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.
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.
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.
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. (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.)
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 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.
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".
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
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
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.
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".
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.
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".
He added that he expected "the land constituency and the
air constituency... both to be profitable this year."
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
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."
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".
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".
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."
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.
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.