Defence Acquisition

Written evidence from Christopher Donnelly

Acquisition - Fundamental Principles

A. Introduction

1. Acquisition is fundamental to our national security. It contributes to advancing UK Interests as an important means of both deterring and countering threats and creating or exploiting opportunities. It underpins our defence and deterrence postures and, through this, much of our leading-edge industrial and commercial competitiveness.

2. Acquisition is not just about the process of buying military hardware. Acquiring capabilities and capacities involves all aspects of our national political economic and social systems. Acquisition is one of the principal competencies of government, experienced by the public in the delivery of the products and services they expect from their MPs.

3. Confusion often arises between the terms procurement and acquisition.

Procurement is simply buying a service or a piece of equipment.

Acquisition involves knowing the whole life-cycle (see endnote 1) of the set of capabilities and capacity needed and the best means of delivery, employment, support and disposal.

Procurement is measured in cost, acquisition is measured in value.

4. Acquisition is a large and truly complex problem. It cannot be reduced to a simple, short brief. This paper is an attempt to draw out some of the basic principles so that an Inquiry, which may perforce have to be limited in scope, can avoid the pitfalls of oversimplification or tunnel vision. Further papers will expand on the issues raised.

B. Acquisition is an important element of the Strategic Deterrent

5. The ability of a state to demonstrate its capacity to produce relevant equipment and effect when required is in itself a very important element of deterrence and influence. Today, our ability to deter strategic threats does not just reside in our nuclear weapons. They will not deter Al Qaeda. On their own nuclear weapons form a brittle countermeasure. In managing an existential crisis it is essential to have a conventional "escalatory ladder" that permits resolution of the problem before nuclear weapons are resorted to. Unfortunately, recent wars we have consumed the conventional component of our deterrent so that we no longer have this escalatory ladder. Attempts to sustain a replacement programme have generated the cost overrun that MOD is struggling to address.

6. When the 16th Century Venetian Republic was threatened by France, the Doge staged a convincing demonstration of his Arsenale’s capacity to build a new war galley from scratch during the few hours it took to hold a state banquet for the French king. The French were duly deterred without the Venetians having to bear the cost of maintaining a larger fleet in being. Acquisition was recognized as a fundamental strategic asset similar in importance to the fleet itself.

7. The Doge had also demonstrated that he understood the crucial difference between capability and capacity. The French had always known that the Venetians had the capability to build galleys. That did not deter them. It was the demonstration of capacity which did the trick.

8. The distinction between capability and capacity often seems to be lost in today’s defence debate. It is not enough to be able to say: "We have preserved a capability". This is only an unrealised, and perhaps even an unrealisable, potential. The UK today is not as fortunate as the Venetian Republic. The industrial part of our national infrastructure is only a shadow of its former self. Over the past 15 years we have subjected our national acquisition capacity to a sequence of disastrous top-down reforms, which have done nothing to improve our strategic situation but have generated huge transformation costs and demoralized the professionals involved. It is now evident that this is a strategic failure which is having a serious impact on the UK’s national security.

9. Today, our conventional forces (supplemented perhaps by our unconventional abilities, such as the ability to track down and seize financial assets) are arguably a more important deterrent against most threats than our nuclear weapons. If we assess that the capacity to make equipment is very important, then restoring this capacity (or creating it in the case of new types of equipment needed to counter new threats) must not only become a priority for the Defence & National Security budget. It should be reflected in the Education budget, the business and innovation budget, indeed in the economy generally.

Security cannot be generated unless there is an adequate and appropriate source of supply.

C. Acquisition and our Competitive Stance

10. In recent years Whitehall has lost all understanding of the concept of "Competitive Stance" and the extreme importance of this for establishing our place in the world. In today’s world there is no country with which we are not competing.

11. The UK used to have a clear understanding of the importance of our Competitive Stance. In the 19th Century the key role in maintaining this was played by the Royal Navy. The RN had to be bigger than the world’s next two largest navies combined, irrespective of whether these were allies or not. Our shipbuilding capacity was seen as a crucial strategic asset, and when, for example, Vickers built warships for others, such as the Japanese, it was ensured that these ships were not as capable as those built for our navy. More recently, the Soviets could be seen to supply their allies only with equipment inferior to their own.

12. The US Government has not lost this understanding. The USA regards its pre-eminent position in the manufacture of military equipment as its principal security asset. Their strategy is to maintain a generational advantage over everyone else. No country is to be allowed to get near the performance of the US’ military equipment. The US will therefore do its utmost to destroy any competitor, whether ally or opponent. The strategy is guarded by Congress and enforced through the Defense Technology Security Administration and its Military Critical Technologies List (MCTL). This controls all US citizens’ access to discussions with any other nationality about anything technical.

13. France established an Economic Warfare Department some 30 years ago, and the German Economics Ministry discharges a similar function. These appear to make full use of opportunities accorded by the EC. Japan, S Korea, Russia and China all employ economic warfare. The UK felt it important to have an Economic Warfare unit in WWII, but no longer.

