. In the case of services to Government customers this is to be in line with the Government's pricing policy. 4. Dstl's customer base in MOD can be broadly separated into 4 areas. The first, described as support functions, consists mainly of capability development for MOD's Chief Scientific Advisor, but also includes tasking from Defence Estates and the Defence Intelligence Staff. The second area is work in support of military operations for the three services and command headquarters. The third is supporting the acquisition and maintenance of military equipment for Deputy Chief of Defence Staff (Equipment Capability) (DCDS(EC)), DPA and DLO. Fourthly Dstl carries out a range of tasks relating to policy for the MOD Policy Director. Dstl also undertakes a range of tasking for OGDs with the agreement of MOD. A complete breakdown of Dstl's major areas of work is shown in figure 1. 5. Looking to the future, in order to sustain its role in the longer term Dstl will need to: · maintain a high-level overview of science, technology and engineering relevant to defence and security; · be world leading practitioners in overarching technical areas such as systems and capability engineering advice as well as in the development and application of underpinning science and technology to address sensitive defence capability challenges; and · actively engage with industry, government laboratories and academia in the UK and overseas.
Figure 1 - Breakdown of Dstl tasking
2. Dstl highlights 6. Since its inception Dstl has used science and technology to deliver high impact solutions to a wide range of defence and security related problems facing its customers. Dstl's scientists and engineers can bring to bear a wealth of experience built up over years of research and development. Only with this depth of experience can Dstl deliver these solutions to the evolving problems being posed to the MOD and other areas of government.
7. Dstl has made a major contribution, both in terms of technology and expertise, to the fight against international terrorism both in the UK and abroad. The increased deployment of our armed forces has led to Dstl deploying a significant number of staff into theatre as well as providing support to operations from the UK. Having our forces deployed abroad, in particular in Iraq and Afghanistan, has required Dstl to rapidly develop new force protection measures, in particular against improvised explosive devices.
8. While Dstl has been delivering solutions to the problems faced by our troops abroad and protecting the UK from terrorist threats it has not neglected the longer term requirements of MOD. Dstl is playing an important role in planning and developing the capability MOD will need in the future, in particular in relation to the future structure of our armed forces and how its various units will be networked together to deliver improved military effectiveness. Dstl is also making a key contribution to the Joint Combat Aircraft programme.
9. In order to deliver against such a wide ranging requirement Dstl is proud of the extent of its network of contacts and collaborations with the military, industry and academia both within the UK and abroad. This brings real added value to the work Dstl does with MOD.
3. Financial Performance
10. Dstl has a strong track record since its inception and has never failed to meet its key financial targets, which include Return on Capital Employed (ROCE), the MOD dividend and maintaining the staff average charge rate below that for 2001/2 uplifted by the GDP deflator. Further details of Dstl's performance against key targets are set out in Annex A. 11. Dstl's financial performance, over the last five years as detailed in table 1, has been consistent and sustained with each year building on the previous. In a difficult trading environment with increases in external costs outside its control such as fuel and pensions, Dstl has through effective control maintained charges to customers below the 2001/02 average (in real terms). This has enabled Dstl to generate significant funds allowing the Balance Sheet to strengthen over the period since its creation. Net Assets stand at a level some 70% higher than in 2002. As a consequence Dstl is now in a strong financial position to face the future with confidence.
Table 1. Dstl financial performance over the last five years
12. Turnover of the trading fund remained the same in 2005/06 as in the previous year, at £353.3 million. This performance reflects the confidence placed in Dstl by its customers. Although work for the Ministry of Defence declined marginally during the year, work from other government departments and non-exchequer customers increased. 13. Cost control and close monitoring of financial performance throughout the year contributed to a profit of £18.7 million in 2005/06, an increase of 2.7% on the previous year. 14. Dstl had a positive cash inflow last year amounting to £19.8 million (excluding the dividend payment). This inflow was partly due to the continued monitoring of the balance sheet to ensure cash did not get tied up pending investment on the i lab programme over the next two to three years. Cash and cash equivalents on the balance sheet improved by £16.8 million and cash balances remained positive. 15. Cash expenditure on fixed assets was £5.6million in 2005/06, compared with £5.7 million the previous year, which included capitalisation of costs associated with site rationalisation and the acquisition of new equipment to maintain Dstl's position at the leading edge of technology. 16. The level of government funds, represented by the Group balance sheet value, increased by £19.2 million to £218.1 million, mainly due to the £18.8 million retained profit for the year. 17. The Group's return on capital employed was 8.8% in 2005/06, compared with 9.4% the previous year.
