House of Commons - Defence

Select Committee on Defence Tenth Report

3 Current and future issues

Business Strategy 2008-12 and "Blueprint"

69. On 18 January 2008 the MoD announced that the Chief of Defence Materiel had written to all staff in DE&S to set out the "organisation's strategic direction and priorities in a Business Strategy 2008-12 and a Blueprint for what DE&S will look like and how it will operate in 2012". CDM told DE&S staff that he believed that staff must work together to embed changes over the coming years, and to continue to find even more ways to improve how DE&S does business to meet the inevitable challenges that will arise. This included the need to further improve the service to its customers whilst delivering value for money to the taxpayer.[89]

70. Detailed plans had been developed by "cluster leaders" for how each part of DE&S would contribute to achieving the "Blueprint". These plans were aimed at improving how DE&S did its business and enabling people to do their jobs better. DE&S had created a team under its Director General Change, "to manage the coherent delivery of these plans within a single change programme, PACE—Performance, Agility, Confidence and Efficiency". The ultimate goal from these plans is for DE&S:

to be a more effective organisation, capable of achieving its mission of equipping and supporting our armed forces for operations, now and in the future.[90]

SHAPE AND SIZE OF DE&S

71. The DE&S "BLUEPRINT: The Future Operating Model" sets out future changes to the size of the new organisation:

It is difficult to exactly predict the size of the future organisation. Estimating a precise number at this stage would not only go against the principle of delivering greater efficiency through continuously striving for ever greater effectiveness, but would presume the outcome of further work that will need to look at the capability we need in DE&S, what tasks can better be undertaken elsewhere, including in industry, and whether tasks need to be undertaken at all. Indications at this stage from initiatives aimed at improving how we do business and doing business differently, are that DE&S in 2012 is likely to employ around 20,000 people.[91]

Table 3 sets out the number of personnel in post before the formation of DE&S, the number in post during the first year of DE&S operation, and the forecast number in post in the future.

Table 3: Number of DE&S personnel in post prior to the merger, during the first year of operation, and the forecast number in post in the future

Date Number of personnel

September 2006
Personnel in the DPA and the DLO prior to the formation of DE&S
28,669

2 April 2007
Formation of DE&S
27,512

1 December 2007 26,345

March 2008
DE&S Manpower Control Total
27,650

2012
Forecast in the DE&S BLUEPRINT
20,000

Source: MoD[92]

72. The number of DE&S personnel is forecast to reduce by some 27% by 2012 compared with the number of personnel in post when the DE&S was formed on 2 April 2007. The scale of the reduction is similar to the "streamlining" exercise of the MoD Head Office in London. On 23 October 2007, the MoD announced that Head Office staff were to be cut by 25% with the loss of 1,000 civilian jobs and 300 military posts. The MoD expected to be more agile and better able to respond to the needs of those on operations once the "streamlining" exercise of the Head Office had been implemented.[93] We examined issues about the "streamlining" exercise in our report Ministry of Defence Annual Report and Accounts 2006-07 published on 28 January 2008.[94]

73. We were interested to understand how the reduction in DE&S personnel would be achieved without impacting on its work, and how DE&S would retain the personnel with the skills it needed. CDM acknowledged that this was a "big challenge". He did not believe that it could be achieved by money and that it must be done "by motivating people, so it is a matter of leadership and management".[95]

74. We asked what impact the planned reduction of personnel in the MoD Head Office would have on DE&S. CDM thought the relationship between MoD Head Office and DE&S would be stronger. He said that the whole point of the MoD streamlining was "not just to take out 25% of staff but to make it more effective". He expected that the approval and decision making process in the MoD Head Office would be quicker. CDM added that:

There is a danger that some of the things currently done in the main building will move into DE&S. I do not have a problem with that at all, if that is the right thing to do, provided the resources to do it come with it.[96]

75. We sought further explanation on how fewer personnel would be more effective. CDM said that the merger of the DPA and the DLO had "pulled in two sets of processes", such as the assurance processes. As a result, there was some duplication and by reducing the processes and the number of staff involved the processes were more streamlined and the decision-making quicker.[97]

