HC 652 Defence Acquisition

Written evidence from the Ministry of Defence

FOLLOW UP QUESTIONS FROM THE HEARINGS WITH THE MOD PERMANENT UNDER SECRETARY AND THE CHIEF OF DEFENCE MATERIAL

Thank you once again for asking me to give evidence to the House of Commons Defence Committee. As always, I enjoyed the opportunity to update you on our work, and in particular the work we are doing to reform the Defence Acquisition system. During the evidence session, I undertook to provide you with some additional information on a number of areas.

Defence Acquisition Reform.

I undertook to provide the Committee with some additional information on the boundary, structure and purposes of the GOCO [Government-Owned, Contractor-Operated]. I hope that the attached "essay" explains more clearly how we believe such an entity would work. This essay has also been shared with the Public Bill Committee, who recently considered the Defence Reform Bill.

In our discussion, I agreed to investigate whether or not it would be possible to release a number of documents relevant to the Commercial competition. After careful consideration, we have concluded that, for commercial reasons, it is not possible for the Committee to see this documentation at this stage. Some of the information you asked for has not yet been written, and the other information you request is commercially sensitive, and so could not be released at this stage. We do not expect to see the bid documentation from the GOCO bidder until next March, and from the Defence Equipment & Support+ (DE&S+) until in January. Once the GOCO bid has been evaluated, a Main Gate Business Case will compare the two options – the GOCO bid and DE&S+. At this stage a full Investment Appraisal will be carried out, as part of the decision making process. Until that Appraisal has been completed, given the commercial sensitivities involved, it is very unlikely that we will be able to make any of this documentation available.

You asked for some more detail about the MOD’s capability to oversee a GOCO contract, and to retain an intelligent customer capability. We recognise and share the views of the Committee about the importance of a strong oversight capability. In the first instance, management and oversight of the GOCO contract would be provided by the same team responsible for its initial negotiation, ensuring we benefit from continuity of knowledge and expertise.

We are in the process of identifying the full range of customer capabilities that will be required within the Commands and MOD Head Office to operate with the GOCO. This includes the knowledge, skills and experience needed to manage the contract. Elements of the Cost Assurance and Analysis Service and the Department’s Commercial Assurance function are firmly within the scope of this work.

It is too early at this stage to be able to conclude how these capabilities could be provided, including the extent to which we might need to offer enhanced terms and conditions for civil servants. This work is part of the Assessment Phase to inform next year’s Business Case.

You were also interested in the decision to appoint an Additional Accounting Officer for the GOCO, and whether there was such an arrangement in place at AWE. AWE ML and AWE plc which make up the GOCO are classified as a Public Corporation so are not within the Central Government sector for financial and administrative purposes.

An Additional Accounting Officer (AAO) is normally appointed by the Sponsor Department Principal Accounting Officer for:

- its executive agencies

- all NDPBs and other Arms Length bodies

- for defined part(s) of the department’s business at his or her discretion.

At the moment the indications are that the Operating Company will be classified within the Central Government sector and hence would be consolidated within the Department accounts like an Arms Length Body or NDPB. The Management Company would not be included within this as it is clearly in the private sector.

The Principal Accounting Officer retains overall responsibility but the AAO is personally responsible for ensuring the organisation he or she manages delivers the standards set out in Managing Public Money and in particular:

- the accounts of that body

- the annual report

- governance statement

and has remained with voted budget limits and associated Supply Estimates Memorandum.

As you said, the conversation moved on before I had the opportunity to explain how a GOCO would be evaluated with regards to the support programme, and I’m glad to be able to elaborate now.

As with acquisition, a GOCO’s performance in equipment support would be measured against delivery of required outputs agreed with MOD based on Front Line Commands’ needs. Where appropriate, a similar approach to Earned Value Analysis (EVA) will be used, tracking performance and cost for a defined level of output (e.g., number of flying hours) or required condition. This use of an approach similar to EVA will form part of a broader suite of performance measures relating to logistics and support including, for example, stock availability, delivery lead times and response time to orders.