14. A review of our current national defence industry from the point of view of re-establishing our Competitive Stance gives cause for concern. Much of UK defence industry is no longer UK owned. Industry that is U.S. or French owned is unlikely to be doing its best for UK PLC. For example, the last 20 or so joint procurement projects with the US have produced nothing of substantial value to the UK. JSF is the latest example. Congress has refused to authorise the release of the key software codes which would allow the UK to take control of the development of the aircraft we are buying. The version the UK needed has been abandoned. The more than £3Bn spent supporting the US R&D has been poured down the US drain. What has the UK got in return for this investment? Understanding "Competitive Stance", and having a clear idea of our own Competitive Stance, could have stopped this.

15. Simultaneously, the enforcement of EU regulations further damaged our Competitive Stance. The EU was committed to creating a United States of Europe with homogeneity across all markets, so the UK could not be allowed to dominate French or German defence industries and had to be restrained. Unlike the US Congress, Parliament failed to understand this, and failed to consider legislation to protect UK interests. Interestingly, France and the Netherlands both exempted themselves from the EU defence regulations.

16. Our whole national policy and strategy need to be re-developed on the basis of our Competitive Stance. This is the fundamental thing we have lost from our political culture, and it is absolutely fundamental to any review of our defence acquisition policy. Parliament can play a significant role in re-establishing our new competitive stance as Congress does in the USA. Understanding our Competitive Stance will enable us to make judgements as to what is or is not in our national interest. This will produce in turn an industrial policy suited to the post-industrial state we now are. For example, we need a new MCTL like the US’ (we abandoned ours in 1995).

D. Defence Economics – the awkward facts.

17. In a world where we measure progress primarily in terms of steadily increasing wealth and technological advances, defence has a particular problem. Firstly, increasing wealth means higher and higher labour costs. In this environment, organisations that can reduce labour costs (eg by using computers and robots, or by outsourcing production to China etc) do well. But if an organisation must have people, then to cope with the rising cost of qualified people it must either have an increase in its budget or it will inevitably have to shrink or lose quality.

18. Secondly, technological advances tend to reduce the cost of equipment if that equipment can have a more or less stable level of performance. In real terms, TVs and washing machines get cheaper every year. But if that equipment needs to improve its performance significantly year on year because it is in lethal competition with an opponent, the cost of the equipment will increase by about 8% per annum above the cost of average inflation. This reflects the higher cost base of the "high-technology" component in the economy. Much military equipment falls into this category. When the ever more costly equipment is not just used but consumed, and in quantity, as is the case with military equipment,the problem is exacerbated.

19. These factors hit Defence hard. But, they also affect the Health service, for reasons remarkably similar to Defence’s (their evolving lethal competitor is new strains of infection, coupled with an ever bigger and more vulnerable, ageing population which consumes drugs and services). But the Government has made the commitment to meet the costs of Health inflation. It has not done so for Defence inflation.

20. Over the last 20 years we have reduced our defence expenditure and the size of our Armed Forces considerably, but we have maintained the same organisational, manning and equipment model - a model which was designed for an armed forces of half a million and a budget of 5% of GDP.

21. But, as we move to a defence budget of under 2% of GDP, the very model of our defence breaks down completely. A process of reducing forces to support ever-smaller numbers of ever higher-performance equipment, plus the ever-increasing ‘labour cost’ of the soldiers, sailors and airmen trained to man this equipment, brought us over the last 20 years to a crunch point. The SDSR took us beyond that point. We have come to the end of the line. We cannot meet today’s challenges by another round of balanced reductions and incremental change. This latest budget cut forces us to change our fundamental organisational paradigm for defence, and therefore also for defence acquisition.

22. We are not the first country to face this problem. Most of our European allies reached this crunch point a decade ago, did not recognise that they had to change radically, and now maintain forces that still cost a lot of bucks, but produce very little bang. By contrast, in other parts of the world, faced with the same calculation, many of our rivals and opponents have chosen to refocus their rivalry and competition from classic military power to other ‘weapons’ – economic, political, cyber, bribery, corruption and information warfare. They have worked out where their interests lie; they have a coherent strategy and can think and act strategically. We need to be aware of this, aware that future conflict will not only be a matter of "kinetics", and adjust our acquisition accordingly.

23. When it comes to contemplating radical change, we must recognise that we are all shaped by our personal and institutional experience, long-standing and cherished traditions, vested interests – and all the emotions which accompany these things. It is vital that we realise how, as a result, most of our current model of organisation and acquisition reflects the industrial society and mass industrialised wars of the 20th Century. We knew who the enemy would be and how the conflict would be fought, and we organised ourselves to match that enemy, based on our industrial capacity. Because of this experience, most people accept our current military system as "normal". They are just not aware of the extent to which our recent past has shaped our present military system and our perceptions of future conflict. It has become clear to us all that future war cannot be predicted, but that it is not likely to be a re-run of WWII, nor the WWIII we expected. But our defence institutions, procedures and habits of mind do not yet reflect this reality. Our current acquisition system is geared to an industry we have lost. We can no longer replace by ourselves even the equipment we are currently using up on operations.