4. Current Management Issues - Chief Executive Recruitment
18. In April 2006, Martin Earwicker left Dstl to move to a post outside the Department after five years as Chief Executive. Frances Saunders, formerly the Operations Director, has taken on this role pending the appointment of a permanent successor. Responsibility for the appointment of the Chief Executive lies with MOD and the post is currently being advertised. Interviews are expected to take place later this year (chaired by a Civil Service Commissioner) with the post being graded at 2-star level. 19. In preparation for the Comprehensive Spending Review, and as part of a wider examination of defence support services, the MOD re-examined the structure and ownership of each of its Trading Funds with a view to determining and confirming whether its current status remained optimal for the future. The confines, within which Dstl operates, in that it only undertakes work that must be undertaken within government, 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. The recruitment process for the new Chief Executive has been taken forward on this basis. 20. In addition, the appointment of a Technical Director has now been made and it is expected that he will take up the role in October 2006. 5. Progress of major change programmes
Background
21. Since its formation in 2001, Dstl has rapidly become a key asset to MOD - an indispensable source of science and technology at the heart of defence. However, to maintain and build on its position and reputation, Dstl must adapt to new challenges and become more integrated both internally and with its customers. In 2004, the organisation embarked on a major change programme with the aim of transforming Dstl into an integrated laboratory (i lab) and improving the coherence and effectiveness of its activities. 22. The three capital intensive aspects of i lab are: site rationalisation (Project Inspire), the provision of an Integrated Business System (iCAS) and the implementation of an electronic document and records management system (EDRM). All three projects are described in further detail below. 23. Significant progress has been made on the i lab change programme. Key aims of the programme are to rationalise Dstl's activities onto three core sites (Porton Down, Fort Halstead and Portsdown West with an enclave at Alvestoke) by 2009. Alongside the physical relocation, the programme also aims to develop the capabilities of Dstl staff to enable everyone to contribute their best in an environment that encourages teamworking and knowledge sharing. This will be facilitated through the creation of common processes and systems enabling staff to devote more time to delivering customer outputs. 24. On completion of the i lab programme, Dstl will be in a position to deliver even higher quality output to its customers on the really important issues by enabling its staff to realise their full potential and by creating an environment in which excellence can thrive. To ensure that a change programme of this magnitude delivers, Dstl is producing a full benefits tracking process which identifies not only the quantitative benefits but also the qualitative benefits which it expects to result from the programme in line with smart acquisition principles. Governance25. The Chief Executive has overall responsibility for the success of i lab. In turn, the Operations Director, supported by the Business Change Manager, is responsible for realising the expected business benefits. The Head of Laboratory Integration is responsible for the effective, efficient and consistent management of the programme.26. The i lab programme is managed in accordance with best practice, as outlined in the Office of Government Commerce's (OGC) Managing Successful Programmes (MSP) guidelines. An internal assurance team provides the Dstl Executive and Board with assurance that programmes and projects are capable of delivering the required outputs and outcomes. The programme manager provides monthly reports to the Dstl Executive on progress against the agreed programme plan. Project Inspire - Site rationalisation programme 27. The aim of the site rationalisation programme is to achieve more effective working between staff, originally spread over 15 different sites. After detailed study, the Dstl Board decided to rationalise Dstl's activities onto three core sites-Porton Down, Fort Halstead and Portsdown West with an enclave at Alvestoke) by 2009. The plan was approved by Ministers in November 2003. 28. Following this, Dstl set up a project to cover the construction needed at Porton Down and Portsdown West to achieve the 3 core site plan and the provision of facilities management for these sites. An invitation to tender for the contract was produced, a preferred bidder selected and detailed contract negotiations concluded. 29. Prior to Serco's appointment as Preferred Bidder on 10th August 2005 the tender evaluation had resulted in a clear understanding of the 3 bidders' proposals and how they would impact upon Dstl in due diligence and beyond. As a result the 15-year facilities management contract was awarded to Serco Defence and Aerospace on 24th July 2006. 30. The construction contract is based on a target cost and maximum price, now agreed to. Any increase above the target cost arising from agreed risk is shared equally by Dstl and Serco up to the maximum price. Any increase above the maximum price is met in full by Serco. 31. The main construction work at both sites is expected to commence in November 2006 with the new buildings at Porton Down due for completion in summer 2008 and at Portsdown West in spring 2009. Agreement has been reached with the relevant local authorities regarding the construction itself and measures to address local transport issues. 32. With the completion of the new accommodation Dstl will be moving approximately 1,100 of its staff in approximately equal number to either Porton Down or Portsdown West from Farnborough, Malvern, Winfrith and Bedford. In addition there will be a further 100 military secondees and contractors relocating predominantly to Portsdown West. Dstl are working closely with the Trade Unions and the staff themselves to provide a comprehensive relocation package and detailed information regarding the new locations. A regular series of briefings are taking place at the sites being vacated along with drop-in events and one-to-one sessions for staff. Integrated business systems project 33. FISP is Dstl's business management system and has been in use for seven years. It is an ageing system and hardware failure is an increasing problem. The system is also costly and difficult to maintain. FISP is a source of significant risk to both business continuity and future business development. 