During our discussion around the risks to the programme, I briefly touched upon the support that Jacobs Engineering is providing. I thought it would be helpful to the Committee if I were to clarify their role in the Materiel Strategy programme. We have appointed Jacobs Engineering as our Delivery Partner – one of four packages of consultancy support – to support the development of the requirements, the financial model, tender process and transition planning for the GOCO option. They are essentially acting in a "red team" role, providing insight into how the private sector would approach this and advising MOD on how to best to govern a GOCO, including what steps we need to take to ensure MOD has the ability to step in and re-take control of the organisation if required. The Jacobs team is also providing support to the development of the DE&S+ option and the Customer Design programme. Their involvement will continue through to the end of the assessment phase but the experience they have would be a powerful contribution to any future support needed to bring a GOCO activity back into Government control, subject of course to the usual competitive process.

Defence Equipment &Support recruitment

I promised to check the validity of the assertion presented in the Mail on Sunday article of 18th August 2013, that DE&S is going to re-employ large numbers of ex-MOD staff. I am pleased to be able to tell you that this is not correct.

As across the wider MOD, DE&S had to make tough decisions to tackle the defence deficit, which included reducing our civilian headcount. Now we have a balanced MOD budget, DE&S has identified the need to recruit in key specialist areas to ensure it has the right skills to take forward the MOD’s new procurement strategy, whatever the outcome of the Materiel Strategy programme. In recognition of the need to meet the recruitment needs of DE&S and that the organisation does everything possible to ensure that it delivers its outputs safely and professionally, a DE&S-wide recruitment programme was established in May this year to recruit around 1,300 new staff, across all functions, by the middle of next year. This is an opportunity to refresh our skills base and get good quality people to join, stay and develop rewarding careers with DE&S.

As part of the DE&S Recruitment Programme run by the central Human Resources Team, although ex-DE&S, or any other ex-MOD staff, that left the department under the recent Voluntary Early Release Scheme (VERS), or for any other reason, can re-apply for advertised posts, we would not seek to re-employ them unless they can demonstrate a significant increase in their skill set since leaving the department, and that those skills are needed by DE&S in the future. This would be an exception and subject to DE&S Board approval, and of over 450 applicants who have been successful at interview to date, only one individual who was previously released under a recent DE&S VERS scheme has been re-employed by DE&S (as part of the Programme). However, we can identify that in previous recruitment efforts by DE&S around 50 administration staff have been re-employed.

In May 2012, I told you that staff reductions were reaching the point where they could potentially jeopardise output, and you asked for an update. We have taken steps to address this issue; as detailed above, a DE&S-wide recruitment programme was established in May this year. The recruitment programme is promoting DE&S as an attractive place to work and a good employment proposition. So far this is proving successful with over 450 successful candidates being offered places across a range of functions including engineering, programme and project management and finance, of which over one hundred new staff are now in post.

You also asked for an update on our work with the Civil Service Commissioners to seek exemptions to speed up the process for hiring ex-military staff as civil servants. The position remains as in the Government response. We agree that it is important to recruit and retrain staff with requisite skills and experience and the skills of former service personnel, in particular, may be of high value to DE&S. One of the aims of the current DE&S recruitment campaign is to attract such people. The Civil Service Commissioners continue to work with the MOD to identify a number of routes through which former military staff with key skills may transfer without competition. The case for a wider exception will continue to be explored as part of the assessment of options for the future DE&S under the Materiel Strategy.

Your letter also asked some additional questions about wider procurement issues, following up on the MOD’s response to your Acquisition Report published earlier this year.

Open Standards

The MOD remains committed to the use of open standards, where they are appropriate and offer value for money. The National Security Through Technology White Paper set out the MOD’s primary acquisition principle of ‘Open Procurement’ enabled through competition, off-the-shelf products and use of open principles, rules and standards. This aspiration is tempered by the principle of ‘Technology Advantage’, reflecting the MOD’s need to maintain ‘operational advantage’ and ‘freedom of action’. A MOD team is leading a project to fully understand how the ‘Technology Advantage’ principle is to be implemented in order responsibly to maximise the opportunity for use of open procurement and open standards, and this work remains ongoing.

Where there are no existing open standards, the MOD continues to work with industry and our allies to develop and adopt new bespoke standards. The Generic Vehicle Architecture (GVA) Defence Standard 23-09 referred to in the Government response has been embedded in the plans for future land vehicle acquisition and has been broadly adopted within the defence industry, with increasing numbers of suppliers offering ‘GVA-compliant’ vehicles and sub-systems. The MOD is sharing this approach within NATO and the industry Military Vetronics Association, with the aim of GVA being developed into a NATO Standard.