24. The painful truth is that, on 2% of GDP we can no longer maintain a "robust" defence structure, ie organise and equip our Forces to match all the potential opponents and cope with all the non-combat tasks they might face in the future. We must not fool ourselves that we can ignore this reality by relying on a technological advantage over a future enemy. Pretending that we had a meaningful technological advantage was often used to justify reducing forces in the past. There might have been a grain of truth in this when we had a highly-developed and effective R&D and corresponding industrial capability, when we could expect a war where platform matched platform and weapons matched weapons and the contest would be decided on that basis. But the conflicts of today and tomorrow are a clash of intellects and of systems, and an asymmetric clash at that. We have been drawn in recent conflicts into using our weapons (and especially our platforms) in tasks for which they were never designed. It is an expensive waste – of equipment and manpower – which we cannot afford, and it does not confer the advantage we need. In Afghanistan, it has been estimated that it has cost $100M to kill each "Taliban", and we contribute to this ridiculous cost-per-kill figure, however questionable a metric it may be.

25. But it is hard to face up to the implications of the UK’s fundamental loss of capability and capacity. If a post-industrial state spending only 2% of its GDP on defence cannot have a "robust" defence structure it must build a force for every campaign, and not get into campaigns it cannot build for. This is what is meant by moving to an "adaptable force"- ie maintaining a military core on the basis of which forces appropriate to the (unforeseen) need can be generated quickly and effectively (and reduced when the issue has been dealt with). This means we need an alternative to the system of committing money one year at a time and an understanding by the Treasury that they must invent a new, dynamic means of investing in security, recognising that it is not simply an insurance premium overhead or drain on the economy. As we move to an adaptable force structure in the coming months and years it will have a revolutionary effect on our acquisition. Unfortunately, this reality has not yet been fully understood or acted upon in Parliament, Government, our defence establishment and industry.

E. Campaigns, rather than Operations, as the best way to approach deployments and tackle problems.

26. There are different understandings of the term Campaign. Ours is best expressed by the consideration that a military operation stops when the last bomb is dropped, as recently in Libya. But a campaign would continue until the strategic objective is reached- in this case a healthy, prosperous, stable Libya.

27. If "Campaigning" is going to be the basis of our interventions, we will need to create a "strategic campaign plan" to direct the campaign. This is a mix of different forms of power that we can generate (acquire) in time, at a cost we can afford, in a system we can manage, and sustain and replace it all. This is applicable for activities to "prevent" problems as well as for those in which an enemy is engaged. A campaign also needs a "campaign infrastructure plan", including the acquisition of equipment, products and services, determining who is to provide what, and including intellectual services (eg information warfare). This also raises the issue of Capability vs Capacity: How many campaigns can we support concurrently?

F. Acquisition Strategy for a Campaign Equipment Plan: Cold War v Op Banner

28. MoD has lost the knowledge of how we maintained 2 parallel and very different acquisition systems for waging the Northern Ireland Campaign and for deterring the USSR. Our Cold War acquisition model was based on maintaining deterrence through a conventional military force, constantly renewed on a 25-year cycle, and a nuclear delivery system protected by dedicated conventional assets, on land, at sea and in the air. For deterring this permanent, patent threat to our national existence, it made great sense to spread out production runs over decades, reducing the burden of defence to an acceptable "peace-time" level. By contrast, the Soviet over-investment in the military instrument produced impressive armies, granted, but resulted in the downfall of the state itself.

29. Simultaneously, the UK set up and ran for 38 years a highly responsive acquisition system which was able to provide equipment to the troops in Northern Ireland in a matter of days. The "Wheelbarrow" robot for IED destruction took only 5 days from the first requirement being established to a functioning prototype being deployed to theatre. A similarly responsive system was set up to support the 1982 Falklands War deployment. This acquisition process was grounded in "war-time" attitudes and procedures. Better was seen as the enemy of "good enough". Prototypes and lash-ups were provided at very short notice to the troops, enabling them to experiment and identify the modifications they needed, which were made quickly and easily.

30. Unfortunately, the OP BANNER acquisition model has been abandoned, leaving MOD to pursue a "Grand Acquisition Strategy" based on countering the old existential and peer-level threats, rather than the broader range of real threats and challenges which currently affect UK Interests. MOD had sustained two strategies, processes and budgets throughout OP BANNER in order to acquire the different forms of power needed to address simultaneously the existential Soviet threat and the N. Ireland troubles caused by failures of governance. Failure to continue this two-track strategy has led us to consume our very expensive peer-threat equipment in failures-of-governance conflicts in Iraq, Afghanistan and Libya. Efforts made to introduce a simpler, responsive ad hoc UOR process, rather than generate a coherent and cost-effective campaign equipment plan as part of an overall campaign plan, demonstrate the failure to understand the acquisition lessons of the Northern Ireland experience. Several thousand costly UORs have now been processed by MOD in support of Afghanistan.

