DES0018

Written Evidence submitted by Royal United Services Institute

 

Digest

DE&S is a flawed but not broken organisation

Its behaviour is much shaped by the regulatory framework in which it operates, which directs a general inclination to favour formal competitive contracting as a procurement strategy.

Formal competitions in defence are time-consuming and expensive for all parties and, in the more demanding defence areas, they lead predictably to highly optimistic contracted commitments Is there adequate recognition of the point that different sorts of things should be bought in different ways?

The MoD including DE&S is reacting to the changing world .  There is recognition of the importance of defence industry as a key element of national capability and the concept of the DE&S as an arms length body from its customers and suppliers is not helpful.   For major projects involving development as well as production work, the DE&S should serve as a key relationship manager working to ensure that the users and the suppliers are having the most effective dialogue on service needs and what is feasible in a time scale, cost and risk. While there will always be a need for contracts, relationships between suppliers and customers are important for solving problems.

Is there excessive focus on the delivery of a piece of equipment? In financial terms, it will cost much more to operate than it did to buy and in operational terms what matters is its military utility for deterrence and operations.

Value for money for the taxpayer is an elusive concept.  In defence terms, it is multi-dimensional, subjective and dynamic (changing over time).

Defence is susceptible to the ‘sunk cost fallacy’ which enhances reluctance to cancel struggling projects.  Could the MoD develop some process akin to the Nunn-McCurdy machinery in the US for triggering a potential cancellation process when costs and delays exceed a pre=-determined level.

In terms of which countries do defence acquisition better, few countries take on the risks of development and production work, but Israel, Korea, Singapore and Sweden achieve more than be expected by countries of their size. 

There are many defence acquisition issues not addressed in detail here including whether the DE&S needs greater commercial and technical expertise among its staff.  Is there in peacetime an appropriate sense of urgency among procurement officials? Do procurement officials rely too much on adherence to process to justify their choices and the timing of choices? And why does the MoD persistently say that it wants more involvement from SMEs while leaving in place multiple obstacles to this occurring.

 

Evidence in full

The DE&S is not broken although it could function better. In any huge organisation, there are inefficiencies but, as its CEO found on taking up the post, it delivers most of its projects by number rather than by value on time and to budget.[1]

Also relevant is that the DE&S has constraints on what it can do. It is significantly directed in its behaviour by the approvals processes within MoD and the Government as a whole, by the Treasury approvals processes, and by regulatory documents including the Public Procurement Regulations and the Green Book. These incorporate an emphasis on the utility of formal competitive tendering which, in some cases, adds very little value and in other cases can be positively damaging.

Formal competitions that are ‘fair’ and not vulnerable to unwelcome protests are inevitably time-consuming, if only because the precise documentation that needs to be prepared by both purchaser and supplier is so voluminous.  The lived experience is that, in times of crisis and urgent need when the regulatory framework is eased, the DE&S has shown it is capable of moving quickly.

To expand on the impact of competition, this approach can make sense when there are numerous potential suppliers who have access to numerous potential customers. Repeatedly unsuccessful companies are driven out, which is not consequential if the entry barriers for new suppliers are low.

Unfortunately none of these conditions apply in many areas of British defence.  If a UK defence company cannot win favour from one customer, the UK MoD, it has little chance in the rest of the world.  Moreover, if the competition is for a once in 20 years order in a defence category, the loser will likely choose or have to leave the sector. Also, when it comes to entry barriers for companies wanting to move into major platform and sub-system production, the entry barriers in terms of knowledge, infrastructure, skilled manpower and financial resources are huge.

Sustained use of competitive tendering in many defence areas has served to reduce its own feasibility as subsequent industrial consolidation has produced more oligopolies and even monopolies.  This is a UK, European and American experience.

What about the impact of competitive tendering on delivery performance?  In areas where the next major opportunity may be more than a decade away and where there is only one credible customer, bidders are driven to be at least very optimistic.[2]   For their part, officials and ministers are incentivised to accept such optimistic offers because being able to cite them much assists approval processes in the MoD centre and wider government.

Competitions not surprisingly are often associated with disappointments: Ajax and Astute were procured using competitions. In the US so was the F.35 and the KC.46.  Would the Government allow research into DE&S records to compare what was actually delivered as opposed to what was promised in competed major projects that involved significant development work (and so risk) and production over the last 30 years.

These points underline that different things should be bought in different ways and that defence has unusual market characteristics. The organisational answer that Defence has adopted is to create separate bodies outside DE&S, most notably Defence Digital, the Submarine Delivery Agency, and the Defence Infrastructure OrganisationOne question is whether the training and education provided for Defence Commercial staff equips them to deal with the complexities involved.

A significant reason for using competitive tendering is that it reduces the likelihood of corrupt behaviours. But italso adds time and cost to contracting procedures.

In response to global developments, UK defence and its acquisition arms are seeking to adapt positively, although some old habits die hard and there is a way to go.  At the highest level of government there is recognition that the defence industrial sector is a strategic asset central to meeting the goal of the UK being able to use its forces as its sees fit and to enjoy operational independence. Multiple sector strategies have been put in place under the capstone Defence & Security Industrial Strategy document. The Government has recognised that its money needs to be used to preserve and develop industrial capability as well as provide the armed forces with their perceived needs. This makes the DE&S task more complex. The term partnering is increasingly used to capture the MoD-industry relationship but there may still be commercial staff in DE&S who see it as their task to get as much as possible from the private sector while spending as little as possible.