34. The iCAS project aims to replace FISP with stable, yet flexible, industry-supported software and hardware systems to meet the requirements of business functions such as finance, commercial and human resources. 35. The project was approved by the Dstl investment panel in early 2005. Since then, the Dstl Board has granted approval for the design, build and testing of iCAS based on Peoplesoft 8.9. The project is due for completion by February 2008. Project delivery is on a 'targeted time and materials' basis, with risk sharing built into the contract. Electronic Document and Records Management (EDRM) project36. The EDRM project has been driven by a requirement for improved access to information, helping people to find the information they need quickly and easily. Dstl's existing document management system contains multiple copies of the same information and this creates issues in finding information. Dstl owns a considerable archive of records and records management practices (e.g. reviewing and destroying information assets) have been undertaken all too infrequently in the past. 37. The EDRM project was endorsed in January 2003. At that time, there was a major push in government towards better records management, as highlighted in The Modernising Government white paper. This paper stated that: "all central government organisations were set a target to create and manage records electronically to mange information electronically." EDRM was a key part of Dstl's efforts to meet this challenge. 38. EDRM also tied in with the objectives of i lab and supported many of the programme's outcomes. More specifically, EDRM aims to create a collaborative working environment that helps Dstl to manage and use its knowledge effectively and efficiently. It is also focused on creating consistent corporate processes and procedures by providing a common toolset and information system. Following successful detailed design, testing and piloting of the solution, the first roll out of EDRM is due to take place in summer 2007, with full implementation due in 2008.
6. Performance of Ploughshare Innovations Ltd
Exploitation of intellectual property through Ploughshare Innovation Ltd. 39. All public sector research establishments (PSREs) are required by Government to ensure that, wherever possible, their Intellectual Property - that is to say, knowledge and technologies developed with public funding - are exploited within the wider economy. This ensures that the tax-payer, in the long run, gets the best value for money from the public investment in R&D. The policy applies fully to Dstl (as an MOD-owned PSRE) to the extent that it does not compromise its core role within MOD. This remit to spin out technology to create wealth in the civil sector is enshrined in Dstl's Trading Fund Framework Document inherited from Defence Evaluation and Research Agency (DERA). The aim is not that Dstl itself expands into wider markets and undertakes commercial work, but that, where appropriate, its technology is safely transferred to independent companies (by licensing or through spin-outs and Joint Ventures) for them to develop into products and services for the greater public good. 40. When Dstl was formed in 2001, it inherited from DERA a successful early track record in IP exploitation, including three spin-out companies and a portfolio of income generating licence agreements with third parties for the right to use patented Dstl knowledge. Since then, Dstl has formed a further three new spin-out companies with outside investors and others are in the pipeline. Despite the clear remit to exploit IP, and the track record of success, there has been some ambiguity surrounding Dstl's role in this, given its clear primary purpose of undertaking work that must be done in government. The challenge for Dstl was to find a way to fulfil the important exploitation role without ever compromising its integrity or its ability to provide impartial advice to UK Government. These two necessary functions do not sit easily in the same individuals. 41. Ministers agreed that the best way for Dstl to meet its technology transfer obligations was through an MOD wholly-owned GovCo whose sole purpose was to pursue the Dstl's (and therefore the Government's) technology transfer and exploitation agenda with professional expertise. With this purpose in mind, Ploughshare Innovations Ltd was created on 6th April 2005 and is based in offices in the Science Park at Porton. Ploughshare acts as Dstl's technology management company with a remit to exploit in non-defence fields intellectual property that Dstl selects to licence to it. Responsibility for managing Dstl's technology transfer portfolio has now been transferred to Ploughshare along with the resources and full transparency of the costs. This also involves the transfer to Ploughshare of Dstl's equity in most of its spin-out and Joint Venture companies, a process which is ongoing. 42. The governance arrangement for the operation of Ploughshare along with the transferred joint venture companies is detailed in Annex B. Ploughshare business model and financial issues and risks to Dstl 43. Ploughshare's business model has as its principal objective the sustainable generation and recovery of value from IP. It has access to Dstl's broad range of patented IP in a wide range of technologies. The Company reviews and assesses the potential value of individual patents and clusters of patents and develops exploitation plans for transferring those patents and technologies to commercial applications in civil sectors. The two main income streams for the Company will be income from IP licenses and from sales of equity in technology spin-outs/JVs. 44. To deliver a sustainable business, Ploughshare will need to create a virtuous cycle of IP development and commercial income realisation. The business model adopted is strongly driven by the assets placed with Ploughshare on start-up, the financial support agreement with Dstl, and the evolving requirements of its stakeholders. 45. Ploughshare's operating principles are to: · treat each IP opportunity on its merits and take it forward via the most appropriate exploitation route for that IP (licensing or spin out) · invest in, and maximise income from, new licence agreements in the short term · manage and support the development of the JV/spin-out portfolio towards successful disposal of equity. 46. The current (Years 1 to 3) licence revenue is insufficient to cover the short-term operating costs of the business. Whilst the new business develops this income stream towards the point of self-sustainability, the shortfall will be provided via a "hard cash" drawn-down loan from Dstl, up to a maximum of £750,000 over three years. Ploughshare is expected to repay this capital sum in 2007/08 and aims to do so from the proceeds of the first projected equity sale. At this time of writing the prospects of a JV sale in the next 12 months are encouraging.
