House of Commons - Defence Equipment 2010

Defence Equipment 2010 - Defence Committee Contents

3 Procurement reform

Background to the Gray review

70. In December 2008, the then Defence Secretary, Rt Hon John Hutton MP, commissioned Bernard Gray to assess what steps the MoD was taking to reform its procurement process and to suggest further recommendations for how that process could be improved. Gray's report was published on 15 October 2009 and concluded that:

The Department's commitment to improvement in acquisition is genuine and progress in some areas has been significant. Nonetheless, the Ministry of Defence has a substantially overheated equipment programme, with too many types of equipment being ordered for too large a range of tasks at too high a specification. This programme is unaffordable on any likely projection of future budgets.[169]

Bernard Gray told us that he believed that the problems had existed over a long period of time. He explained that over the past 40 or so years, Defence Reviews had been used to bring the programme back under control and that the problems which had developed since the 1998 Strategic Defence Reviews were "just the most recent example of a systemic problem".[170] Industry witnesses to our inquiry welcomed the Gray report, saying that "it rightly identifies the imbalance that exists between the programme and the budgets and the need to address that issue".[171]

71. We commend the Government for commissioning, and then publishing, the Gray report. In doing so the Government was being refreshingly open. We hope that the MoD will follow this approach on other occasions.

DE&S response to the Gray report

72. The Secretary of State announced the publication of the Gray report on 15 October 2009, and at the same time listed a number of actions which the MoD intended to take in response to the report. The MoD published its acquisition reform strategy, The Defence Strategy for Acquisition Reform, on 3 February 2010.[172] We discuss those actions and the reform strategy in paragraph 113. In the following paragraphs, we review some of the evidence which we heard from DE&S witnesses, with regard to their reactions to the report.

73. The Gray report noted that it had "worked to establish a basis of agreed facts with the Department" in a number of areas relating to the equipment programme and the levels of time slips and cost overruns.[173] It provided the following assessment of the extent to which the equipment programme was now 'overheated':

From a possible universe of around 150 programmes for which significant data exist, a floating sample of just over 40 where the data are the most complete have been the focus of attention to try to establish patterns.

The overall picture may be familiar, but it does not look pretty. On average, these programmes cost 40% more than they were originally expected to, and are delivered 80% later than first estimates predicted. In sum, this could be expected to add up to a cost overrun of approximately £35 billion, and an average overrun of nearly 5 years.[174]

74. Some DE&S witnesses did not accept the quantitative data in the Gray report. CDM said that "there is not a lot of evidence" for the figures,[175] Guy Lester said that DE&S disagreed with some of the assumptions behind the figures[176] and Dr Andrew Tyler said that Gray's figures were based on generalisations from a very small sample of projects.[177] However, DE&S witnesses broadly supported Gray's qualitative analysis. CDM told us that he accepted the equipment programme was overheated.[178] Guy Lester said that "we totally accept the analysis in Bernard Gray's report, which is that all sorts of things of things … are dependent on having a more balanced programme than we have at the moment".[179] Dr Andrew Tyler agreed, saying that "qualitatively I think we would agree with the vast majority of Bernard Gray's conclusions; once or twice I have described them as 'glimpses of the bleeding obvious'".[180] The Minister for Defence Equipment and Support appeared to be less convinced. He told us that "Some of his judgements I found persuasive, some of his judgements I found less persuasive; some of his recommendations I thought attractive, some of his recommendations I thought less attractive".[181]

75. Bernard Gray described to us the process which his review team had used to collect and analyse MoD data, to discuss draft conclusions with MoD staff and to agree subsequent presentation of the data in the report. He said that:

As far as we are concerned, any questions we were asked, any issues that were raised, were answered in that process, which was substantially complete by early July and, to our knowledge, the people who are in charge of numbers inside of Abbey Wood and in MoD Main Building are in agreement with us about our numbers.[182]

Bernard Gray said that there did not appear to be a "wholly singular view" within the MoD as to whether the equipment programme was unaffordable:

There are a substantial number of people, and I believe that includes the Secretary of State and Lord Drayson, for example, who accept the analysis in this report and are intending to do something about it. There are other people, some of whom came and talked to you, who appear, as far as I can tell, to think that there is not a problem, so I do not think there is a single view inside the Ministry of Defence.[183]

Lord Drayson told us that CDM, and the whole ministerial team were all agreed with regard to the importance of implementing Gray's recommendations "with full vigour" and that there was "clear ministerial focus around the reform process".[184]

76. The Gray team attempted to establish a basis of agreed facts with the MoD, but, despite the fact that MoD staff provided the data to the review team and were given the opportunity to review early drafts of the report, some key senior individuals in DE&S told us that they did not accept the data presented in the report. Whilst we welcome the willingness of DE&S openly to consider the qualitative recommendations of the Gray report, we are concerned that the lack of agreement within MoD on the extent of the problem forms a poor basis on which to build effective reform. We return to the issue of implementation of Gray's recommendations in paragraph 113.

