Defence Reform Bill

Written evidence by Professor K G Hambleton, I J Holder & Professor D L I Kirkpatrick (DR 08)

The utility of a GoCo for defence acquisition

Authors

1. The authors (all now retired) have had long and varied careers in the MoD. They created and managed the MoD’s designated centre of excellence for acquisition education and research [1] , and were the principal authors of the only comprehensive UK textbook on defence equipment acquisition, Conquering Complexity [2] .

Introduction

2. The Defence Reform Bill seeks to improve the MoD’s management of defence acquisition, of single-source contracting, and of Reserve forces. This submission addresses only the future of defence acquisition, for which the MoD’s policy is presented in ‘Better Defence Acquisition – improving how we procure and support defence equipment’ published as Cm 8626 [3] .

3. Cm 8626 identifies the three principal problems of defence acquisition as:

a. An overheated programme of acquisition projects

b. An unstable interface between the MoD and its acquisition organisation

c. Scarcity of knowledge and skills in the acquisition organisation

4. Cm8626 suggests that, subject to the satisfactory conclusion of on-going studies, these problems can best be solved by transforming the MoD’s present acquisition organisation – Defence Equipment and Support (DE&S) based at Abbey Wood near Bristol – into a Government owned Contractor operated (GoCo) entity. Cm 8626 has correctly identified three of the principal problems (there are at least seven others [4] ) but it is unclear whether a GoCo would solve them more effectively than a thorough intramural reform.

Overheated programme

5. In 2009 the National Audit Office revealed [5] a gap of at least £36B between the MoD’s scheduled programme of defence acquisition projects over the following decade and its likely budgets for that period. Soon afterwards the Gray Report estimated that this ‘overheated’ acquisition programme, which annually demanded frenetic re-scoping and rescheduling of projects, caused delays which wasted up to £2B per year [6] . It is generally accepted that this overheating had arisen because of a long-standing ‘conspiracy of optimism’ between Service customers and industrial contractors who had both underestimated the likely costs of their cherished projects (often with the collusion of Ministers eager to associate themselves with ambitious and newsworthy projects), and because the MoD’s acquisition organisations (DE&S and its predecessors) had generally been insufficiently influential to resist that conspiracy.

6. A second important source of overheating, particularly affecting large and protracted acquisition projects, was the tendency of the Service customers to revise their requirements. Sometimes such revisions arose from the MoD’s rational response to developments in the threat or in the relevant technologies, and sometimes they arose from the imaginative zeal of staff officers eager to get the very best equipment for their Service. Almost all of these revisions, however they arose, tended to increase project costs. The GoCo would presumably seek to minimise such cost increases by accepting only those requirement revisions which are well considered and have been justified by rigorous cost-effectiveness analysis, even if its rejection of other revisions provoked unpopularity with the customer Service. In principle the scrutiny of potential revisions should be the responsibility of the MoD.

7. Only the UK government can determine the nature and balance of military requirements for national defence. The GoCo’s proper role would be to manage the MoD’s programme of defence equipment acquisition as economically as possible, but not to determine which projects are included in that programme. The solutions to both optimistic cost estimates and unnecessary programme changes must therefore be found within the framework of UK government, and must include the power to restrain the optimistic enthusiasms of Service staffs and their contractors.

8. In particular, the Minister responsible for equipment acquisition must insist on having an independent forecast of a project’s cost and timescale, as well as forecasts from the customer Service and industry, before its budget is approved. In principle this forecast could be produced within the MoD by a unit directly responsible to the Minister, but in practice its staff would find it difficult to resist institutional influences (and thereby imperil their future careers) if their forecasts were unpopular with senior officers and officials. It would be more appropriate to establish a truly independent cost forecasting unit within the Cabinet Office or within the National Audit Office to validate the cost forecasts produced by the MoD (and by other government departments prone to launch ambitious projects). During analysis of a new defence project in the US, for example, the cost forecasts produced by the customer Service and by its contractor are validated twice by comparison with forecasts from the Office of the Secretary of Defense and from the Congressional Budget Office.

MoD/GoCo Interface

9. In any complex system or organisation the interfaces between the component parts are as important as the entities themselves and require detailed attention and firm management if the whole system is to operate successfully. At present on any defence project there is a single major contractual interface between the MoD and its chosen prime contractor (although there are also many internal interfaces within the MoD and many contractual interfaces between the prime and its subcontractors). Interposing another private contractor as a GoCo in the acquisition process would create an additional major contractual interface which would have to be regulated effectively.