G. Acquisition Methods and Processes

(a) The Governance of Acquisition

31. The UK Grand Strategic process has failed, as was confirmed by the previous CDS and by the recent PASC reports. MOD is not excluded, since it actively destroyed its Strategic Planning system, rendered the Defence Engineering & Science Group non-viable, destroyed UK Defence research capacity and abolished the critical military post of DCDS(Commitments). Governments must accept responsibility for this, but Parliament has failed to address the matter and help Government to remedy the situation. The Civil Service has also failed to advise Government and Parliament on the matter. There has been no effort to sustain the industrial, commercial and Academic contributions to the enterprise. The de-industrialization of the UK, with the resultant collapse of the Defence industrial base, makes the current MOD acquisition programme irrelevant.

For details of the formal acquisition process, see Endnote 2

(b) Acquisition turbulence.

32. MOD has persistently changed its provisioning organization and processes in response to evident failures, frequently identified both by NAO and by Parliamentary Committees. Few, if any, of these attempts have improved the situation and some have exacerbated the problems. With another attempt now underway, reaching in desperation for the management consultants will not solve the problems. They usually bring in more "management", less technical capacity, no technical improvement, and increased costs to insure against the risk of criticism.

(c) Requisite Variety.

33. MOD requires a range of acquisition processes appropriate to the systems to be acquired. "One size fits all" has NOT worked, and WILL NOT work. The failure of our >£100M investment in management consultants in an attempt to solve MOD’s acquisition disasters demonstrates the need for a range of processes specifically tailored to the needs of MOD.

34. One of the factors which contribute to the selection of an appropriate acquisition process is the customer stance. There are (at least) three types of customer: an ordinary customer, an intelligent customer, and an expert customer.

(i) An ordinary customer sees the kit, likes it, buys 20 or 200 without modification. This is easy as long as the necessary quantities are available when needed.

(ii) An expert customer wants unique kit which confers a special advantage of some sort. This is also relatively easy, albeit expensive. But it is justifiable for small quantities if the requirement is specified wisely.

(iii) An intelligent customer is one who wants to modify kit (or build it from scratch when it is not unique, just because it suits him to do it). This is the area where most of the difficulty lies and most of the really expensive mistakes are made (think aircraft carriers, Nimrod, FRES).

(d) Management methods

35. MOD’s acquisition management methods must similarly reflect the needs of acquisition, not the desire of the senior civil service for conformity with performance management. Acquisition requires strategic management across the whole security community, management which involves the community, motivates them through their participation and welcomes their creativity. Lives depend on it.

36. The reduction in our acquisition budget will require new forms of partnership involving Government, Industry/Commerce and Academe to generate the systems needed. The acquisition budget will need to change to multi-year, dynamic financing to reflect the uncertainty in the campaigns that must be undertaken.

37. Acquisition is a socio-technical, not simply a technical, process. Because it involves the complex interaction of people and equipment it requires a good knowledge of systems engineering by all involved. Project management is but a small part of acquisition, rather than the dominant role that is now allotted to it in MoD. This is challenging, for the majority of acquisition projects are now controlled by technically ignorant managers. They believe that it is unnecessary to have technical knowledge of the equipment or experience of the markets which it services. They assert that they only require a "business knowledge" to enable them to manage any business or government enterprise. They have flourished by marginalizing the technically competent and by suppressing the sources of innovation, ie researchers and users

(e) Systems Identification

38. Acquisition processes are necessarily creative, rather than procedural. Through "systems identification" the acquisition community must first decide what is the nature of the systems to be acquired for a campaign, identifying the attributes of each system and its interaction with other systems in service or likely to be acquired, in order to determine the campaign acquisition strategy

39. Systems Classes. There are two classes of systems, each requiring a very different acquisition strategy:

(a) Engineering systems; these have a limited use for a given purpose, eg a rifle, boots. They constitute a "static requirement", ie their use is unlikely to change over the life-cycle of the equipment. They can be complicated or simple in design.

With "static requirements" it is essential to avoid "requirement creep" if costs are to be contained. Changing the requirement or increasing the specification half way through the acquisition process can be very costly. So is artificially extending the time frame of the design and production process. There is normally a (frequently unspoken) requirement to minimise support costs so as to increase the effectiveness of the force.

(b) Natural systems; these describe equipment which will come to be used for purposes other than originally foreseen. People will learn by using them, so the system needs the capacity to evolve. Acquisition of such "dynamic" systems is complex rather than complicated, ie it is impossible to predict or describe how their use will change over their life-cycle, only to foresee that it is likely to do so. Software is an obvious candidate for approaching as a natural system requiring an evolutionary approach.

(f) Evolutionary Acquisition

40. The key to initiating a successful acquisition process is to make the correct systems identification from the outset, as the two systems require a fundamentally different acquisition strategy that incurs different timescales, cost profiles, and possibly total costs, over the life cycle. An evolutionary approach can be used on engineering systems. But an engineering approach cannot be used on natural systems. To do so, to break them down into small simple components with set specifications ("reductionism") is to guarantee failure. The NHS IT project is a good recent example of such a failure. The Nimrod MPA project would have benefitted from an evolutionary acquisition strategy.