77. The Gray report included a summary of around 50 specific recommendations and related these to three main areas of concern:

balancing the equipment programme and keeping it in balance;
providing better leadership and separating and clarifying roles and accountabilities between the MoD Centre and DE&S; and
injecting key skills and tools into DE&S, possibly through a partnership with a private sector programme management organisation.[185]

We consider each of these issues in turn in the following paragraphs.

Balancing the equipment programme

78. We discussed the issue of the funding gap in Chapter 3 and referred there to the conclusion in the Gray report that the equipment programme was significantly out of balance with funding projections. In this section, we review Gray's analysis as to why the programme became out of balance, and his recommendations for reform. Bernard Gray told us that he used the phrase 'out of balance' to mean that "the proposed equipment acquisition by the MoD is substantially in excess of any likely projected future funding", meaning that either there was substantial under-funding or excessive demand.[186]

REGULAR STRATEGIC DEFENCE REVIEWS

79. The Gray report suggested that a key reason why the equipment programme had become out of balance was because the full cost implications had not been fully spelled out at the time of the 1998 Strategic Defence Review. At that time, the partial cost estimates for some significant components had "pointed to significant, and unaffordable, bulges in equipment spending beyond the formal 10-year planning horizons of the MoD", but the view had been taken by all concerned "that some kind of 'bow wave' had existed within the equipment programme for a long time, and that its effects had always in the end been smoothed out". It concluded that "with the benefit of hindsight it now seems clear that the very existence of this bow wave is itself a significant contributor to the problems that have plagued defence procurement over a long period" and that:

In reality the bow wave allows the MoD to maintain a position that a whole variety of defence capabilities are in the process of being procured. This feels reassuring to the country about the size and scope of Britain's Armed Forces, but behind this comforting thought is the cold fact that the budget does not exist, and has arguably not existed since the end of the Second World War, to support this level of ambition.

The policies of successive governments, and a lack of political will to present to the electorate the unpleasant reality of the position, has been a significant force behind this double-think.[187]

The Gray report commented that "there is worrying evidence that the problems are not just an endemic burden, but that they are an accelerating problem" and that "the problems of prior years are compounding with the problems of current years to produce an increasing rate of delay and cost increase". It also suggested that it was not possible to be precise about the time at which problems would "start to compound at a catastrophic rate", but that "it does not feel very far away".[188]

80. The Gray report stated that "Some military planners have argued that efforts to update their detailed plans have been hampered by the lack of a new strategic framework in which to set their ideas" and that "In corporate life, no enterprise should persist with a 12 year old strategy without at least re-evaluating it fully on a regular basis". It recommended that "a Strategic Defence Review process be conducted on a regular 4 or at the most 5-year basis" and that this "should be enshrined in legislation to ensure that incoming governments did not try too easily to slip out of any difficult examinations of these issues".[189] The Secretary of State has accepted this recommendation.[190]

81. Industry witnesses welcomed the proposal to conduct regular SDRs, but also expressed concern that the scope of the SDR would have an overly narrow focus, pointing out the importance of maintaining an up-to-date Defence Industrial Strategy to enable industry to make the necessary long term commitments to technology, skills and resources to provide the required defence equipment. Ian Godden, Secretary to the Defence Industries Council and Chairman of ADS Group Ltd, said that "there is a fear that … the next Strategic Defence Review and Defence Industrial Strategy will simply focus on procurement reform and not deal with the other very important strategic matters about capability, operational sovereignty and the need for an industrial base, and that this becomes the focal point and wrongly so."[191] Ian King agreed, saying that "We are concerned that the Green Paper will be done in the absence of looking at what the industry provides as part of the Defence Review".[192] Industry witnesses also expressed concern about the impact of the inevitable period of uncertainty on small and medium sized enterprises (SMEs) in the defence industry. Dr Sandy Wilson pointed out that:

Very few SMEs are sitting with fat order books with several years of sales that allow them to weather any reduction in order output by a principal customer such as MoD. Therefore, the SDR really ought to be conducted on a timescale which does not have a terribly deleterious effect on their business. One fears that when we get into the purdah that is always associated with an SDR there will be some fallout, especially in the SME community, and it will cascade down through the primes, the mid-tier and finally hit hardest those who are least able to cope.[193]

82. The Gray report concluded that the MoD's budget is insufficient to deliver its planned procurement programme, and that there is an accelerating issue of the problems of prior years compounding to produce an increasing rate of delay and cost increase. Witnesses from the MoD and from industry accepted this analysis and the need for urgent action to rebalance the equipment programme.