The GVA approach is now being applied in the MOD’s core Armoured Vehicle programme, including for the Scout Specialist Vehicle and the Warrior Capability Sustainment Programme. Similar standards for Generic Base Architecture and Generic Soldier Architecture are currently in development.

FIST - Fast, Inexpensive, Simple and Tiny

Investigations with the US Department of Defence (US DOD) have confirmed that the "Fast, Inexpensive, Simple and Tiny" (FIST) initiative is not a US DOD or United States Air Force (USAF) policy; it is a personal initiative of one individual [Lt Col Dan Ward USAF]. Whilst the acquisition values and behaviours advocated by this approach are fully supported by MOD, FIST appears to offer nothing further to what the MOD is already pursuing through initiatives such as the System of Systems Approach and more widely as part Defence Transformation. The MOD therefore believes that there is limited value in benchmarking further against the FIST initiative.

Bernard Gray

Chief of Defence Materiel

21 November 2013

‘GOCO ESSAY’:

What is the Materiel Strategy?

1. For decades buying and supporting equipment for HM Armed Forces has been beset with difficulties that have been well-documented in studies dating back to the early 1960s. The 2009 "Report on Defence Acquisition" demonstrated that, on average, MoD procurement programmes over-run by 40 per cent in cost and are delivered 80 per cent later than their original estimates suggested. This analysis also said that the cost to the MoD of the poor functioning of the procurement system was between £1.1bn and £2.2bn per year.

2. More recent work by Booz & Co for the MoD has confirmed these findings. Clearly costs on this scale are a serious problem for the MoD, the Armed Forces, and the taxpayer. At any time, the country cannot afford such waste, at a time of national austerity, the requirement to solve these problems is all the more pressing.

3. The 2009 report identified three root causes of the problem. First, the Equipment Plan needs to be balanced – that is, future commitments need to be brought into line with future available resources. This was achieved in May 2012 following the SDSR. Second, the relationship between Defence Equipment and Support, the MOD's delivery arm, and MOD Head Office and the Capability staffs that set the requirements for equipment, needs to be strengthened to be much more business-like and focused on value for money. Third, DE&S needs to be able to draw on significantly better tools and to develop enhanced skills in order to deliver effectively that Equipment Plan.

4. The Materiel Strategy is focusing on the second and third root causes: developing a more robust relationship with the ‘customer’ – the Front Line Commands and Head Office – and transforming the way DE&S operates. The Materiel Strategy programme will deliver a costed set of options, covering the ‘as-is’ baseline, a radically transformed DE&S wholly within the public sector (DE&S+) and a ‘GOCO’ model, for a Ministerial decision in summer 2014. All of these options will be rigorously tested on their ability to deliver the required outcomes for defence acquisition: effective cost and schedule control, decision-making focused on delivering the best value for defence spending, and sustainable improvement with reduced ‘frictional costs’ [1] .

5. The Materiel Strategy programme began its analysis of possible operating models for DE&S in May 2011 with the Chief of Defence Materiel as Senior Responsible Owner. In October 2012 a sister programme to the Materiel Strategy, Customer Design, was established to ensure that the acquisition system across MOD – essentially elements of MOD Head Office, the four Front Line Commands and Strategic Programmes – will be optimised for whichever DE&S operating model is chosen.

6. Following an Initial Gate Business Case approval, Materiel Strategy entered its Assessment Phase in April 2013, when the commercial competition was launched for a prospective GOCO provider. Both DE&S+ and GOCO projects are due to submit final proposals in early 2014 and a Main Gate Business Case will be submitted in Spring with a final decision expected in the summer. The challenging target we set for ourselves for vesting is November 2014.

What is a GOCO and why would it resolve problems?

7. A GOCO is a legal entity that is ‘government-owned, contractor operated’. There is no single model for a GOCO although there are many examples across both UK and globally [2] . The precise nature of any DE&S GOCO will be determined through negotiation with the preferred bidder prior to contract award, however, the model proposed would comprise a Management Company and an Operating Company contracted by MOD to deliver products and services to Defence (and OGDs as appropriate).

8. One key reason that a GOCO has been proposed as a solution to the second and third root causes of the procurement problem is that it would bring much greater skill to bear on the procurement process, and much greater discipline into the relationship between the Front Line Commands as requesters of equipment, and industry as the providers of that equipment.

9. The public sector finds it hard to recruit sufficient numbers of highly qualified procurement professionals to run its acquisition systems. This is true of defence ministries around the world. There are a number of reasons for this, but underlying causes include the fact that governments compete with the private sector for these skills, in a way that they do not directly for most other groups of public sector workers.