7. The impact of Defence Industrial Strategy and the Defence Technology Strategy on Dstl.
47. The Defence Technology Strategy (DTS) is currently being updated as agreed in the Defence Industrial Strategy (DIS)[1] and is scheduled for publication later this year. Professor Sir Roy Anderson, the MOD's Chief Scientific Advisor (CSA) is leading this review and is working with others in MOD (including Dstl), industry and academia. The DTS will look to identify the key technologies that the UK needs to maintain a national capability in, and those technology areas where it might be more appropriate to rely more on collaborative or 'off the shelf' sources. The DTS and DIS represent an important and influential shift in Government thinking on defence acquisition, specifying the need for a closer, more transparent relationship with industry, and underlining the importance of Through Life Capability management.
48. Dstl is currently undertaking a range of activities to identify how the recommendations of the DIS and DTS are likely to impact on their business and capabilities. Although specifying the true nature of the impact at this stage is premature, the DIS's advocacy of the adoption of innovative acquisition models to replace the traditional 'customer/supplier' relationship with a range of partnerships strategically aligned to MOD's long term needs has clear implications for Dstl. As Dstl only provides support to MOD activities that demand either impartiality of expertise or support effort in the most sensitive areas of defence capability, significant areas of defence are currently supported outside government. As MOD brings industry closer, it is Dstl's responsibility to adapt and facilitate access to the best available expertise.
49. To accommodate this shift in balance and greater openness in capability objectives, Dstl will be ensuring that its capabilities are aligned with those identified in the DIS and DTS. Its business will evolve in a manner that is consistent with the strategic guidance contained in the DIS and DTS, to ensure that it positions itself to deliver best on the emerging issues that count.
Annex A
Key targets and performance
Key performance targets
A range of key performance targets for Dstl are agreed with the Minister for Defence Procurement at the start of each financial year with performance against these targets reported in the annual report and accounts, Corporate Plan and Business Plan (shown in Table 1).
Performance against key targets in 2005/06
Dstl fully achieved or exceeded seven of its ten key targets for 2005/06. The organisation achieved a score of 71.6% in the 2004/05 technical benchmarking exercise - maintaining the required improvement on the 2002/03 figures. This puts Dstl on track to meet its 2005/06 target of 72% in 2007.
In 2006, Dstl presented its top ten current technical capability risks to MOD's Chief Scientific Adviser (CSA). The agency is working closely with the CSA's team within his SIT TLB to examine the implications of the Defence Industrial Strategy S&T priorities on Dstl's future technical capability requirements. Dstl has also agreed, with MOD, the top ten programmes and projects which require Dstl support in the shorter term, based on their impact to the customer. These have now been specifically included in the key targets for 2006/07.
In order to publicise Dstl's achievements more widely, a new technical 'highlights document' has been launched. This provides a platform from which to communicate key achievements to senior customers in MOD and wider government. Two major new capabilities were introduced in 2005/06. Work has commenced on category 4 micro organisms and the new MOD Counter-Terrorism Science and Technology Centre has been launched (both at Dstl Porton Down). Finally Dstl exceeded its two financial targets relating to the charge-out rate for staff and Return on Capital Employed (ROCE).