83. We welcome the commitment from MoD ministers to establish regular Strategic Defence Reviews in order to maintain an up-to-date strategic context for the equipment programme. There is a risk that more frequent SDRs could undermine the longer term planning of the equipment programme and the MoD must establish ways to manage this inevitable tension. We note the concerns of industry representatives that the next SDR and the next version of the Defence Industrial Strategy will be focused too narrowly on procurement reform, and urge the MoD to ensure that wider capability and industrial issues are also addressed, so as to ensure that industry can make the necessary long term commitments to technology, skills and resources. We would welcome more information on the extent to which the industry partnering proposals set out in Chapter 6 of the Defence Acquisition Strategy have already been developed, and the anticipated scope of their contribution to achieving greater value for money in defence. We also request an explanation as to how the partnership arrangements will be reconciled with the commitment given in the Green Paper for greater transparency. Our successor Committee may wish to return to this issue and to consider the implications of such industry partnerships for the future role of Parliamentary scrutiny.

TEN YEAR ROLLING BUDGET

84. The Gray report recommended that "the MoD's budgeting should be moved from the current short-term cycles to a ten-year rolling budget". It stated that:

The deal across government should be that the MoD's programme should be brought into a genuine and transparent long-term balance, reported to Parliament and externally audited, and in return the MoD should be funded on a long-term basis that allows it to manage effectively.[194]

The Secretary of State did not commit to the proposal of a ten-year rolling budget for the MoD, but announced that the equipment programme would be planned to a longer time frame "with a ten year indicative planning horizon for equipment spending with Treasury".[195] Bernard Gray acknowledged that there were constraints on what government could commit to,[196] but described the ten year indicative planning horizon as "a sort of promise with one's fingers crossed"[197] and said that he would have preferred to go further.[198] Lord Drayson agreed, saying that "Certainly it is not the same as a legally binding commitment, but I think it is important progress". Sir Bill Jeffrey suggested that it would not be realistic to expect Treasury to make a more absolute commitment but that the provisional agreement on a ten year indicative planning horizon was nevertheless "a real step forward".[199] Lord Drayson explained the benefits of creating a ten year framework:

… it is about giving the Ministry of Defence the ability to take decisions in terms of the flexibility of spending between projects such that they can cope with the reality of the nature of defence—the enemy changes its tactics, technology changes, inflation may change—but at the same time having the confidence that it can do that within an overall planning envelope for the equipment plan as a whole, which is acceptable. That is not the way it is done at the moment, it is done by Treasury approval on specific projects …[200]

Lord Drayson said that an agreement had been reached in principle with the Treasury, and that more details would be published with the strategy for acquisition reform.[201]

85. Industry witnesses supported the proposal to have a longer term budget framework. Ian Godden said that industry's view was that a longer term planning commitment was "long overdue". However he pointed out that if, the budget commitment was to be set at a time of depressed economic conditions, "you get into an argument about whether the cyclical nature of the economy and the needs of the nation have been cemented in at the wrong time". He explained that:

We would assume a ten-year plan is then refreshed quite regularly as most ten-year plans can never survive the ten years. The idea of an SDR every five years and a DIS as a follow-through to that is a sensible thing to do with a ten-year programme where you can make decisions about bringing things in and out of it and have to adjust, as all corporations do, to changing circumstances."[202]

Sir Brian Burridge, Vice President Strategic Marketing, Finmeccanica UK Ltd agreed, explaining that "There needs to be a much clearer view of what proportion of national wealth is a government willing to commit to defence and security."[203]

86. We accept that there are wider constraints which limit the Government's ability to make a firm ten year commitment with regard to the MoD's budget. We consider, however, that the fact that other Government departments would demand the same treatment would be not be a reason for the Government to resist it. The scale and nature of MoD contracts is quantitatively and qualitatively different from other Government procurement. It is clear that greater financial stability could help to control and reduce the hundreds of millions of pounds of unproductive costs which are incurred annually to keep the equipment programme spend within each year's budget. We welcome the proposal to introduce a ten year planning time-frame for equipment expenditure but we doubt that the proposed ten year planning horizon will provide sufficient certainty to stabilise the equipment programme. We recommend that our successor Committee returns to this issue when further details about HM Treasury's agreement with the MoD are made available.

SCRUTINY AND TRANSPARENCY OF THE EQUIPMENT PLAN

87. The Gray report recommended that the costings in the equipment programme and the veracity of the estimates be subject to independent audit by a major accounting firm; and the audit report published. The MoD advised us that the NAO had agreed in principle to conduct such audits, starting with the SDR, and that it was now developing a proposed approach.[204]

88. Lord Drayson described the proposed increased transparency about the equipment programme as "a critical component of a reform package", saying that:

Clearly, it has to be done within the constraints of national security and, in some cases, relating to commercial confidentiality, but the more that we can have transparency about the acquisition process, the more effective I believe it will be.