The emphasis of the Gray reforms that the DE&S should be an ‘arms length’ body receiving customer needs from the commands and securing contracts from the private sector seems inappropriate for major projectsAs an aside, what assessment is available of the Managed Service Provider contracts that were announced in 2014 and were a substitute for the virtual privatisation of DE&S that was once envisaged? [3] When major development work on national and international projects is involved, the DE&S as a governmental body should surely be a key relationship manager working to ensure that the users and the suppliers are having the most effective dialogue on service needs and what is feasible in a time scale, cost and risk.

There will always be a significant role for contracts in defence acquisition but excessive reliance on them would be an error.  A year or so ago this author asked a very experienced commercial officer now with a leading consultancy company which he would prefer: a good contract or a good relationship.  He immediate answer was always a good relationship.  Contracts get looked at when a project is in trouble but relationships can enable trouble to be avoided. The Committee may like to consider the impact of the contract in the Ajax case.

The performing commercial officer needs also to be a relationship manager.  To this the role of the supply chain manager needs to be added.  The commercial function needs to be about more than whether a supplier delivers on time, to cost, to quality and to the right delivery address. The author has not forgotten meeting with a (junior) commercial officer who was glued to his phone. He eventually explained that one of his (sole source) suppliers had gone bankrupt and he needed to buy up all the stock.  I asked whether he had been monitoring the financial circumstances of his sole source suppliers and got only an embarrassed look.

Focusing on the in-service phase of acquisition, there are two points that are perhaps not addressed often enough.

The first is the shocking reality that, in pure financial terms, a platform coming into service at 20% over budget coming into service does not matter very much. Even within a decade, the in-service costs will dwarf the purchase cost.  In-service costs are complicated and difficult to specify, and neither users nor the suppliers are normally keen to expose detail but, having done the calculations on our family car (which gets about 10-12 hours of maintenance a year including time spent at the petrol pump), I am confident of the validity of the relative weights of purchase and in-service costs.

The second point is that whether a piece of equipment arrives on time and to budget matters less than whether it proves a great or little relevance for deterrence or operational purposes.  Tornado and Typhoon arrived later than expected but proved to be workhorses for the RAF. Who is aware that the much-used C.17 was late, over budget and nearly cancelled by the USAF.[4] The first C.130Js when delivered to the UK, had real performance shortcomings.[5] This dimension of value, military utility in service, could yet be a question both about Ajax and, dare it be said, the QE class.

The Committee asked particularly about value for money (VFM). It is a practical rather than an academic point to underline that VFM is a multi-dimensional, subjective, and dynamic concept even when the focus is on ‘the taxpayer’.   The multi-dimensional aspect is well-illustrated by the diagram in the Land Industrial Strategy which spells out the 19 separate objectives being pursued by the government through defence acquisition. Clearly when three retired very senior generals judge the Trident replacement as a waste of money)[6],  the subjective nature of value is clear. An example of a change in fortunes over time is the Thales factory in Belfast which didn’t receive an MoD contract for years but became highly appreciated in 2022 as the UK source for NLAW and Starstreak missiles.

In practice, value is defined by the interaction of numerous stakeholders in governmental defence, who can change their minds when the world moves on.

It is recognised that public sector projects are vulnerable to the ‘sunk cost fallacy’, a reluctance to cancel struggling projects because it will appear to mean that public money has been wasted.[7]  The UK has nothing like the Nunn-McCurdy processes in the US which require Congressional review and approval when a project breaches cost, time and performance limits. I also have never heard of the Ministry of Defence defining, privately of course, what is the most it would pay for a piece of equipment.  The known but secret existence of such a figure would incentivise companies to maintain focus and be a trigger tool for reviews of projects that were faring poorly.

There is also an interest in which countries do it better than the UK.  Direct comparisons are difficult because acquisition systems are complex things that operate in a national political and constitutional context.  If the question was which countries achieve a lot in the light of their funds and size, Sweden, Israel, Singapore and South Korea would be real candidates.  In these cases, governments play leading directing roles and competition among domestic firms is rarely emphasised.  In major development and production projects, their national champion’ companies are apparent. These companies are recognised as central to national security:  the Secretary of State’s words in Japan were striking on this topic.

Industry mustn’t look just to itself and its own shareholders. It’s got to look across because as ministers and Chief of Air Staff, our job is to deliver a requirement to defend our nations and that goes above all else. It goes above individual industry self-interest, it will go above shareholder interest and that has to be the overruling principle that must guide this.[8]

This paper has covered just part of the defence acquisition agenda.  There are many other questions of relevance: does the DE&S have the resources to monitor and assess the multiple global technological developments of defence relevance, including AI?  Do DE&S commercial officers always have an appropriate sense of urgency in their work and are they sensitive to the commercial importance of time to many suppliers. What are the DE&S performance statistics on documents for industry being released and decisions made on their scheduled dates?  How serious a problem is any sense that DE&S staff seek to reduce risk to their own careers by slavishly following recommended process without considering its wider implications?  Finally, but not least, why does the MoD persist in arguing that it wants more work to go to SMEs while, at the same time, putting multiple barriers to such firms that would be interested to working in defence?

 

30th March 2023

 

 

 

 


[1] See Olivia Savage, Andy Start interview, Jane’s Defence Weekly, 26 October 2022

[2] See Bartleby column, ‘Mega Lowdown’, The Economist, 18 March 2023, p.61.

[3] MOD offers managed service provider contracts - GOV.UK (www.gov.uk)

[4] See the referenced Wikipedia piece: Boeing C-17 Globemaster III - Wikipedia

[5] Personal interviews and presentations to students at the Defence Academy by the RAF receiving engineer.

[6] Trident nuclear defence system was 'completely useless', says top general | Daily Mail Online

[7] See Bartleby column, ‘Mega Lowdown’, The Economist, 18 March 2023, p.61.

[8] UK Defence Secretary - Keynote speech DSEI Japan 2023 - GOV.UK (www.gov.uk)