41. The US DOD insist on an "evolutionary acquisition" approach for all identified natural systems, i.e. they buy a few items or the initial elements of the product, use it, learn from its features or performance, then develop it further, rather than trying (and failing) to specify all details from the outset. The US Defence Acquisition University insists on "evolutionary acquisition" for all software. As real evolution is not linear, but it jumps and has extinctions, this approach allows failure to have only a limited effect. Projects that show no promise can be killed off before they become a ruinous waste of money.

42. MOD had great success with evolutionary acquisition in the torpedo programmes of the 1980s. They demonstrated that they could reduce the life-cycle cost and delivery time of the complex software embedded in the torpedoes by about 50%, and enable it to evolve as measure-countermeasure competition developed.

(g) Agile Funding

43. Funding National Security needs to be dynamic because we can no longer plan for a known threat as we did in the Cold War. As we have chosen not to have robustness as a strategy, because this is impossible to achieve at 2% of GDP, we have to build for each campaign, so we need new forms of financing for the security infrastructure. Private finance is more expensive than government finance, so efforts need to concentrate on engaging the Treasury to develop new ways of financing defence and security. Private City expertise could be very useful here in helping to encourage flexibility, imagination and innovation in HMT. This underlines the fact that the intellectual capacity/capability to address any security or defence acquisition issue is just as important as the industrial, banking or diplomatic capability. This needs Government, Academia, the City, Think Tanks, all to collaborate

(h) COTS, MOTS, GOTS & Bespoke

44. The OECD "Frascati" manual defines everything in the acquisition cycle to enable countries to standardise their statistics. UK MoD converted to these definitions in 1990. COTS= Commercial off the shelf, MOTS= Modified off the shelf, GOTS=Government off the shelf.

45. Competition in defence acquisition is mad when we are looking for something to give us a comparative advantage. A comparative advantage can be achieved by both modification and ab initio design. A reduced budget means that we need to choose more carefully what equipment we try to adapt or invent. We will need to be able to reduce the proportion of our equipment which is specially made and concentrate more on what we can buy when we need it, adapting this for the required purpose. This is actually what we have always done in major war when we adapt civilian equipment to the current military requirements. The application of this principle is most obvious in the Navy, which can benefit most dramatically from this cost-effective wartime procedure in today’s time of rapid change.

46. In addition, it is important to invest more in weapons rather than in platforms. Modularised weapons can be retro-fitted cheaply to a variety of platforms. There are a few notable exceptions to this rule and, in the current situation, there are some weapons systems for which it still makes sense to organise their acquisition and replacement over long periods – the nuclear deterrent would be one. But for the rest, maintaining an irreducible minimum core of weapons and equipment and designing a fast, efficient system to acquire what else we need when we need it (and to dispose of it profitably as soon as its utility is past) would appear to be a sensible option. An ideal ratio of 90% COTS, 9% MOTS, 1% totally new might be a target to aim at.

47. Along with systems identification, Customer Status is the most sensitive issue in the acquisition saga. This is where we need very good people to make the decisions, technically competent. It cannot be done by bureaucrats or non-specialist managers. The system also needs discipline to avoid its being corrupted.

(i) Suppliers (International Corporations vs National networks)

48. Previous MOD improvements have sought to achieve the impossible, by removing risk from the "Owner" or "Customer" and passing it to the Supplier at no penalty in cost, performance, responsiveness, inventiveness or quality. This encouraged the supply industry to pursue the route to monopoly and to forming very large international Corporations of unknown allegiance.

49. Primes were originally important because of their ability to integrate the many components needed for complicated weapons and platforms, and to bring these into mass production on a scale appropriate to mass industrial warfare. As the fall in demand for weapons and equipment began to bite after the end of the Cold War, the UK attempted to create large defence entities to compete with US counterparts, seeing size as the key competitive advantage. This strategy failed.

50. The current problem with Primes accelerated in the mid 1990s, when the MoD offloaded onto the private sector its responsibility, as "owner", to bear the risk of equipment development. This was at a time when defence companies were already under great stress from rapid political and technological change. Offloading production could be justified. Offloading risk could not. Whitehall was beguiled into believing that defence markets were like civilian markets. They are not. They are always closed, run by political considerations rather than purely commercial ones, and canny nations never sell their best kit. As a result of MoD’s policy, many smaller companies went out of business, often beaten in competition with foreign companies that were subsidised by their governments in contravention of the EU regulations with which the UK complied.

51. The problem was compounded by organisational reforms which led to the technical deskilling of the Civil Service in this crucial area. The move of the Procurement Executive from London to Bath resulted in its losing 40% of its technically literate staff. A further reform, as currently proposed, will remove the rest. It is rumoured that, in response to its call for 750 redundancies in Bath last July, MoD received many thousands of applications. If MoD cannot recover its position as a technically literate intelligent (and expert) customer it will continue to be ripped off. MoD procurement will remain dysfunctional until MoD restores its own technical competence. Furthermore, in time such a customer also destroys the supplier’s competitiveness. We cannot sustain a viable Security Industry/Commercial base without a technically literate customer/owner.