The MoD's acquisition reform progress report listed one of its eight commitments as "Establish a ten-year planning horizon and increase transparency", and recorded the status of this task as "On Track. Ministers, HMT and Cabinet Office have agreed that MoD will annually share its assessment of affordability with the HCDC". However, it listed no activities to provide wider public scrutiny, nor any other measures to increase transparency.[205]

89. The MoD told us that it had asked the NAO to audit its assessment of affordability of the equipment programme. We welcome this and seek an assurance from the MoD that the NAO will be given access to all of the relevant technical and commercial data necessary to do this job properly. DE&S has accepted that its cost estimating has been poor and such independent scrutiny will be necessary to provide evidence that the new iteration of the equipment programme resulting from the SDR is closely matched to available resources.

90. Whilst we also welcome the commitment by the MoD that it will annually share its assessment of affordability with us, we note that this falls well short of the Gray report's recommendation that the annual audited assessment should be made public. Transparency is not a practice which has traditionally been embraced by the MoD. Although the MoD has identified increased transparency as one of the commitments in its strategy for acquisition reform, it has provided no details of any concrete steps or milestones for realising that ambition. We ask the MoD to provide us with a description of the specific measures it plans to take in order to ensure greater transparency. We also ask the MoD for an undertaking that it will provide our successor Committee with accurate and complete responses to its requests for information.

INCREMENTAL DEVELOPMENT

91. The Gray report suggested that one of the benefits of a balanced equipment programme would be to facilitate the use of "sensible processes such as 'spiral development' and 'technology insertion' which were heavily discouraged by the current overheated programme". It proposed that:

Development risk (and hence cost overrun/delay) could be reduced by introducing equipment into service, with space allocated within it to introduce more sophisticated technologies later, and to learn from using the equipment rather than trying to guess at all ends before the first of type is ever fielded. But bitter experience shows that any restraint shown in this way will be punished by the loss of uncommitted budget to some other more immediate requirement at a later date. 'Bid High Spec, Bid Full Spec', seems to be the encouraged behaviour, however much technical risk that this imposes.[206]

92. Industry witnesses agreed that benefits could result from an incremental development approach. Dr Sandy Wilson said that:

we could do a lot more to deliver earlier an initial capability which could then be onward developed through a spiral development process. This has a tremendous advantage of eliminating, or at least reducing, vast swathes of risk that go in the greater the complexity of your target. This leads to faster acquisition, probably better value for money and automatically even improves exportability of the product at the end of the day."[207]

Sir Brian Burridge described the example of Typhoon which had come into service with very basic operational capacity and then been upgraded.[208] Witnesses said that it would not necessarily be appropriate for all platforms or across all technologies; saying "there could be could be no 80% solution for body armour for example", but that there were other areas such as armoured vehicles and communication systems which were appropriate.[209] Sir Brian Burridge explained that "the ability to do spiral development does depend on the nation's ability to maintain the skill base in its engineering industry. … just doing support availability contracts on a support basis does not necessarily preserve the highly skilled aspects of systems engineering, of design engineering and of development engineering. These are very important aspects in being able to do spiral development."[210]

93. The Gray report proposes that development risk, and hence time and cost overruns, could be reduced by introducing equipment into service with an initial operating capability which could then be upgraded. Industry witnesses agreed that acquisition could be faster, provide better value for money and greater export potential if this approach were to be taken, provided that steps were taken to ensure that the engineering industry skill base was maintained. We recommend that the MoD provide us with an evaluation of the scope for using an incremental approach, setting out the steps it will take to overcome the obstacles to this approach which were outlined in the Gray report.

Clarifying roles and accountabilities

94. The second group of recommendations in the Gray report related to ways of improving MoD leadership and decision-making processes in order to ensure that the equipment programme stayed in balance. With regard to the planning of defence capability, the Gray report identified a number of underlying factors driving the unaffordability of the equipment procurement and support programmes and other problems with the current planning and financial control processes. It stated that, whilst cutting back programmes might bring the equipment programme back into balance, there were "serious and deep-rooted behavioural and organisational issues that will drive again towards unaffordability". In oral evidence, Bernard Gray described the MoD's decision-making processes for keeping the equipment programme under control as "dysfunctional",[211] and said that:

…the behaviour of putting things in the programme and slowing everything down is endemic and it is expensive and they do not, systematically at least, understand how much that actually costs them.[212]

95. The Gray report made a number of recommendations to improve leadership, decision-making and accountability, one of which was the formation of an Executive Committee of the Defence Board. The Executive Committee would be chaired by the Permanent Secretary and would be accountable for an affordable Equipment Programme. Bernard Gray explained that:

…the attempt to make the Permanent Secretary legally responsible to Parliament for a balanced programme … is an effort on our part to force him to say no to people who want things in the Department that the Department cannot afford …[213]

