Defence Support Group - Defence Committee Contents

1  Introduction

The Inquiry

1. The Defence Support Group (DSG) is a wholly-owned UK Government Trading Fund established to support the Armed Forces and to deliver wider defence objectives in support of the Defence Industrial Strategy (DIS). It was launched on 1 April 2008 following the merger of the Army Base Repair Organisation (ABRO) and the Defence Aviation Repair Agency (DARA). As the Ministry of Defence (MoD) set out in its memorandum to us, the four main DSG business streams cover Armoured Vehicles, Land and B (unarmoured or 'soft') Vehicles, Large Aircraft and Electronics and Components. These business streams operate across eighteen sites supported by the DSG Head Office, currently located at Andover.[1]

2. We announced our intention to examine DSG in November 2008, following our seminar at Shrivenham when we considered our forward programme for 2009. Our formal call for evidence was issued on 17 December 2008 and set out our key areas of interest:

  • the future work, role and status of DSG;
  • the viability of DSG, particularly with regard to its remaining aviation business;
  • the success of the merger of ABRO and DARA;
  • the strategic importance of maintaining current DSG skills and abilities within an MoD Trading Fund; and
  • the impact of the increased tempo of operations on DSG's current and future activity.

A memorandum was received from the MoD in connection with the inquiry. Unfortunately, on account of the pressure of parliamentary business, a visit to DSG Donnington planned for before our scheduled evidence session had to be cancelled. On 20 January we took oral evidence from Archie Hughes, DSG's Chief Executive, and from Major General Ian Dale, Director General Land Equipment from Defence Equipment and Support (DE&S), DSG's main customer within the MoD. We are very grateful for the excellent, clear and comprehensive, evidence they gave to us.

3. There were a number of reasons for our deciding to conduct this inquiry. We had touched upon key elements of DARA's work in a previous Report, Delivering Front Line Capability to the RAF,[2] but had not dealt in this Parliament with the activities of ABRO. We felt it was important to examine how successful the amalgamation of ABRO and DARA had been. We were mindful also of the duty laid upon all select committees periodically to examine the work of departmental agencies and trading funds. Furthermore, we had already decided, following the Shrivenham seminar, to conduct an inquiry into recuperation issues early in the New Year. DSG has a vital role in rolling recuperation, particularly with regard to Armoured Fighting Vehicles (AFVs), and in respect of Urgent Operational Requirements (UORs); and likewise its contribution to the planned, more thorough, programme of recuperation following drawdown from Iraq would be significant. The DSG inquiry would therefore also assist with other elements of our programme of work.

Background: the Merger

4. We do not intend in this Report to examine in any detail the rationale behind the Government's decision to merge ABRO and elements of DARA (selling off or closing other parts of that latter business). However, it is important to set out the background to the decision, the Government's intentions behind the decision, and an account of how amalgamation proceeded, in order to provide proper context for an examination of DSG's current performance, role and likely future.

5. The merger was announced in Parliament by Lord Drayson, then Minister for Defence Equipment and Support in the MoD, on 22 May 2007 following a number of reviews over preceding years into the future of both ABRO and DARA.[3] A short time later, and nine months before the merger was due to take place on 1 April 2008, the two executive teams in ABRO and DARA were replaced by a single team, in order to manage the merger more effectively.[4] At the merger, DARA's Rotary and Components Business, based at Almondbank and Fleetlands, was sold off, eventually passing into the hands of Vector Aerospace, a Canadian company.[5] The Fast Jet and Engines Business had already been closed down in March 2007 as no longer viable. The defence engineering activities previously carried out by the Defence Storage and Distribution Agency (DSDA) at Stafford were transferred into DSG from the MoD.[6] (After the merger, on 1 September 2008, a cadre of DE&S procurement and distribution staff based at Sapphire House in Telford was also brought within DSG.[7])

6. There were a number of clear reasons cited by the Government for the amalgamation. The Government wanted to rationalise its equipment support activities as then carried out by ABRO and DARA[8] in the light of the thorough consideration of the defence industry's support for the Armed Forces undertaken in preparing the Defence Industrial Strategy, which was published at the end of 2005.[9] Assessing what the defence industry could best provide and what the MoD needed to retain in-house lay at the heart of this rationalisation. We will consider the MoD's thinking about strategic need later in this Report. The MoD decided that the Fast Jet and Engines Business and the Rotary and Components Business could without detrimental impact upon support for the UK Armed Forces be closed and sold off respectively. The Large Aircraft Business at St Athan, dealing with ageing VC10s, was not sold off as it became "apparent that sale was unlikely to offer best value for defence".[10]

7. Lord Drayson in his May 2007 statement said that the merger reflected the

"commitment from the MoD to sustain essential levels of capability and capacity which will provide the new defence support group with greater clarity and allow it to implement a programme of continuous improvement. At the same time, the new organisation will look to consolidate and build on ABRO's and DARA's existing defence industry relationships and partnerships, by entering into agreements on future equipment programmes. Those will ensure that the MoD retains the intellectual property and design skills required to maintain operational sovereignty in key areas as set out in the defence industrial and technology strategies."[11]