52. Big corporations have no incentive to change the current system. They like the bureaucratic model. It saves them management effort. They can use their low quality people and retired military to manage the relations with MoD and keep their best people to handle rich foreign customers who are unhampered by a parasitic managerialism.

53. Today, the concept of relying solely on Prime Contractors is obsolete considering the volume of equipment we are now acquiring. Primes are needed for only a few complicated systems. For the rest they are a massive unnecessary cost. Similarly, large framework contractors and lucrative PFI contracts have done much to waste money and destroy flexibility and innovation. All tend to destroy true competition. Making Primes and Framework contractors into large, virtual monopolies so as to be more internationally competitive has had the unintended consequence of supressing innovation in UK industry. Reducing competition and innovation further increases the cost of acquisition. The Primes’ supply chain is just as problematic as MoD’s. It takes 2 years for a SME supplier to get accredited to BAE. Primes, even in the USA, are now facing problems in that they are not getting the diversity of ideas they need to cope with the speed of change in the international security sphere.

54. As an alternative, the UK has a lot of small companies who can do a great deal – they are innovative, low cost, effective. They do not like working with large companies. But Government/SCS does not like working with small companies and continues to make it increasingly difficult for them. MoD and DfID are alike in this.

55. Since we must move towards an adaptive military model, we need networks of companies that can produce quickly and in relatively small quantities what is needed for a campaign. Should we not be developing small companies’ networks, exploiting a national trait as our competitive advantage? Using this network of small companies will stimulate our intellectual capability and grow the economy in a way that subsidising the Primes’ monopoly will never do. Monopolies only work when nationalised. Using small companies will need MoD to make a lot of adjustments to its working practices. For example, although small companies can overall be a lot cheaper, profit margins need to reflect volume. Big companies with huge, long-term orders can manage on 7%. Small companies with small contracts need at least 20%. A reformed DESO would be part of such networks to restore our competitive stance.

H. Regenerating lost Acquisition Capability and Capacity

56. In the last two decades we have reduced our national R&D capacity to such an extent, and we allocate so little investment to R&D in our current acquisition programmes, that we are injecting massive cost, time and technical risk into those programmes. This has been reflected recently in so many very costly and embarrassing failures that I need hardly labour the point.

57. The national R&D resource was vested in DERA. The privatization which split DERA into DSTL and Qinetiq effectively destroyed this resource. DSTL now operates as an internal technical consultancy. If a national capability or capacity is privatised and the new company owner cannot make money out of it, then the nation loses that capability and capacity.

58. The UK’s ability to produce inventions and innovations was a major factor in sustaining the "Special Relationship" with the USA. Put bluntly, we had something they needed and prized. Now that we no longer have the R & D capacity to produce many inventions the "Special Relationship" is seriously weakened.

59. It was always acknowledged that the military R&D produced major spin-off to benefit the country. But it was widely claimed during the Cold War that too much of the UK’s national intellectual capacity was tied up in defence. However, when the defence investment was reduced and military R&D was lost, intellectual development and innovation did not obviously migrate to other sectors. No compensatory civil R&D programme was established to serve the industrial base, no extra investment was made in universities to this end. The innovation seems simply to have been lost. To be sure, there was a growth in financial engineering, but that has not proved an unalloyed treasure.

60. If the above Cold War argument was wrong, this is a most important point to note. It means that reducing Defence R & D has been bad for the economy. Perhaps the unique beneficial effect was because defence was a national programme, not driven solely by profit but by the commitment and enthusiasm of the participants, motivated to do something they believed in. This expresses the value of Defence, rather than the cost. Another lesson that might be drawn from this is that privatisation and introducing business attitudes and procedures may not be the best way of improving Defence

I. Engaging the Collective Knowledge

61. Some 90% of the overall costs of any project are determined in the first 10% of the life-cycle. Those making these early decisions need the knowledge to understand the implications of their decisions on the life-cycle costs. Getting the research and development right, therefore, is crucial to containing costs. Established best practice indicates that across a portfolio of technical acquisition programmes some 10% of the cost should be allocated to research, 35% to development in order to contain the system technical risks and ensure delivery timescales. Arguably, the smaller the budget and hence production run, the larger should be the % allocated to R & D to ensure the minimum of problems with the equipment. Currently, for US defence acquisition, the Research:Development:Production ratio is 6%:26 %:64%. Today, in the UK, our spending on research has fallen to a fraction of what it was. It would be important for an Inquiry to establish what the current ratio actually is. The important issue is that current MOD senior management appears to be unaware of the changes in these ratios or possible reasons for them. Since they affect the volume, balance and health of our acquisition capability, this is an unacceptable oversight.

62. Industrial Research Capacity. In 1995 BAE took the corporate decision to get out of aircraft manufacturing as there was not enough profit margin. The corporate research facility at Bristol finally closed in 2000. Their merger with GEC closed GEC’s research labs, as GEC had earlier closed Ferranti’s labs - a chain of industrial mismanagement going back to 1990. BAE no longer has the capability to design advanced military aircraft - no adequate computers, designers, physical engineering infrastructure. The design of all current aircraft currently being produced in the UK is based on work from before 2000, even for UAVs.