With regard to improving the performance of equipment and support delivery, the Gray report recommended that the original Smart Acquisition principle of a clear distinction existing between customer and project deliverer should be reasserted, and that a real customer-supplier relationship should be created between the capability sponsor (MoD centre) and project delivery (DE&S).[214] It also recommended that aspects of the approval process be revised to improve decision-making[215] and that further cost reductions within in-service support be pursued and the aspirations of through life capability management (TLCM) be reappraised.[216]

96. Industry witnesses agreed that there was room for improvement in the MoD's decision making processes. Ian Godden told us that "decision-making between Armed Forces and procurement, or customer, for industry is very often too lengthy, is quite often unclear or unstrategic, and therefore gets reversed or can have a period of uncertainty created around it, and that aspect of the decision-making and the clarity of decision-making and direction is something that we believe does need to be tackled."[217] Sir Brian Burridge described a tendency for "tribal rivalry" among the individual Services which led to a lack of strategic thinking, a tendency to generate complexity in decision-making and a failure to recognise time was cost; and he pointed out that "these behaviours which either leave decisions tenuous or unmade have a cost to them".[218] The MoD advised us that it had already implemented Gray's recommendation to create a Defence Board Executive Committee, and that the first meeting had taken place in November 2009. It also stated that other proposals were being developed to improve project initiation and control and to "sharpen" relationships.[219]

97. One of the three key areas of weakness identified by the Gray report was the lack of clarity and leadership from those in charge of the MoD, which resulted in poor decision making processes and an inability properly to keep the equipment programme under control. The Gray report concluded that, even if the equipment programme were to be brought back into balance by the next SDR, poor leadership and decision-making processes would soon cause old problems to return and the programme again to become unbalanced. We note that the Defence Acquisition Strategy includes a number of specific actions to improve leadership and decision-making and the MoD should provide us with a progress report on these activities.

THROUGH LIFE CAPABILITY MANAGEMENT (TLCM)

98. TLCM seeks to harmonise and maximise defence output by ensuring that all areas of defence activity that have an impact on one another are considered together. It aims to ensure that capability delivery is viewed at a more strategic level rather than just the delivery of individual new equipment projects or individual in-service capabilities. The Gray report noted that:

A large number of factors exist from relatively early in a project's lifecycle that later lead to delay and increased costs. This includes the failure of the Department to consider whole life costs on a regular basis … These effectively hide true costs and store up problems for later in a projects life …[220]

However, the report described TLCM as "fearsomely complex" and "fraught with potential pitfalls in practice". The key problems it identified were a lack of financial data and financial management skills available to members of Programme Boards; the tendency for TLCM to blur lines of accountability (made worse by rapid rotation of staff through posts); and an environment within the MoD which did not support the concept of increasing short-term spending to gain economies in the longer-term. It recommended that "TLCM should be considerably simplified, and financial modelling tools should be imported along with the staff capable of using them to allow the system to make choices." The NAO Major Projects Report 2009 made a similar assessment.[221]

99. Industry witnesses supported the use of TLCM and were of the view that its aims were achievable, but that DE&S was aiming too high too soon, for example by trying to trade across lines of development.[222] CDM told us that creating DE&S as an entity had made TLCM easier to deliver, but that "It is not easy; it needs working at. … but the prize is well worth seizing for Through Life Capability Management and I do not agree that it is as complex as Bernard Gray suggests."[223] Vice Admiral Lambert said that "I think that Bernard Gray highlighted a real risk that we can, or could, over complicate these issues … in response to Bernard Gray, I would say that we are aware of the risks and we are trying to manage them".[224] The Minister for Defence Equipment and Support agreed.[225]

100. The Gray report recommended that the MoD's aspirations for Through Life Capability Management (TLCM) be reappraised. Witnesses from industry and the MoD were unanimous that TLCM was the right way to proceed, in order to support the making of sound decisions. However, evidence from the Gray review and from industry indicates that the MoD's TLCM approach is incomplete and over-ambitious. We note that both the Gray report and the NAO identified a lack of financial tools and data as significant factors affecting the implementation of TLCM. We ask the MoD to provide a report setting out the progress it has made in addressing these issues, and in particular the progress made on the specific activities described in the relevant section of the Defence Acquisition Strategy.

Injecting key skills and tools into DE&S

101. The third group of recommendations in the Gray report related to the need to improve skills within DE&S, and ways in which the necessary skills improvements might be achieved via some form of private sector partnership. The report concluded that DE&S "needs significantly greater skills and tools in a number of areas if it is to be able to deliver effectively on a better-balanced programme". It specifically identified a need for a greater level of resources and skills in programme and project management, finance, cost estimating, engineering and contracting, and for better project management and management information systems.[226] It added that the skills shortages were "exacerbated by the current rotation system for military personnel and civil servants, which has created a situation where mobility is prized/required and tenure is short".[227] The Gray report identified a lack of continuity of staff in positions of responsibility as a "key concern" and commented that this contributed to a lack of accountability for project performance over the long-term; an increased reporting/briefing burden; a loss of context and knowledge; and a loss of working relationships. It compared the tenure in post for 30 team leaders of large projects being managed by DE&S with that in 2003 and concluded that the tenure of project leaders had decreased significantly over the past five years.[228]