8. Archie Hughes, then Chief Executive of DARA, was put in charge of the amalgamation and led the merger of the two executive teams into one, in time for 1 April 2008. The majority of those on the final, DSG, executive team were his colleagues from DARA. Archie Hughes explained to us that this was the result of a mix of factors, and was not what he had initially set out to accomplish: "it happened a bit by design, a bit by default, but the clear intent was to have a reduced, slim-lined, more effective board."[12] There were also a number of significant challenges which had to be faced in the amalgamation. It was important for the Chief Executive and his team to understand the businesses both of ABRO and of DARA, to look at merging management structures, to put together "all the necessary legislative work to formulate the new trading fund", to run both businesses effectively, to sell off the unwanted parts of the DARA business, and to put in place all the mechanisms to allow DSG to begin operating without pause or drop in effectiveness from 1 April 2008.[13]

9. The new executive team also had to overcome what Archie Hughes termed a "number of cost surprises in the ABRO side of the business".[14] While DARA, with a turnover of some £133 million, had an operating profit of some £10 million in its last trading year, ABRO, with a turnover of some £147 million, had made a £3 million loss in the same year.[15] This was unexpected, following as it did profitable years of trading. Archie Hughes explained to us that there has "now been put in place the actions to improve" the performance of the land business, "and there are much better financial cost control mechanisms in place".[16] He added that he expected "the land constituency and the air constituency... both to be profitable this year."[17]

10. Operationally, the merger appears to have been a considerable success. Major General Ian Dale stressed to us that at amalgamation "the Defence Support Group … had not dropped the ball on any occasion" and that "despite the turbulence of the change and amalgamation and the internal drive for efficiency… we have not had any perturbation in the outputs whatsoever."[18] He also noted that the benefit of dealing now with "a single point of contact" was making the DE&S-DSG relationship "so much simpler and so much clearer".[19] The workforces of both ABRO and DARA, now within DSG, are to be commended for their conscientious and flexible approach to the merger. The executive team implementing the merger should also be praised for ensuring that there was no hiatus in DSG's support for the Armed Forces nor any diminution to the quality of that support.

11. Lord Drayson's statement setting out the MoD's decision to amalgamate ABRO and DARA made no direct or explicit reference to the level of cost savings from the merger. However, an emphasis on cost savings to be made from the amalgamation is apparent from the MoD memorandum, and from the evidence we took from Archie Hughes. The memorandum stressed that even "the formation of a single executive management and trading fund board... delivered annualised savings in the region of £1 million".[20] It added that "overall benefits of £10 million have already been achieved primarily through manpower reductions at corporate level", while "a tranche of further measures will drive down costs across the whole of the business."[21] The continuing efficiency and effectiveness of the businesses represented by both bodies obviously relies to a great extent upon keeping costs down. The MoD's explicit rationale for the merger was to create a business that could better support the UK's Armed Forces, with the private defence sector playing its proper part and the MoD keeping in-house those elements it felt it most needed for strategic or other needs to retain within trading fund status. However, the focus on savings only serves to suggest that the expectation of cost benefits on amalgamation and thereafter might significantly underpin this. While cost will always be part of any consideration of the best model for maintaining those elements, we expect the MoD in its response to this Report to make categorically clear that the ability of DSG to continue to deliver cost savings will not alone determine its future, and that the rationale of the creation of DSG is broader and deeper than the cost considerations that supported the reasoning behind the merger.[22]

12. DSG's footprint immediately after the merger was as follows: DSG's Head Office was located in Andover from where it directed the activities of the organisation's main sites in Bovington, Catterick, Colchester, Donnington, Sealand, St Athan, Stafford, Stirling and Warminster; smaller sites were located at Aldershot, Bicester, Edinburgh, Kinnegar, Sennybridge and York. Small support teams were also permanently embedded at other UK military sites, with other small teams serving as required in operational theatre. Except for the addition of ex-DE&S staff in Telford in September 2008, there have been no changes to this footprint since the merger.

1   Ev 18, paras 1-33 Back

2   Defence Committee, Third Report of Session 2005-06, Delivering Front Line Capability to the RAF, HC 557, paras 81-101 Back

3   HL Deb, 22 May 2007, col WS38 Back

4   Ev 18, paras 8-9 Back

5   Qq 17-30 Back

6   Q 5 Back

7   Ev 18, para 11 Back

8   HL Deb, 22 May 2007, Col WS38 Back

9   Defence Industrial Strategy: Defence White Paper, Cm 6697, December 2005 Back

10   HL Deb, 22 May 2007, Col WS38 Back

11   ibid. Back

12   Q 12 Back

13   Q 3 Back

14   Q 14 Back

15   The 2007-08 Posted Accounts for both ABRO and DARA are available on the DSG website at Back

16   Q 14 Back

17   Q 15 Back

18   Q 8 Back

19   Q 16 Back

20   Ev 18, para 9 Back

21   ibid, para 12 Back

22   See DSG website, Back

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Prepared 22 June 2009