76. CDM told us that a lot of the jobs in DE&S would go because, as the MoD moved to contracting for availability, "a lot of the transactional work that we currently do in-house will move to industry". He said that as more partnering arrangements are formed, work undertaken in DE&S would move across to industry which was better placed to do it. He thought that DE&S would "finish up with a higher skilled and paid workforce but a smaller one".[98] CDM acknowledged that:

It is unsettling people. We will come down to some 20,000 people over four years. People need to know who is staying, who is going and who will have early release. There is a degree of uncertainty in some areas.[99]

77. We note that, as with the MoD Head Office, DE&S is to be streamlined with the loss of some 7,500 staff—27% of its workforce—by 2012. As with the streamlining of the MoD Head Office, we remain to be convinced that improved economy, agility and responsiveness will follow from the reduction in staff. We look to the MoD to provide adequate support for those DE&S staff who are to lose their jobs. The MoD must monitor closely staff morale during the streamlining of DE&S and ensure that it continues to deliver the services which our Armed Forces require.

78. Given the planned reduction in the number of DE&S personnel, we asked whether there was enough room for the whole organisation to be based at Abbey Wood in the future. CDM said that it was not possible to get 20,000 people into Abbey Wood and this was not the intention as some DE&S staff needed to be at the naval bases and airfields. However, by 2012, the plan was that all DE&S personnel who "are office-bound and who do not need to be somewhere else" would be based in Abbey Wood.[100] CDM said that the planned reduction in personnel could release a number of sites currently occupied by DE&S.[101]

79. On 7 March 2008 the Minister for Defence Equipment and Support wrote to our Chairman about the planned reduction in DE&S staff and informed him that the reduction:

would enable DE&S to fulfil the strategic intent of consolidating more business at Abbey Wood, Bristol by 2012. Subject to departmental approval and Trades Union consultation later this summer it is proposed that DE&S would withdraw completely from Ensleigh, Brampton, Andover North and Wyton by 2012, with the majority of the activities transferring to Abbey Wood. This would be in addition to extant plans for DE&S to withdraw from Foxhill, Andover South and Caversfield. Every support and assistance will be offered to staff affected by this decision to ensure that disruption to their work and home life is minimised.

The MoD is to review the overall impact on the Defence Estate as a whole and the future use of the sites vacated by DE&S.[102]

New approaches to contracting

80. CDM expected that some of the reduction in DE&S staff would result from the MoD moving to contracting for availability (paragraph 76). He explained that this approach pushed back onto the manufacturer of equipment the "risk of unreliable equipment". The rationale for this approach was that when the "cost of not repairing something falls on the contractor he repairs it very fast". It had been recognised that the financial risk usually ended up back with the MoD and the operational risk always had to remain with the MoD. However, CDM believed that the risk of unreliable equipment was one that could be pushed back onto the manufacturer.[103]

81. CDM provided an example of this approach at Rolls-Royce, in Filton near Bristol, where:

They have a military engine operations room across the end of which is a big sign for the Rolls-Royce workforce to see—we contract for availability of engines—which says "Remember! Spares are now a cost, not a profit".[104]

Mr Gould said that another example was the patrol vessel HMS Clyde. The MoD had not bought the vessel from Vosper Thorneycroft but was buying from them "five years' worth of ship time".[105]

82. Military equipment acquired by DE&S must be reliable and available for use by our Armed Forces. We note that the MoD is seeking to push back onto the manufacturer the risk of unreliable equipment by contracting for availability. We consider this to be a promising approach and we look to the MoD to evaluate whether these new arrangements deliver the expected benefits in terms of improved availability and, if so, to consider how they might be used more widely.

Comprehensive Spending Review 2007 and Planning Round

83. The Secretary of State for Defence announced the overall outcome of the Comprehensive Spending Review (CSR) settlement for defence in a Statement to the House on 25 July 2007.[106] The 2007 Pre-Budget Report and Comprehensive Spending Review[107] published in October 2007 provided further details on the CSR settlement for defence.