STAFF SKILLS

102. CDM told us that he accepted that there was a shortfall of relevant skills in DE&S.[229] He accepted that cost estimation needed to be improved and cost estimation tools used more widely across the Department, saying that the equipment programme was overheated partly because of inadequate cost estimation and partly because "our aspirations are always much greater than the money we have available".[230] He explained that DE&S was seeking to improve its skills in four main areas: cost assurance (including cost forecasting, cost engineering and cost certification); technical assurance; financial skills; and complex programme management.[231] However, he added that "as far as project management is concerned, DE&S is the best in government, and I am not too sure we are not the best across industry as well".[232] He said that "I have in my organisation 700 people with project management qualifications, external civilian project management qualifications. That is a pretty good record."[233]

103. Bernard Gray told us that he had discovered that half of the management accounting jobs in the Finance Department of DE&S were not filled by qualified accountants, and that the explanation of the Finance Director had been that he was unable to pay sufficient salary to attract qualified accountants into those jobs.[234] Sir Bill Jeffrey said that it was always going to be hard to compete with the outside world, but that "the trend in recent years had certainly been towards the professionalisation of the finance function right across the MoD."[235]

104. Industry witnesses told us that they believed there was a shortfall in skills within DE&S, and that this was part of a wider skills problem. Ian Godden said that:

There is a shortage … of skill-base in programme management, systems engineering and equivalent, and you can see that across many industries in the West … it is not just a UK problem. Overall there is a shortage of high skill in that area, but the skill level within DE&S and equivalent is lower than you would expect and is lower than necessary."[236]

He added that:

As I survey the four sectors I am involved in—civil aviation, defence, civil aerospace and security … the demands on that type of skill are increasing over time, and with the civil nuclear coming into that equation quite dramatically, there is a real risk of a further skill drain out of the traditional defence sector, particularly because … [people] are beginning to fear that the security, space and civil nuclear are much better future careers for them because it has got growth, it has got expectations of more money, it has got more research etc and there is therefore a belief that defence has got this risk of being stuck in a box and not going anywhere."[237]

Dr Sandy Wilson agreed, saying that:

It is not just an MoD versus defence industry issue. In fact as we progress into the reinvigoration of nuclear energy in this country, we are going to find a whole gamut of technologists being required across a much wider industrial landscape than we currently have in defence, and they are the same skills—systems engineering, complex contracting …, programme management. … As other industries come up in importance that is going to be a greater problem, and it speaks to us having to have a skills strategy that feeds all of those industries over the next ten to 20 years."[238]

105. Ian King agreed that there was a salary differential between industry and MoD but denied that MoD trained staff would necessarily move to better paid jobs in industry.[239] Sir Brian Burridge suggested that acquisition reform over the years had changed the skills needs within the MoD away from contract writing skills towards a more commercial approach. He said that "the challenge for the MoD is to get the commercial experience; the challenge for industry is to understand the user better".[240] Ian King pointed to the need for a long term commitment to training, saying that "You … have to put in training schemes, you need a skills strategy and there has to be a commitment to meet these training schemes, because there is not a surfeit of these types of people with these skills sets…. It is a really long-term commitment."[241] He also said that this long-term commitment would need to underpinned by "a proper SDR which then determines the Defence Industrial Strategy and that allows us to invest, because it takes a long time to train these people."[242] He told us that there were already joint training schemes available both to the MoD and to industry.[243] Sir Brian Burridge added that:

Following the creation of the Defence Academy and real focus on acquisition skills, I think it has moved a long way since the days when it was the Royal Military College of Science focusing purely on weapon technology. I think there is some very good management training available. No doubt it is proving difficult for the MoD to release people. We release people and it is difficult for us as well but you have to make that investment.[244]

106. The skills required by project and programme managers in the defence industry are particularly specific which means that they are not interchangeable with those in other industries. In a review of education in defence systems engineering, the Defence Engineering Group (1991-2004) at University College London have commented that:

… the delivery of an education in defence systems engineering presents a difficult challenge. Defence systems engineers must have not only a sound knowledge of a broad range of engineering, analytical, management and military topics relevant to their equipment projects, but also an overarching understanding of how these topics and their multiple interactions affect the acquisition process.[245]

STAFF ROTATION

107. CDM did not accept that there was too much staff rotation. He told us that he did not perceive a problem with regard to the movement of staff,[246] he did not believe it had increased,[247] and that he did not recognise the figures on staff rotation quoted in the Gray report.[248] He explained that "The reason the military are there is to bring current operational experience, and it is less important that they stay there forever. Civil servants are the continuity, they actually produce that deep continuity and the understanding of business."[249] He said that some staff had been moved away from the project teams they were originally on to work on UORs[250] and Dr Tyler suggested that there appeared to be more changes than had occurred in reality because of changes in job titles and project team boundaries which had resulted from recent organisational restructuring.[251] Sir Bill Jeffrey told us that he had seen some analysis that the staffing arrangements were steadier than Gray had suggested, but added that "we probably need more continuity that we have even now".[252] Lord Drayson described some of the ways in which he planned to reduce staff rotation:

I feel this is an issue which we need to look at very carefully indeed. I have asked the chiefs of the Services to take very seriously the idea that they should be flexible in their career planning within the Services to ensure that those people posted into defence procurement, particularly into major IPTs [integrated project teams], are posted with sufficient flexibility that they can make sure that they are able to effectively carry out that role.[253]

STAFF NUMBERS

108. As part of the PACE (Performance, Agility, Confidence and Efficiency) programme launched by DE&S in March 2008 to transform DE&S into a more effective organisation, DE&S staff numbers have been reducing from around 27,000 in 2007-08 to a target of 20,000 by 2012. In our Defence Equipment 2009 Report, we expressed some concern that DE&S was pushing ahead with this streamlining programme, given that procurement performance had declined in 2007-08.[254] CDM confirmed to us that reductions in staff numbers were still planned, saying that "I believe that DE&S can come down to a figure of 20,000—we are at about 22,000 now; but … we must spend money on re-skilling and up-skilling if we are to get down to those sorts of numbers."[255] He explained that one of the consequences of the programme was that some of the work previously done by DE&S was being outsourced to industry.[256]

PRIVATE SECTOR INVOLVEMENT

109. The Gray report suggested that the best way to provide the necessary injection of skills and tools into DE&S would be "through a partnership with a private sector programme management organisation, of the type operating in civil engineering and other complex engineering fields". It stated that "The suggested route to achieve this is through a Government-owned, Contractor-operated (Go-Co) entity", but that "At the very minimum it [DE&S] should become a Trading Fund".[257] Bernard Gray told us that the review team had considered five principle types of business model: next-steps agency, trading fund, outright privatisation, Go-Co, and leaving DE&S as it is.[258] He said that the team's central assumption had been that the Go-Co would be the best operating model, but that further work was necessary in order fully to understand the implications.[259] With regard to the trading fund option he said that:

A trading fund would have the advantage of ensuring that there was clarity between the requirements community and the head office on the one hand and DE&S, as deliverer of the programme, on the other. …the trading fund would give some management freedom of action to the trading fund chief executive, but not as much as a Go-Co would, so it would be a step in the right direction, in my view, but maybe not far enough.[260]

110. Ian Godden described the Go-Co proposal as "a mechanism to get an electric shock through the system", but said that it was industry's view that it would not be a "very practical" answer.[261] Ian King explained the issues:

If we are talking about some Go-Co, so you are talking about this fantastic organisation that has got all these commercial, these programme management, these financial skills as specialist to the area, all of which we debated earlier and which are in short supply, where is this going to come from? What benefit are we going to have from putting somebody between industry and the MoD when, if you look at the real things which are showing progress, the real things which are showing value, these availability contracts, these partnering structures, if we think of how the munitions programme is now structured, the terms of business around naval, that is the way forward rather than putting some artificial interface in the way.[262]

With regard to the creation of a Trading Fund, Sir Brian Burridge said that:

It will take a long time to create a trading fund out of the structure that they have already, and it does provide the one advantage, necessity even, that a Go-Co does not. Under a Go-Co structure I was hard pressed to understand how, say, the Permanent Under Secretary as the Accounting Officer would exercise his accountability because so much of decision-making would potentially be outside his purview and I think he would have a very difficult time justifying a programme, say, in ten years' time that was run under a Go-Co arrangement.[263]

111. Lord Drayson said that he had rejected the Go-Co option because he believed it vital that the military were fully involved in the process of defence acquisition, and that defence acquisition should not be seen as a semi-detached activity from defence. He explained that "Therefore, I believe that what we should do, and what we are doing, is implement the changes to get the advantages that you would get from a Go-Co structure: common project management tools, improved skills, a clear project management charging structure between the people responsible for the projects and the people who are the customers for the project."[264] He added that the trading fund option was still "on the table", but that it would also have "some of those disadvantages in terms of putting it slightly at arm's length."[265]

112. Over the years we have highlighted the need for key skills in acquisition and procurement, and have received reassurances from the MoD that appropriate training programmes were in place. However, we are unconvinced that DE&S has a properly effective strategy for the training and education of its staff, and believe that it has failed to prioritise this issue. Project leaders in DE&S must have an understanding of all of the military, technological, industrial and political issues which impact on their projects. What is required is not only the provision of appropriate training, but also a longer-term commitment to career management which is organised to suit efficient acquisition, not just military needs, and a recognition that key project staff have to be released from time to time to attend proper education and training. The MoD should provide an update on the progress it has made with regard to the actions described in the Defence Acquisition Strategy to achieve the necessary levels of staff skills.