10. Barriers to the recruitment and retention of the high-quality procurement professionals we need include relatively inflexible processes and pay and incentive mechanisms.

11. To be effective in negotiating with private sector companies and to manage the deals once made we need access to the same kind of skills that exist in the private sector. To solve the problem of creating a professional, capable and trusted procurement cadre, the organisation delivering acquisition needs to be able to compete for the skills we need. It will then be able to create its own culture that brings private sector skills to bear in delivering the public good.

12. The GOCO has been proposed as a mechanism to deliver this outcome because as a company it can create its own culture and vary its policies to make it a more attractive career for the procurement professionals it seeks. At the same time this is short of privatisation. The Government would retain significant controls over the company, because it is delivering key public goods, including the right to return the company to government control.

13. This hybrid of the agility and flexibility of the private sector, combined with the control exercised by the government (including the ability to return the activity to direct government control, and to recompete the management contract from time to time) is an essential component of the case for using a GOCO, rather than an outright sale or reform within the governmental system.

14. By creating a formal contractual interface between the Requesters of equipment on the one hand (the Front Line Commands), and the deliverer on the other (the DE&S organisation), the GOCO also produces greater discipline and focus into what is being requested, and how much that will cost. While there are benefits to flexibility, at present, there is so much informality that the costs of changing requirements are not adequately addressed.

15. A GOCO contractor would have the skills, incentives and objectivity to deliver difficult advice to MOD decision makers. This discipline will be a vital component of keeping the balanced programme balanced into the future.

16. Needless to say the problems tackled by the GOCO proposal, are the same issues that need to be addressed by any other method for resolving the issues faced by government procurement.

17. It is important to recognise that the GOCO would act as the MOD’s agent in delivering the Equipment Plan. The MoD would retain the rights over all of the major decisions over what kind of equipment would be purchased. So, for example, if the MoD felt it was important for a particular capability to be bought from a UK supplier, then it would be able to specify this caveat as a policy constraint. Equally well, if the Government felt that something was best procured by open international competition, it would be able to mandate this route too.

18. Similarly, the Armed Forces would remain responsible for specifying their equipment. If the army felt that a 40mm gun was important on a new vehicle, rather than a standard 30mm cannon, it would be able to mandate this. The MOD will not lose either strategic or tactical control of its procurement if a GOCO were implemented. The GOCO would exist to execute the will of the Government and the Armed Forces. Its role is limited to delivering professional services designed to procure well, and to provide expert advice on the art, and costs, of the possible.

19. As the MOD’s agent for the provision of defence equipment, support and logistics acquisition services, the GOCO would manage a programme of work for which payments would be made directly to Defence suppliers by MOD. The GOCO would be authorised to act on MOD’s behalf, to manage the delivery of defence equipment procurement, support and logistics and would be responsible for the provision of accurate information to the MOD, to allow the Department to construct a robust and affordable Equipment Plan, and for delivery of outputs once they have been agreed.

20. Decisions relating to project approvals would be taken by the MOD, not the GOCO. It would be the GOCO’s job to inform and deliver the programme defined by such decisions. The MOD’s Capability Planners would remain responsible for deciding what should be bought and when. The GOCO would be free to make appropriate management decisions about how best to deliver its outputs.

21. As now, MOD and HMT would continue to approve procurement business cases. As part of this, MOD will assess and agree proposed procurement strategies, so will be able to take into account policy decisions issues such as maintaining a UK industrial base. Industrial policy, informed by the views of either DE&S+ or the GOCO, would therefore continue to be set by the MOD in consultation with other government departments. And the future DE&S, whatever form it takes, will still be required to support defence exports.

22. The GOCO would be providing acquisition services to MOD as its agent but would not control the £15Bn Equipment Programme, which would continue to be overseen by crown servants working in MOD. Government and parliamentary oversight would be retained.

23. The GOCO model enables a more disciplined interface between requirement-setters in MOD and those charged with delivering equipment & support through a contractual relationship, that places obligations on both sides in respect of cost, performance and schedule. More importantly, a GOCO would be able to operate with greater autonomy, such that it is better able to optimise its internal management controls, processes and systems for the role it performs and recruit, retain and train its workforce.

