DES0021

Written evidence submitted by ADS

 

  1. About ADS

 

1.1.            ADS is the trade association for the UK’s defence, security, aerospace, and space sectors. ADS has more than 1,200 members across all four sectors, of which over 95% are Small and Medium Size Enterprises (SMEs). The UK is a world leader in the supply of defence, security, aerospace and space products and services. From technology and exports to apprenticeships and investment, our sectors are vital to the UK’s growth. In 2021 businesses across ADS sectors generated £77 billion turnover with £34 billion in exports.

 

  1. Executive Summary

 

2.1.            While many suppliers have a broadly positive experience contracting with the UK Ministry of Defence (MoD) and Defence Equipment & Support (DE&S), there are areas from industry’s point of view where improvements could be made. This document has been put together with feedback from ADS members and sets out ways that the DE&S could look to improve its approach to procurement and industrial engagement.

 

2.2.            On a strategic level, ADS has seen improvements in the way the MoD deals with industry in recent years. Structured professional interfaces work reasonably well and there has also been early market engagement, more transparency, and more clarity of requirements in a variety of programmes. The recent DE&S Strategy Refresh and recent workshops held in February and March 2023 in Bristol are particularly welcome developments. However, there are still improvements to be made.

 

2.3.            The lack of consistent long-term certainty on capability requirements and funding leads to inefficient procurement as industrial production has to be ramped up at short notice. Financial stability combined with a good understanding of the governments future requirements are important features of a business environment conducive to investment.

 

2.4.            A closer strategic partnership with industry could strengthen DE&S’ performance but a cultural change will be crucial to embedding a new approach to industry-government collaboration. Some structures to deliver this are already in place, such as the Defence Suppliers Forum, but secondments could provide a further way to support this by developing trust between all parties and strengthening mutual understanding. Where DE&S has leveraged the opportunity to collaborate with industry, the positive value generated has been evident.

 

2.5.            Social value considerations being applied consistently and proportionally in tenders is seen as vital by industry. Inconsistent application and guidance on social value considerations by government risks undermining the principle and making the concept less effective. Additionally for the concept to be effective, social value delivered in the UK should receive a higher weighting in tenders than social value delivered outside of the UK. Industry should be consulted to ensure transparency and to find a collaborative solution.

 

2.6.            During crisis the MoD has responded incredibly strongly, such as during the war in Ukraine or the Covid pandemic, and has moved quickly. However, this is mostly because it sets aside the normal processes, meaning challenges were resolved through Urgent Operational Requirements and informal discussion of problems with industry, followed by joint working. It is important that the MoD and DE&S ensure they learn the main lessons from these crises and apply their benefits to normal day-to-day processes where appropriate and do so in a measured way.

 

  1. What are the strengths and failings of DE&S’ current approach to defence procurement? Does it deliver value for money to the taxpayer?

 

3.1.            There are many areas where the Government’s approach to defence procurement works well, however there are also cases where this approach is less successful, especially when it comes to more complex procurement. A key area where the DE&S could look to improve is to provide long-term certainty through strategic engagement with industry.

 

3.2.            It would be advantageous if the MoD could provide consistent long-term certainty about the capabilities it needs. The current approach means that industry receives packets of orders and that industrial capability and capacity needs to be ramped up and ramped down constantly. This leads to inefficient and ineffective procurement and results in both government and industry losing experience and knowledge during the ramp-down periods, meaning procurements effectively need to start as new programmes, as opposed to building on legacy knowledge. That creates the conditions for procurement to go wrong, which then may be exacerbated by either buyer or supplier behaviours or competences.

 

3.3.            When funding from Government is provided in bursts rather than in a stable, consistent manner, it often results in unpredictability, which hinders industry’s ability to invest and causes greater inefficiencies. This is a particularly acute issue for the defence sector, where programmes often have long lead times and can need years of planning and delivery. Where appropriate, moving from annual budgets to multi-year budget assessments would provide industry with greater confidence to engage with a long-term vision and bring innovation into existing programmes.

 

3.4.            Overall, for businesses to develop the technologies of tomorrow they need a financial environment based on stable long-term planning. Financial stability combined with a good understanding of the Governments future requirements are important features of a business environment conducive to investment.

 

3.5.            It is worth emphasising that more troubled procurements tend to get more headlines than less troubled procurements and many programmes run to time, to budget, and are delivered well.