The implementation of Gray's recommendations

113. On 15 October 2009, following the publication of the Gray report, the Secretary of State and Lord Drayson announced that they would take the following steps:[266]

A Green Paper to be published early in the New Year; a Strategic Defence Review to be undertaken immediately after the General Election; and the Government to examine legislative frameworks to require a Strategic Defence Review to be conducted early in the term of each new Parliament.
Equipment programme to be brought into balance with future requirements and likely availability of resources.
Equipment expenditure to be planned to a longer time-frame, with a ten year indicative planning horizon for equipment spending with the Treasury. This planning horizon to be published, along with an annual assessment of the affordability of the equipment programme.
Board-level governance to be strengthened within the MoD by the formation of a new sub-committee, chaired by the Permanent Secretary as Accounting Officer.
Methods of costing projects in the equipment plan to be improved; better techniques to be applied more consistently; investment decisions to be based on the most reliable forecasts; management of risk across the programme to be improved.
Stronger controls to be introduced with regard to the entry of new projects and changes to existing projects in the equipment programme.
The business relationship between MoD Head Office, DE&S, and the Service Commands to be 'sharpened' by clarifying roles and responsibilities and providing greater visibility of project management costs in DE&S to the Capability Sponsor.
Improvement of key skills (including cost forecasting and programme management) in DE&S and MoD Head Office to be accelerated.

114. The Secretary of State and Lord Drayson rejected Bernard Gray's suggestion of establishing DE&S as a Government-Owned Contractor-Operator entity. They announced that they intended to publish a wider, more detailed Strategy for Acquisition Reform in the New Year. The MoD press release stated that Mr Gray would work with the MoD on the development of the strategy, although we later discovered that Mr Gray chose to leave the MoD at the beginning of December 2009. We asked the MoD in December 2009 to provide us with a progress report regarding the development of its acquisition strategy. Its initial response merely stated that the strategy was progressing and gave no new information,[267] but in January 2010 it provided a one-page paper describing a few specific actions and their current status.[268] The MoD published its acquisition reform strategy, The Defence Strategy for Acquisition Reform, on 3 February 2010.[269]

115. Industry witnesses expressed some concern that the Gray recommendations, whilst welcomed by Ministers, would not be translated into effective action. Ian Godden told us that there was a fear in industry that Gray would live as a document and would not have "the sharp implementation associated with it", and that "perhaps [the Gray report] misses the people, leadership and implementation issues in addressing how this is going to become, not a change programme, but a reform programme, and that is, I think, the worry."[270]

116. Witnesses from DE&S referred to changes which were already being implemented within the MoD in response to Gray.[271] However, the Minister for Defence Equipment and Support made it clear that he was not involved with Lord Drayson's acquisition reform work, so it was unclear to what extent any changes within DE&S were being coordinated with the development of the strategy for acquisition reform.[272] The Minister for Defence Equipment and Support also made it clear that he did not agree with all of the conclusions of the Gray report.[273] Lord Drayson said that he was "optimistic" that the acquisition reform process would be effective,[274] saying that:

We are, I think, fortunate in that we have clear ministerial focus around the reform process. This is my job to make sure it has happened and I am very, very clear, in part because of my previous experience of having done the MinDES ministerial role. I know that for this to be successful it has to have the buy-in of MinDES and CDM.

117. It is quite clear that some senior individuals in DE&S do not accept the need for radical reform, and that they are only reluctantly involved in the reform process. Whilst it might be possible to write a good reform strategy in isolation, it would clearly not be possible to implement it without united commitment from the leadership within DE&S. With the publication of the Gray report, the MoD has come clean about the extent of its problems with the equipment programme, but the Department will have to work hard to persuade people that it will not return to business as usual.

118. The MoD's Defence Strategy for Acquisition Reform explicitly accepts Gray's broad analysis of the difficulties faced by the Department with regard to defence acquisition, and includes a summary of objectives and key actions which it intends to take to address those difficulties. Some of the key actions correspond with recommendations we have made in this Report, although we await the further details which we have requested on a number of points. We expect the MoD to make a statement to the House by summer 2010, updating it on progress with acquisition reform. We hope that the NAO will report on acquisition reform progress as part of its Major Projects Report 2010, and we recommend that our successor Committee returns to this issue later in 2010.

169 The Gray report, p 6 Back

170 Q 638 Back

171 Q 261 Back

172 Ministry of Defence, The Defence Strategy for Acquisition Reform, Cm 7796, February 2010 Back

173 The Gray report, p 56 Back

174 The Gray report, p 16 Back

175 Q 2 Back

176 Q 72 Back

177 Q 64 Back

178 Q 2 Back

179 Q 76 Back

180 Q 81 Back