 
Governance and Control

24. The Secretary of State would continue to be accountable to Parliament for DE&S business under any GOCO arrangement. Departmental Officials will still advise and Ministers will still decide. The Permanent Secretary will remain accountable to the PAC for the Departmental Accounts; and Ministers will be accountable to Parliament in the normal way. International relationships and MOD industrial policy for example, while informed by the expertise of the GOCO, would continue to be set by the MOD in consultation with other government departments. The difference however is that, by incentivising the GOCO Contractor to provide objective and accurate advice, we ensure that all decisions (even at the earliest stages of projects) are properly informed.

25. The GOCO would be governed and controlled in accordance with arrangements defined in: new legislation being passed as part of the Defence Reform Bill; a Special Share in the Operating Company held by Government; the Articles of Association for the Operating Company and the contract between the MOD and the Management Company [3] . Taken together, these will set a range of strategic controls that are appropriate to the nature of the role performed by DE&S, including:

a. Compliance principles: The Operating Company must provide independent and impartial advice and adhere to other high level principles (e.g. impartiality, integrity, confidentiality and national security) in order to provide assurance that it would act in the MOD’s best interests in providing its services.

b. Operating Company constitution: MOD has the ability to prevent changes to the constitution of the Operating Company; any such changes require MOD’s consent.

c. Additional Accounting Officer: Government Arms Length Bodies (ALBs) are required to have an Accounting Officer (AO) who is responsible to the sponsoring department AO and Parliament for probity in the management of public funds. As the Operating Company is expected to be classified as a Central Government entity, it is expected that an Additional AO would be required in the structure. The Operating Company, as a central government body, would be consolidated under the Government Resources and Accounts Act 2000 and would be required to comply with policies laid out in HM Treasure Managing Public Money (MPM). The role of the Additional Accounting Officers is set out in Chapter 3 of MPM and would be appointed by the MOD Accounting Officer. This individual can be called to appear before the House of Commons to answer for the organisation’s business. The MOD would have the right to nominate an observer on the board of the Operating Company.

d. Transfer of ownership: Upon contract expiry or termination for any reason, the MOD has the right to take back or require the transfer of operational control of the Operating Company to a new contractor. The Operating Company’s ownership is therefore only vested in the Management Company for the time it is providing defence procurement services to the MOD under its contract. MOD can also step in and take ownership of the Operating Company to protect its interests. The transfer of ownership of the shares in the Management Company is also restricted in certain circumstances, such as when such a transfer would pose a threat to national security, where it would lead to the disclosure of a "Secret Matter" or where it would be incompatible with MOD’s operational requirements.

e. Wider Markets: The Operating Company’s opportunity to conduct wider markets work would be constrained to only the following: agencies of the Ministry of Defence; UK Government Bodies; and, if in due course appropriate, foreign government entities. The Contractor will be required to obtain the MOD's prior written consent to conduct any such wider markets work, including seeking consent prior to submitting any tender, and shall be responsible for ensuring that such wider markets work is subject to the monitoring and other powers of the MOD and does not contravene agreed security requirements.

f. Security: The GOCO would be required to comply with Joint Service Publication 440 (Security) and to meet other security requirements such as having personnel cleared to the appropriate level. Both companies would be required to hold ‘List X’ approvals as appropriate. This is to ensure that only those individuals who have the appropriate security clearances and comply with the MOD’s requirements on nationality have access to certain classified information.

g. Freedom of Information and Transparency: While neither the Operating Company nor the Management Company would be directly subject to Freedom of Information Act (FOIA), the Operating Company would be required to support the MOD in complying with MOD’s FOIA obligations. The Operating Company would also be required to comply with the MOD’s commitment to spending transparency.

h. Audit: The NAO would be granted full audit access in connection with its annual audit of the MOD’s financial statements, value for money studies and other reviews.

Pay, Performance & Incentive Mechanism

26. The Contract has been designed to incentivise the performance of a GOCO across delivery of the programme and transformation of the business; those incentives are deliberately aligned to ensure that the GOCO acts in the best interests of its defence customers. The GOCO Contractor would be incentivised to perform by receiving fees based on the real cashable savings it generates but fees are only paid if key performance indicators (KPIs) and milestones are achieved to MOD’s satisfaction.