10. The contractual interfaces between a GoCo and the defence industrial companies which manufacture and support equipment would be relatively straightforward. They would replicate the existing interfaces between the MoD and industry and would no doubt have similar conflicts of interest. However, the new interface between the MoD and a GoCo is by no means as simple, as it will involve the transfer of responsibility and resources (finance and possibly staff) compounded by the acrimonious issues of liability and recompense should projects not go according to plan, as happens all too often in practice. The three-cornered relationship (MoD, GoCo and industry) will be inherently more complex than the current relationship between the MoD and industry, and will require greater management control. The MoD/GoCo interface will need to be sufficiently flexible in order to accommodate any necessary changes (either in requirement or solution) that may be required during the life of a major project and yet rigid enough to resist additional (desirable but unnecessary) features that appeal to military customer. However there is no fundamental reason why a reformed DE&S, under robust civilian management (with appropriate military, technical and financial advice) should not manage this interface equally successfully.

11. One important aspect of the MoD/GoCo interface involves the conversion of a military "Capability Requirement" made by the MoD into a "Contractual Equipment Specification" suitable for the GoCo to place with the defence industry, either in a competition or with approval to a single source. At present this is done in several stages, by determining which types of equipment are likely to provide the desired capability, choosing between the various technical or separate S ervice options , and writing the final specification. The responsibility must therefore transfer from the MoD to the GoCo at some stage , but it is important that the MoD should permanently retain the responsibility for defining the final contractual equipment specification which will determine the performance of the equipment delivered.

12. The role of policing this interface and regulating a GoCo would be a challenging task and would require staff with the necessary skills and experience to judge what is best for the defence of the UK. Many other Government Regulatory Bodies have been criticised for failing, the NHS Care Quality Commission being an obvious recent example. The failures seem to have either been due to inadequate expertise or a lack of will power to stand up to a powerful government department or contractor with vested interests in preserving the status quo. The regulatory bodies often appear to be staffed by well-meaning individuals with limited specialist knowledge or by retired experts from within the field, reluctant to criticise their previous colleagues too strongly. Creating a sufficiently strong and capable regulatory body may add to the challenge of implementing the GoCo solution, as the regulatory body will need to be more effective than some of the existing regulators.

Knowledge and skills

13. Command 8626 states that the MoD needs better defence acquisition skills in order to improve the procurement and support of defence equipment. During the 1960s, 70s and 80s the MoD introduced many processes and structural changes intended to improve defence acquisition performance. Despite these changes, acquisition continued to be a difficult challenge for the MoD [7] and the problems and issues of the 1980s meant that a new approach was needed.

14. In the early 1990s, the MoD concluded that it needed people with a particular set of skills, knowledge and behaviours which was specifically tailored to defence acquisition, in order to manage the acquisition of complex defence systems in the 21st century. These ideas led to the creation of the MSc course in Defence Systems Engineering (MDSE) which was delivered from 1991 until 2004 at University College London (UCL). The main subjects of the MDSE were almost identical to the list at paragraph 36 of Cm 8626, with the exception of GoCo management. The MDSE provided the MoD with graduates who had the ability to understand complex defence systems, resolve interface and system issues and manage industrial suppliers; they were thus better able to manage projects to meet their agreed performance, cost and timescale targets.

15. Conquering Complexity summarises the content of the MDSE and presents the view that project management combined with a holistic systems engineering approach, supported by rigorous analysis, provides the key skill-set for defence acquisition. Leadership is an important attribute and is necessary to set and plan for strategic goals, but defence acquisition involves a plethora of risks, issues and problems across a wide range of subjects (technical, commercial, financial, people, defence etc.) and the most important skill is managing the numerous issues to achieve the best balance of performance, cost and time. Paragraphs 25 and 36 of Cm 8626 rightly place the emphasis on project management rather than leadership.

16. Unfortunately, the MDSE graduates were too few (and several years from senior management positions) to revolutionise the competence and culture of DE&S, which remained generally deficient in the knowledge and skills which its role required. The transfer of the DE&S workforce to a GoCo would not alter this situation, even if the GoCo paid higher salaries to attract and retain talented personnel, because very few individuals in the UK workforce have the particular combination of knowledge and skills required for defence acquisition. The GoCo would need to make a substantial investment in MDSE-style training and education in order to improve the capabilities of its personnel. The MoD could, if it chose, augment its staff’s knowledge and skills by rediscovering its 1991 commitment to defence acquisition education and training (guided by the experience of MDSE graduates) and by instituting more flexible personnel management with adequate rewards for achievement, while still maintaining the public-service ethos embodied in the Civil Service Code and recognising why the Civil Service was created (essentially to support the policies of the government of the day and to act impartially as a check and balance to avoid commercial issues from distorting, or even corrupting, Government intentions).