84. We examined the CSR settlement for defence in our inquiry into the Ministry of Defence Annual Report and Accounts 2006-07. MoD's Permanent Secretary, Bill Jeffrey, told us in November 2007 that:

what we will be doing is taking the spending review outcome as the starting point, looking at where the pressures are in the programme—and there undoubtedly are some—and trying to put together the sort of advice that our ministers will need in order to set priorities and ultimately to set budgets for the next three years.[108]

He expected that there would need to be reductions in some areas.[109]

85. On the issue of the equipment programme, he told us that:

our ministers would very much like a programme which is, if anything, more focused on the kinds of equipment requirements that come out of current operations like protected armoured vehicles, helicopters et cetera. It would be extremely surprising if the process we are going through did not lead to a consideration of that.[110]

86. We asked the Permanent Secretary whether the advice to Ministers would specify which equipment programmes should be cut. He confirmed that they would "certainly be looking at the equipment programme" and said that "my guess is that we will have to make some quite difficult decisions".[111]

THE EQUIPMENT PROGRAMME

87. We asked CDM whether the current Planning Round was different from other Planning Rounds. He said that it was the first time "we are looking at an equipment and equipment support budget". In the past the equipment plan had been separate from the equipment support plan. He considered that the bringing together of the two had enabled the MoD to be more realistic about the costings.[112]

88. CDM thought that the scale of the difficulty this year was different[113] and that it was "a greater challenge this year than it was in 2007".[114] He recalled that in the late 1970s "we had some pretty challenging times".[115] Mr Gould also considered that the current Planning Round was particularly challenging:

The Chairman specifically asked whether this was as serious as we had ever known it at least in recent years. To that I would say yes, although my memory goes back to the 1970s as well and I can think of times when maybe it was worse.[116]

89. In its response to our report, we expect the MoD to set out the reasons why the current Planning Round is so challenging given the real terms increases to defence expenditure set out in the Comprehensive Spending Review 2007.

90. On the process which was underway, CDM said that:

We are not yet at the end of the planning round…. There are always difficult decisions to make in planning rounds…. our aspirations are much greater than the budget ever allows us to achieve, so there are always difficult decisions to be made.[117]

91. CDM thought that there would be cuts or delays to some of the major equipment programmes, but did not know what these would be.[118] All the equipment programmes were being examined as to "whether the profile of the programming is right".[119] He was not closely involved in the planning round, but was closely involved in providing costs and options.[120] He believed that recommendations would be put to ministers in late February or in March.[121]

92. Mr Gould acknowledged that the uncertainty over the equipment programme was bound to delay investment by industry.[122] CDM said that he thought:

industry would say it would like to see an affordable programme and fewer projects properly funded, if that is what it takes, than a lot of projects not properly funded.[123]

He added that he did not think that the MoD "have had a properly affordable programme for many years".[124]

93. The Equipment Programme also includes key programmes that are in the Assessment Phase and yet to pass through Main Gate—the main investment decision. An example of such a programme is Military Afloat Reach and Sustainability (MARS), which is to provide the logistic support requirement of the future Royal Navy and sea-based support to deployed forces. The Approved cost for the MARS Assessment Phase is £44 million. The MoD's memorandum to our inquiry states that the selection of a Preferred Bidder for MARS Fleet Tankers and the seeking of approval for Main Gate is expected in 2009. There have been reports that key programmes currently in the Assessment Phase, and programmes such as Future Lynx,[125] may be cancelled or delayed. This would lead to a reduction in the future capability of our Armed Forces and a substantial loss of public money already spent on these programmes.

94. We note that the MoD is preparing advice to Ministers about the defence budget for the three years 2008-09 to 2010-11 and that the MoD acknowledges that there are likely to be cuts or delays to projects in the Equipment Programme. The MoD needs to take the difficult decisions which will lead to a realistic and affordable Equipment Programme. This may well mean cutting whole equipment programmes, rather than just delaying orders or making cuts to the number of platforms ordered across a range of equipment programmes. While it is the natural inclination of all governments and departments to avoid bad news by "moving programmes to the right" rather than by cutting out an entire capability which has many supporters, such an approach can cause in the long run more financial and operational damage than confronting the perennial problem of an over-ambitious Equipment Programme. A realistic Equipment Programme will give confidence to our Armed Forces that the equipment programmes that remain will be delivered in the numbers and to the timescale required, and will also allow industry to make informed investment decisions. This is an issue we plan to return to.