27. The proposed approach comprises a Base Fee and an Incentive Fee. The Available Base Fee would be determined according to the Contractor’s performance against Service Requirements (throughout the contract term) and its achievement of Transformation Milestones (during the Transformation phases of the contract). The Incentive Fee would be determined principally by its performance in delivery to approved parameters (performance, cost and time) in the Equipment Programme by its performance in delivery. Both would be financed separately from net cashable Operating Cost and Equipment Programme savings. Each of the Base Fee and Incentive Fee would be awarded to the Contractor out of the available fee amounts on the basis of a scoring mechanism which would be based upon clearly defined KPIs. The Operating Company’s reasonable and properly incurred costs would be reimbursed via an ‘Allowable Cost’ regime.

28. Equipment Programme costs (payments to Defence suppliers) would, as discussed above, flow direct from MOD to the industry supply chain following payment authorisation by the Operating Company.


Scope

29. Unless there is a compelling reason to do otherwise and, with the exception of changes already planned outside of the Materiel Strategy, the scope of DE&S should remain the same under a GOCO. Some roles currently performed by DE&S that are Department of State functions, such as policy-setting, would remain within the MOD as matter of principle.

30. In addition, since May 2010, and following the 2010 Strategic Defence and Security Review, we have made considerable reductions in the size of DE&S, decreasing from some 21,500 personnel to the present figure of approximately 16,300. By 2015, this will have reduced still further to about 14,500. This figure includes the planned outsourcing of the Logistics, Commodities and Services activity.

31. Also, for broader Departmental reasons, there have been other changes to the scope of DE&S either already made or planned, including 1,500 people who manage our naval bases. This activity currently sits within DE&S, but will be largely transferred to the Royal Navy. A further 2,100 in the Information Systems and Services organisation would be transferred out of DE&S into Joint Forces Command. Finally, we expect that approximately 1,250 of the posts in what will be the "Common Resource Platform" (HR, Finance, Commercial, and Technical specialists) and some 350 of the posts involved in Requirements Management and the Finance Military Capability transformation could be retained within the MOD as part of the intelligent customer function.

32. Of the remaining 9,300 posts, we would expect that some 1,500 would be military personnel. Thus posts in scope are planned to transfer into the GOCO in two stages, with a first vesting day at the end of FY14/15 followed by a second vesting day at the end of FY 16/17.

Phased Approach

33. In the first of the two stages the maritime area, under Chief of Materiel (Fleet), along with the Common Resource Platform, would transfer.

34. Maritime accounts for some 45% of planned DE&S expenditure over the next decade, over a comparatively small number of large procurement projects. The sooner these projects can reap the benefits associated with the enhanced skills, expertise, processes and tools that we anticipate a GOCO would bring, the better.

35. The Common Resource Platform would be responsible for the operation of key central enabling functions, and would support both Maritime, and the remaining domains, from within the GOCO. It would broadly comprise functions such as commercial, finance, human resources, technical and other corporate areas.

36. Transferring all the enabling functions simultaneously would allow the GOCO to embed positive change in these areas once, rather than twice. The staged approach also reduces the risk to successful delivery through progressive transfer and allows more time for the development of the Governor and Intelligent Customer models.

37. The GOCO Contractor would only be able to proceed from one phase to the next (taking on the remaining areas: Land, Air, Joint Enablers) on satisfactory achievement of specified conditions. Failure to achieve these within a specified period would give the MOD a right to terminate the contract; as such the staged approach improves the MOD’s competitive position with the provider at the 2 and 4 year points. Importantly, it also maintains and reinforces the MOD’s ability to take back control of DE&S delivery functions should that be necessary.

Impact on Staff

38. DE&S staff in scope would transfer to the Operating Company on Vesting Day under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which ensure that employees' rights are safeguarded in the event of transfers of undertakings, businesses or parts of undertakings or businesses. In addition, the proposed legislation in the Defence Reform Bill would ensure that the legal protection afforded to employees under the TUPE Regulations applies to MOD employees currently carrying out activities which are within the scope of the proposed GOCO.

39. TUPE gives employees a legal right to transfer to the new employer on their existing terms and conditions of employment and with all their existing employment rights and liabilities intact (although there are special provisions dealing with old age pensions under occupational pension schemes).

Legislation

40. The Government is introducing legislation to enable a GOCO through Part 1 of the Defence Reform Bill. Part 1 of the Bill does two things –

o It defines the circumstances in which the provisions of the Bill would apply, and gives the Secretary of State an explicit power to contract with a publicly-owned company for the delivery of defence procurement services.

o It enables the company to operate effectively by making provision for such things as financial assistance, exemptions relating to premises used by the contractor, etc (Clauses 2-11).