Challenges for a GoCo

17. A GoCo for the acquisition of defence equipment, and hence for one vital component of the UK’s military capability to provide national security, would be even more complex than privatising Britain’s railway system or reforming its NHS. The plan for the GoCo must resolve:

a. The financial risks, if any, which would be transferred from the MoD and its industrial contractors to the GoCo and which powers would be delegated to the GoCo to enable it to manage these risks.

b. The conflict between the GoCo’s ambitions to streamline bureaucracy with continuing Ministerial oversight and public accountability.

c. The GoCo’s responsibility, if any, for maintaining the UK’s defence industrial base and for promoting exports.

d. The security and protection of intellectual property rights of the many industrial contractors involved in defence projects, particularly if some of the technology originates from foreign governments.

e. How to sustain fair future competition for subsequent GoCo contracts, by which time the management company which had won the first contract would have the advantage of its accumulated experience.

f. Whether the MoD Governor responsible for monitoring the GoCo’s performance would be able to assign, beyond reasonable doubt, the respective responsibilities of the MoD, the GoCo and its industrial contractors for the failure of any project to meet its targets for performance, cost and timescale.

g. How to ensure that the criteria used to measure the GoCo's success, and hence to determine its incentive payments or penalties, are closely aligned to the MoD's own priorities regarding any project's performance, cost and timescale, and to ensure that these criteria can be modified to match changes in the MoD's own priorities whenever the UK's armed forces engage in combat.

18. At least some of these problems might be avoided, for example, by sharing the initial responsibility for managing defence acquisition projects between two or more competitive GoCos and by retaining within the MoD the responsibility for those projects in which foreign governments are significantly involved, especially if the GoCo were a foreign company. The liability and risk of introducing leading-edge technology must also be addressed.

Conclusions

19. A man with a hammer in his hand tends to perceive every problem as a nail. A government with an ideological faith in private enterprise may be predisposed to believe that every difficulty in a public-sector organisation can be solved by outsourcing. However this solution does not always work well. Even in other government departments (where the services outsourced are easier to compete, scrutinise and assess) the performance and ethics of some private contractors have been robustly criticised by the Public Accounts Committee.

20. It seems clear that the creation of a GoCo would be largely irrelevant to the three principal problems of UK defence acquisition (overheated programme, unstable interface and a dearth of knowledge and skills) which the MoD itself identified in Cm 8626. In any event, solutions to two of these three principal problems will require specific action by skilled and experienced staff within the MoD in addition to any external GoCo activity. It is the MoD's own responsibility (whether or not a GoCo were created) to formulate an affordable acquisition programme through better forecasting of project costs. It is also the MoD's responsibility to determine the specification for the new equipment it requires and to control judiciously any changes to that specification. Regarding the third problem, the creation of a skilled workforce for defence equipment acquisition would require a long-term commitment to recruitment, training, education, mentoring and retention, either within a GoCo or within a reformed DE&S. In either case, dramatic improvements cannot be achieved in the short term, even by offering increased salaries, which may be necessary but are not in themselves sufficient.

21. It is unclear whether or not the outsourcing of defence acquisition management to a GoCo would yield savings larger than the additional costs of providing an effective regulatory body for the GoCo and of managing an additional contractual interface. However it is obvious that the creation of a defence acquisition GoCo of the proposed scope and scale would be an unprecedented experiment which would have to overcome a daunting array of challenges and potential risks

September 2013

References


[1] Hansard, HC Deb, 26 March 1991, vol 188 c397W

[2] Prof K G Hambleton et al, Conquering Complexity – Lessons f or Defence Systems Acquisition , TSO , 2005 , ISBN 0117730343

[3] Better Defence Acquisition – Improving How We Procure and Support Defence Equipment, Command 8626 , June 2013

[4] Prof K G Hambleton, I J Holder & Prof D L I Kirkpatrick , Defenc e Acquisition – Ten Challenges, 4 Feb 2013 , unpublished paper

[5] NAO Major Projects Report , TSO , London , December 2009 para 2.3

[6] B Gray et al, Review of Acquisition for SoS for Defence, MoD October 2009 p283

[7] Warren Chin, British weapons acquisition policy and the Futility of Reform, Ashgate 2004

[7]

Prepared 9th October 2013