EFFICIENCY AND VALUE FOR MONEY

95. The 2007 Pre-Budget Report and Comprehensive Spending Review states that the resources set out in the CSR will be accompanied by value for money reforms generating "annual net cash-releasing savings of £2.7 billion by 2010-11, building on savings of £2.8 billion during the 2004 Spending Review period".[126] The initiatives in the CSR 2007 period to deliver the value for money savings include:

the merger of the Defence Logistics Organisation and the Defence Procurement Agency to form Defence Equipment and Support. This will contribute towards generating annual net cash-releasing savings of £253 million by 2010-11.[127]

96. We sought further details of the savings expected from the merger. The MoD told us that:

Although there are no specific additional efficiency targets resulting from the DLO/DPA merger, the post merger change programme is designed to deliver the DE&S contribution to the Central Enabling Services (CES) efficiency targets as well as meeting its primary aim of greater efficiency through continuously striving for ever greater effectiveness. The benefits will be achieved through streamlining the organisation and transforming how business is conducted.[128]

Under the new Administrative Cost Regime and as part of the associated CES targets, DE&S budgets already assume cost savings of 5% per annum over the next three years. These savings are in addition to the major efficiency initiatives already delivered by the DLO and DPA.[129]

97. The MoD expects that there will be savings "downstream", particularly in overheads, as most of DE&S business is collocated in the Bath and Bristol area. [130]

98. We note that the merger of the DPA and DLO will contribute to generating annual net cash-releasing savings of some £250 million by 2010-11 and that there will be further savings in the future as most of DE&S business is collocated in the Bath and Bristol area.

Measuring and reporting performance

MEASURING PERFORMANCE

99. In our Defence Procurement 2006 report we examined how the performance of DE&S would be measured. We were pleased to learn that there would be new targets to measure performance relating to managing equipment on a through-life basis and a new target covering how quickly DE&S responded to the needs of our Armed Forces. We expected 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. Otherwise, there was a risk that poor procurement performance could be buried in long-term project management data.[131] The Government Response to our report stated that:

We will continue to monitor performance of procuring equipment to time, cost and performance within the new Defence Equipment & Support organisation. In FY 2007/08 acquisition performance will be reported externally against the extant Departmental Public Service Agreement. The current Comprehensive Spending Review negotiation will determine the Departmental performance targets post 2007-08. The Major Projects Report will also continue and we are currently examining how this might evolve to reflect more appropriately the management of projects and capability on a through-life basis.[132]

100. In its memorandum to our Defence Equipment 2008 inquiry, the MoD provided an update on how the performance of DE&S would be measured and reported. The initial set of targets established for DE&S for the first year seek to reflect the broader nature of its mission—to equip and support our Armed Forces for operations now and in the future. There are new targets covering delivery of equipment into theatre and "satisfying Urgent Operational Requirements". These targets exist alongside other targets including the former DPA targets covering the delivery of new equipment to performance, cost and time. DE&S has also established internal measures related to the development of its staff, including upskilling to "meet the challenge of a more joined up approach to Through Life Capability Management".[133]

101. We asked the MoD if DE&S' achievements against its new performance targets would be validated by the NAO. We were surprised to learn that the MoD had no plans for:

DE&S new performance targets to be validated by the NAO. As the key measures will contribute to wider Departmental performance, they will be reviewed by the Defence Management Board. This will inform both the Department's Annual Report and Accounts and the Public Service Agreement results.[134]

102. We are concerned to learn that the new performance targets for DE&S will not be validated by the NAO, as was the case for the Key Targets of the DPA, now merged with the DLO to form DE&S. Independent validation of reported performance against Key Targets provides Parliament with assurance that the reported performance is accurate. In its response to our report, we expect the MoD to set out the reasons why it has no plans for the targets to be validated by the NAO and how independent validation will be achieved.