41. The legislation is essential to ensure the GOCO can operate effectively and that the future interests of the Government are protected. The Bill also provides the opportunity for Parliament to consider, scrutinise and agree the proposals for the reform of DE&S.

Costs & Benefits

42. At present, hundreds of millions of pounds are lost to the defence budget each year because of the weak interface between DE&S and the wider MOD, and the insufficient levels of business capability at DE&S for the complexity of the portfolio that it is asked to deliver. The GOCO operating model is expected to provide benefits in the following areas:

a. reduced delay and cost overrun in projects;

b. more realistic planning and estimating leading to more informed decision-making;

c. reduced project cancellation costs;

d. greater transparency on the impact of changes;

e. greater value for money from suppliers;

f. increased efficiency in operating costs.

43. Initial estimates suggest a GOCO could deliver a net benefit of several hundred million pounds over 10 years.  The analysis draws on the evidence provided by three independent studies - Gray report, Booz and Co, and Corporate Value Associates. This will be tested in the market process.

44. A critical part of the Assessment Phase is validating the anticipated benefits associated with each option for comparison in the Main Gate Business Case.

45. The cost benefit equation will be tested at Main Gate and the Performance and Payment Incentive Mechanism being negotiated with bidders’ aligns the payment of fees and therefore the GOCO incentives to the achievement of these benefits. The bottom line is less wastage means greater capacity to support the front line.

Evaluation

46. The Outline Propositions from the GOCO bidders were received in September, with Detailed Propositions to be submitted in November, and the Final Propositions due in March. Propositions from DE&S+ are due in similar timeframes.

47. The Bidders’ proposals will be evaluated against a series of weighted criteria across a range of competences including: Senior Team & Management Approach, Delivery of Required Services, Transformation, Transition, Commercial Fit and Financial.

48. Evaluators (subject matter experts from across the MOD, and the consultants working on the Materiel Strategy programme) will look at bidders’ approach to these areas, the skills they will bring with them and the risks, assumptions and dependencies associated with their proposals

The preferred bidder will be compared against DE&S+, the public sector comparator, to ascertain the best value for money.

Making a decision

49. Once potential GOCO operators have submitted final bids, a preferred bidder will be selected; this proposition will be tested in the Main Gate Business Case against the ‘as-is’ baseline and the DE&S+ proposal to facilitate a decision.

50. In addition to the business case, Ministers will be informed by internal and external review of the case through MOD’s approvals process as well as Major Projects Review Group scrutiny. Continued Parliamentary oversight through the legislative and Select Committee processes is also anticipated.

51. A Ministerial decision is expected in summer 2014, with vesting day planned for late 2014/early 2015.

Annex A: GOCO Design

Under a Contract let by the MOD, the Management Company would:

a. operate, on behalf of the MOD, the Operating Company (a separate limited company) into which certain services currently being provided by DE&S would be transferred together with the employees providing those services; and

b. provide and improve the MOD's defence equipment, support and logistics acquisition services, enhancing business capabilities through processes, tools and skills, and controlling the management and operation of DE&S.

The Management Company would be required to procure the Operating Company’s performance of the Requirements via a subcontract with the Operating Company. The Requirements are grouped into two broad categories:

b. deliver for the Intelligent Customer: support the MOD with planning the Programme of Work, support the MOD’s Investment Decisions; deliver the MOD’s Programme of Work and provide Quality Contractor Services

c. run the enterprise: plan the enterprise; manage delivery resources and maintain readiness to handover the enterprise.

The initial contract with the Management Company would be for a nine-year base term, comprising:

i. 3 to 6 months for transition;

ii. approximately two years transformation of the initial scope transfer (including another three-six months transition relating to the remaining scope);

iii. remaining term, Full Operation (including approximately two years transformation for the remaining scope).

The Operating Company would be established as an enduring business capability that can be passed to a new Management Company either at the end of the initial contract term or earlier in certain circumstances.

Defence Equipment & Support

21 November 2013


[1] Frictional costs – include late stage cancellation of projects, direct cost overruns on the Equipment Programme, indirect costs of extending DE&S staff, the cost of interim solutions and life extensions of legacy platforms

[2] e.g. Atomic Weapons Establishment, UK Civil Nuclear Site Licence Companies, Rocky Flats and Los Alamos in the US.

[3] GOCO design set out at Annex A

Prepared 28th November 2013