Performance against the three remaining key target areas that were not fully met was as follows:
· . The 2005/06 customer satisfaction score for service provision was 74.7% - a decrease of 0.7% on the baseline 2004/05 score. Although this is a three-year target, the slight drop in score in the first year required further investigation. The principal cause was a notably reduced score from customers in the Research Acquisition Organisation (RAO). Mitigation steps are now being taken to address these issues and improve the relationship with MOD Head Office and RAO science staff. Overall, however, customer satisfaction increased from 80% to 83%.
· 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. However, Serco has now been appointed as the FM provider and the programme of work remains on schedule. The handover of facilities management took place, as planned, on 1 August 2006.
· The target to complete the detailed design and build phases of the new integrated corporate applications system (iCAS) by December 2005 was not met. However progress was made in terms of capturing user requirements, agreeing the design of the new system, identifying software solutions and procuring the relevant licences. A decision was taken to delay the project to incorporate the latest version of the Peoplesoft 8 software into the design. In the long term, this will reduce the need for customisation and therefore reduce the cost and risk. Work is now progressing well and the project is scheduled for completion in February 2008. Table 1. Dstl key targets 2004 to 2007
Annex B - Governance of Ploughshare Innovations Ltd
Ploughshare is a wholly owned GovCo. The company currently includes an independent Chief Executive appointed by the Dstl Chief Executive, three senior technology exploitation managers and four support staff.
The Ploughshare Board comprises: · a Non-Executive Chairman (external appointment, remunerated) · a Chief Executive · three Non-Executive Directors (external appointments, remunerated) · two Dstl-appointed Directors (Dstl Finance Director, Dstl Technical Director; non-remunerated).
The Ploughshare Board reports to the Dstl Main Board which is responsible, inter alia, for approving Ploughshare's business plan. Any business decision by Ploughshare that is potentially novel or contentious for MOD or Dstl is referred to the Dstl Main Board for approval. Where appropriate, decisions will be referred to Ministers for approval. Min (DP) is kept informed of all significant developments in the exploitation of Dstl's IP. Ploughshare's activities are additionally overseen by the Technology Transfer Oversight Group (TTOG) which acts as an advisory board to the Dstl Board with responsibility for scrutinising in more detail, and advising on matters to do with, Dstl's technology transfer and exploitation strategy and the activities of Ploughshare. TTOG representation is at 1-star level and from:
· Director S&T Policy, MOD · Director Business Delivery, MOD · Shareholder Executive · two Dstl Directors (Finance Director and Technical Director) · one Dstl Main Board Non-Executive Director · Manager, Dstl IP Group · Head of Technology Transfer, Dstl · Chair and Chief Executive of Ploughshare Innovations Ltd.
The TTOG, which meets quarterly, is tasked with:
· advising the Dstl Board on Ploughshare's annual business plan and progress against targets and any major, novel or contentious issues which may require Board intervention, · monitoring the development of Ploughshare's equity portfolio · overseeing the continuing development of Dstl's IP portfolio, in line with government policy and national security requirements · overseeing the funding generated as a result of Ploughshare's activities, including the progress and effectiveness of the Dstl Rewards to Inventors scheme · advising Dstl-nominated Directors on any matters associated with discharging their role effectively at Ploughshare Board meetings. This includes early identification of any major, novel or contentious projects, including JV propositions, to enable appropriate action to be taken.
From the outset, Dstl's policy has been that its investment in spin-out companies/JVs is confined to its intellectual property, invested in exchange for equity in the company except where there are exceptional reasons, which the Dstl Board endorses, for doing otherwise in the public interest. Notwithstanding the latter, cash to enable the companies to operate and to develop their products and markets is normally and primarily provided only by external investors. Dstl does not sell or market its own services or products through its JV companies. The return for Dstl comes when its equity in a spin-out company is disposed, either to another cash investor or through a successful trade sale or flotation of the spin-out. Governance of Dstl Joint Ventures As a shareholder of a spin-out company, Dstl is able to nominate one or more non-executive directors to the Board of each spin-out. Dstl nominated directors have generally been appointed because of their technical and domain experience. They receive no additional remuneration for their work as Non-Executive directors of spin-outs. Dstl staff are not permitted to receive equity shares in newly formed spin-outs as this could present staff with a conflict of interest or a distraction from their core work for MOD. However, staff are at liberty to resign from Dstl in order to continue their research careers for commercial ends. If a member of staff does resign to join a Dstl spin-out, a business appointment related conflict of interest does not arise because Dstl's interests are also served by the success of the spin-out company.
29 September 2006
[1] Defence Industrial Strategy. Presented to Parliament by the Secretary of State for Defence, December 2005 |