J. What sort of power do we need; what "Forces" do we need to exert that power; how do we acquire those forces? How do we assess their value? Fundamental questions to underpin an Inquiry.

63. Values and Interests. What are the Interests of the UK that we hope to advance? What values underpin them? Assessing the value of acquisition Programmes originates with these needs. Who stops to consider this matter today? Who does the considered thinking in Parliament, Government - MoD, FCO, DfID, BIS, Treasury, Education, …? Everyone assumes we know. But many of our current equipment programmes are based on obsolete ideas and unsubstantiated requirements.

64. Intelligence. We need next to assess what threats, challenges and opportunities we are facing and will face as we strive to advance our interests. Which ones we will deal with by deterrence or prevention, which by engagement, which ones we will exploit? Only then can we establish what range of different forms of power - military and non-military – must we be able to generate to advance our interests, ensuring in the process that we can reduce our dependence on industrial warfare which we know we can no longer support. Only then can we create a sensible national strategy, including an industrial strategy. National industrial power is a key part of our national security.

65. Value AssessmentVolume. What volume of investment in Defence and Security would best advance our interests or generate real value for money from the investment? How do we (MOD, HCDC) know that we are getting the best value out of 2% of GDP? Would we get better value at 1.5% or 2.5%? If we do not know what we will need to do, i.e. which kind of threats or opportunities we will need to deal with, there is no frame of reference for making this assessment.

66. Value Assessment – Balance. How do we generate power, use it, sustain it, replace it? This includes a careful consideration of all systems we seek to acquire. The type of tank that we needed when we had 3000 tanks is not necessarily the type of tank we need when we have only 300. Defence inflation suggests a next-generation fleet of only 120 tanks. Does this have any military utility? Does it make sense to replace 18 adequate warships with 6 advanced but very specialised ships? An alternative perspective is offered at Annexe 1. It is also important to assess if the military power we acquire can be used for other things. RAF transports and helicopters, RN ships, Army logistics are useful for many civil eventualities.

67. An All-of-Government Programme. But power is not just military, and increasing military power does not mean that we can automatically compensate for a lack of some other Department’s power by deploying military forces because this is a complex problem. Nor, with their budgets being cut too, can we bank on replacing military power with FCO or Home Office power. We need to reconsider how to generate national power as a whole.

68. All Governments. Generating (ie acquiring) that national power will involve not just Westminster but also Scottish, Welsh and NI Parliaments as part of an overall UK settlement. So changing the locations of military garrisons and HQs, or where equipment is made, or where defence contracts are placed is not just an issue of pork-barrel politics, it affects the common weal. All aspects of Defence and Security, including what we make and build, influence the common weal. If benefit derives from basing infrastructure in the UK (and returning from Germany), then if it is not spread around the UK there will be resentment. Eg of 2500 MoD contracts recently, only 50 have gone to Scotland. The SNP are making a lot of this. Our security infrastructure does not just consist of buying or building equipment. Only 25% of the Defence budget is spent on straight military equipment purchases and the 1.2% spent on research is almost entirely spent in southern England.

69. Power from the wider Economy. As a post industrial state, how can the UK best generate the power necessary? The UK Security base includes industry, the City and lots of other things. What do universities contribute? What is the research base (governmental, academic, private/corporate)? What is our organisational/ managerial capacity? How quickly can we generate different forms of power and in the necessary quantity in the time appropriate to the nature and urgency of the task?

70. Preventing "Own Goals". Has the UK defence and security base has been strengthened or reduced by privatisation? The privatisation of DERA failed - the rationale for Qinetiq was that it would "increase the defence knowledge base by freeing Qinetiq to operate as a company". The nation is poorer for this privatisation, but some people are richer. Moreover the supply of experienced technical staff able to contribute to Acquisition has dried up, to be replaced by project managers with no experience of security.

K. Conclusions

71. The key issues, fundamental to an effective inquiry, which emerge from the foregoing are, firstly, how, in the light of the current financial climate, the turmoil of the ongoing defence reform process, the buying up of our industrial capacity by foreign firms, the loss of technical expertise in MoD and the lack of technically competent leadership, does the UK actually preserve the ownership of the acquisition process?

Secondly, how do we preserve the infrastructure of acquisition which we will need to (re)generate a new, adaptable force, rather than the inventory created by it? We need to preserve this critical understanding and ability within MoD. We cannot afford for it to be outsourced. For the good of our national security the UK, through MoD, needs  to own this, not a consultancy or an international company.

Endnote 1

Life-Cycle. The life-cycle includes a long period before a system exists and extends to include its disposal and any associated remediation. This is partly associated with the timescales needed for the invention of new systems, and partly with the time to realize needed systems. New science typically takes some 40 years to see application, engineering some 15 years to mature, and manufacture around five years. Systems based on new services may see immediate use directly from research; equipment-based systems take much longer to realize, depending on the novel content. Synthesis of extant knowledge allows systems to be realized and acquired in a matter of months; invention takes many years.