103. DE&S is involved in a benchmarking programme with its allies to identify its relative performance in the key area of delivering equipment into theatre and opportunities to improve its performance.[135] We note that the MoD is benchmarking its performance against its allies in delivering equipment into theatre. We consider this to be a useful exercise and, given our on-going interest in current operations, look to the MoD to inform us of the results and the lessons identified.

REPORTING AND PARLIAMENTARY SCRUTINY

104. In our Defence Procurement 2006 report we examined how the performance of the DE&S would be reported. We were concerned that, as DE&S would not have agency status, its activities would lose transparency. We recommended that DE&S publish an annual report so as to allow proper public accountability, and parliamentary scrutiny in particular.[136] The Government Response to our report stated that:

The activities and performance of DE&S will be fully reported on as part of the MoD Annual Report and Accounts. In addition, the annual Major Projects Report to Parliament will continue to cover major aspects of DE&S business.[137]

105. In its memorandum to our Defence Equipment 2008 inquiry, the MoD provided us with an update with regard to the Major Projects Report:

Proposals for the evolution of the MPR to provide Parliament with a broader view of the Department's acquisition performance developed in conjunction with the NAO, have been submitted to the Committee of Public Accounts.[138]

106. We note that the Major Projects Report is to be revised to provide a broader view of equipment acquisition. However, we remain concerned that the revised Major Projects Report may not provide visibility of the performance of programmes against their acquisition targets covering time, cost and performance, and that poor performance against these targets might be difficult to identify within the broader view provided. In its response to our report, we expect the MoD to provide us with a summary of the key changes expected to the Major Projects Report, the categories of equipment programmes that will be covered, and when the revised format is likely to be approved. We also expect the MoD to continue to provide the key information in respect of the performance of individual programmes.

Defence Agencies and Trading Funds

107. The Defence Storage and Distribution Agency (DSDA) remains the one Defence Agency within DE&S. We asked CDM about the future plans for DSDA. He did not know whether DSDA would continue as an agency. He said that the reason DSDA was the only agency to survive within DE&S was that it was "what was agreed and announced by ministers when we launched…. the Future Defence Supply Chain Initiative under the change programme".[139]

108. On 22 May 2007, the MoD announced that a new defence support group would be created by merging "ABRO,[140] retained DARA[141] business units and certain other defence support facilities". The new support group, operating as a Trading Fund, is to begin operating by April 2008.[142] Mr Gould provided the following overview of the changes from the ABRO and DARA merger:

DARA is made up of three elements: the fixed wing engine part which is at St Athan, that is, engines in large aircraft; the helicopter bit in Fleetlands and in Almondbank, Perth; and the avionic repair part of that at Sealand. The avionic parts, which have a good deal of commonality with some of the work that is done in the Army Base Repair Organisation, which is already a Trading Fund, will be put together. They will become a single Trading Fund agency. The large aircraft part at St Athan will disappear with the large aircraft anyway…. That will just die a natural death. The rotary wing and component rotary wing repair organisation is being considered for sale. Therefore, it is not an amalgamation of the whole thing. What is being amalgamated is the component avionic repair facility at Sealand with ABRO which does quite a lot of similar work.[143]

109. Mr Gould confirmed that the merged organisation will continue as a Trading Fund.[144] DE&S will be its main customer. He said that one of the reasons for keeping ABRO as a Trading Fund was that, because it is a government-owned company, it made it easier to deploy it staff overseas "and into operations and so forth".[145]

89 Ministry of Defence website, Defence News, 18 January 2008, "Chief of Defence Materiel launches Business Strategy and Blueprint" Back

90 Ibid Back

91 DE&S BLUEPRINT: The Future Operating Model, 18 January 2008, p 12 Back

92 Ev 27 Back

93 Ministry of Defence website, Defence News, 23 October 2007, "Streamlining the MoD's Head Office" Back

94 Defence Committee, Fifth Report of Session 2007-08, Ministry of Defence Annual Report and Accounts 2006-07, HC 61, paras 129-142 Back

95 Q 20 Back

96 Q 28 Back

97 Q 29 Back

98 Q 47 Back

99 Q 191 Back

100 Q 26 Back