Endnote 2

Formal stages of the evaluation process. MOD through its observation of global trends, forecasts the potential or actual need for new Equipment Concepts, and identifies inadequacies in the current inventory, within its evolving set of Operational Concepts that collectively implement its Strategic Conceptual Framework.

The systems, once acquired, become part of the overall inventory that suitably educated and selected personnel employ to generate the forms of power needed to advance UK Interests in the a range of Campaigns. The inventory is managed as a whole to ensure the availability of the systems and their continuing relevance to the current Estimate of future capability.

The Estimate Process determines whether to modify systems, either to exploit new technical opportunities that increase the value of the system, or to meet the evolving needs of Campaigns, or to dispose of the systems. Disposal may incur significant costs, generate income or contribute to advancing UK interests. Systems consumed in campaigns may need to be replaced, where the Estimate requires this, or replaced by new concepts.

Campaign Planning identifies both the systems needed to undertake the campaign successfully in the Campaign Systems Plan, but also accelerates the Estimate and Conceptual assessment of the value of the Inventory.

Annexe 1

A radical new approach to structuring the Armed Forces

The Government’s policy of reducing the financial deficit is essential. Financial strength is the basis of security. Defence can and should bear its share of both deficit reduction and of revitalising the economy.

However, there has been no strategy in the recent SDSR and ongoing "reform" process in MoD. These are only cuts driven by financial and managerial considerations. These may well promise some savings in defence costs but they have produced such drastic reductions in military capability and capacity that our national security may be compromised and our Armed Forces irreparably damaged. Furthermore, our economy is being damaged by reducing investment in high technology products and services, and by reducing our capacity to create opportunities for UK industry and commerce globally. The UK’s Interests are not limited to the physical territory of the UK – the UK is now a global "networked state" and economy.

The SDSR and on-going "reform" process also:

· Makes no provision for adapting or regenerating the Forces in time of need or within the time constants of modern complex threats and instabilities

· Does nothing to bring about essential innovation in the Forces and in MOD

· Does nothing to stimulate the Economy or critical modern industries

· Guarantees the "strategic shrinkage" of the UK

· Adds to long-term unemployment

· Damages our international standing

· Reduces the linkage between the people and the Armed Services

· Removes the value created by Service from a significant proportion of the disadvantaged in society

This is unnecessary. There is an alternative, radical, innovative approach to restructuring our Armed Forces available that has not been considered by MOD or Ministers. It would create huge cost savings whilst stimulating the Economy and reinvigorating the Armed Forces. If the necessary political will and leadership exists, it could be implemented rapidly.

In the Cold War, with a budget of 4-5% of GDP, the UK could structure its Armed Forces to match all latent threats to the country, and also be capable of dealing with unexpected threats, natural disasters and civil emergencies. Today, with an active war underway, a wide range of unpredictable threats and a budget of 2% of GDP, it is impossible to structure our Forces to match all potential threats. A radical alternative approach is to restructure the Forces in a way which will endow them with the ability to generate rapidly both the capabilities and capacity they need to deal with a threat (or exploit an opportunity in the national interest) as these arise.

The approach applies to all Services but is most readily evident when applied to the Royal Navy.

This alternative model when applied to the Navy will:

Maintain the existing capabilities of the RN but expand its capacity, giving it more ships than at present and a large reserve that can be mobilised (and stood down) rapidly

Stimulate R&D in innovative technologies, applicable across all Services

Generate new industries with new skills and sustainable jobs

Provide the Government with a leadership opportunity in NATO and Europe

The main elements of the model, which has been developed with the support of the wider maritime community, are:

Commit to no further specialist surface shipbuilding programmes

Maintain the submarine fleet and key specialised vessels in the existing surface fleet

Acquire new families of warships based on commercial hulls, with retro-fitted weapons modules and modularised/containerised equipment for other roles

Renegotiate the disastrously expensive and inflexible PFI contracts

Develop weapons, sensors and ancillary equipment in modular packages, independent of the platform (hull), also useable by the RAF and Army, and with civilian applications

Break-down barriers to service between the RN, RFA and Merchant Navy through a new personnel concept (manning programme)

Create an adaptable fleet by maintaining a reserve of ships in civilian use until needed

Most of the elements of this new model have been proven in practice or are being developed currently by other navies. Examples include:

RN conversion in the Falklands war of MV Contender Bezant (now RFA Argus)

Management on commercial charter of the RN Ro-Ro fleet; militarized construction, specially selected and vetted UK crews, held at 30 days’ readiness for RN war use

USN study recently undertaken by DARPA of container ship conversion to strike carrier

Russian Navy development of modular containerised weapons systems

Soviet practise of building all merchant ships with basic military features, making employment in war easy and cheap

Danish Navy "Stanflex" system of new modular warships

Australian and US Navies’ use of converted catamarans for recent operations

Experience of UK Merchant Navy crews serving in designated war zones

It is acknowledged that the main obstacle to such a transformation will be "cultural" opposition by traditionally minded senior officers and some elements of the industry that supply the current products. However, as the alternative may be systemic failure, if strong political leadership can show the way and ensure that the Services consider this alternative seriously, common sense may prevail.

July 2012

Prepared 23rd January 2013