 

3.6.            There are also issues related to long term certainty that particularly affect Small & Medium Enterprises (SMEs). Many SMEs have limited cash reserves and when contracts and payments take months to materialise this can risk business failure, as MoD work can tie up all available resources. MoD contracting mechanisms can also create issues related to limited cash reserves, for example when key performance indicators include withholding payments as a penalty mechanism or when there are no advance payments. Delays and uncertainties in contracting also especially affects SMEs who are expected to be as flexible as larger primes when projects are delayed and restarted at short notice.

 

  1. How effective and efficient is DE&S? What can be done to improve DE&S’ overall performance?

 

4.1.            On a strategic level, ADS have seen improvements in the way the MoD deals with industry. Structured professional interfaces, such as the Defence Suppliers Forum, the Defence Growth Partnership and the Strategic Suppliers programme, work reasonably well. These interfaces have helped to foster market engagement, more transparency, and more clarity of requirements. However, there are still improvements to be made, especially on involving industry early in capability development and research and development (R&D). Early engagement from government on capabilities, requirements, and strategic thinking is vital for industry to enable a close understanding of strategic requirements and for planning to meet those future requirements, which creates the certainty companies need to make long term investments.

 

4.2.            The publication of industry-related strategies, such as the Land Industrial Strategy and the refresh to the National Shipbuilding Strategy, has provided industry with a welcome direction of what the priorities are in these domains. Implementation of these will remain crucial and it is important that DE&S is aligned with these strategies.

 

4.3.            On a tactical level, it can be quite difficult to deal with the MoD, which has some 7,000 commercial officers. There can sometimes be a divergence between the ambitions of the senior leadership and the operational level, with the incentive structures in place for the operational level not necessarily allowing them to live up to those ambitions.

 

4.4.            Responsiveness remains an issue. Scrutiny and approvals processes are sometimes opaque, which increases costs for both the MoD and the supplier. There is sometimes also an overemphasis on the process, which delays programmes unnecessarily.

 

4.5.            As mentioned above, when there is a crisis, such as the war in Ukraine or the Covid pandemic, the MoD has responded incredibly well and moved quickly. However, this is mostly because it sets aside the normal processes, meaning things get done quickly through Urgent Operational Requirements and informal discussion of problems with industry, followed by joint working.

 

4.6.            Cultural change within MoD will be crucial to embedding a new approach to industry-government collaboration, which will inevitably take time to implement and cannot simply be delivered through regulatory reforms or political direction. This will require strategic patience, organisational training, support from industry, as well as consistent reinforcement to achieve long-term shifts to long-standing mentalities and behaviours. DE&S and industry each play a crucial role in delivering UK capability and it is vital that Industry and DE&S collaborate appropriately at an upstream stage to ensure the downstream complications and issues are minimised. For the right equipment and support to be delivered both parties need to leverage each other's expertise to deliver the best outcomes. If industry is not included in the upstream process, it hampers the delivery of innovation.

 

4.7.            Some of the structures to deliver this shift are already in place, such as the MoD’s Strategic Partnering Programme and the Defence Suppliers Forum, which can enable greater collaboration with industry across the supply chain in the implementation of the Defence Command Paper (DCP) and Defence and Security Industrial Strategy (DSIS). The Shipbuilding Enterprise for Growth and the Land Enterprise Working Group can also contribute to stronger MoD-industry relations, further developing mutual trust and collaboration between industry and Government, including Frontline Commands. 

 

4.8.            It is vital that these behavioural changes are seen in the senior ranks, but also to ensure that mechanisms are put in place to achieve this in the junior ranks as well.

 

4.9.            One way to support this cultural change is through secondments from industry-to-government and government-to-industry, which can develop trust between all parties and strengthen mutual understanding.

 

4.10.        As a final point it is worth highlighting that it would be advantageous for the UK to have proper co-investment models for R&D between government and industry. While the UK defence industry does invest significantly in R&D and developing next generation technology, it would yield significant benefits if government and industry shared risk and co-invested in technology development. This model would need to be based on longer-term timescales beyond the traditional annualised budget cycle and would also involve MoD accepting an element of risk. This long-term partnership approach would provide industry with the confidence to invest in skills to deliver R&D programmes. The MoD’s Rapid Capabilities Office offers a positive model with its technology demonstrator programmes.

 

 

  1. What lessons can be learned from the UK’s recent history of defence procurement?

 

5.1.            The release of the DSIS in 2021 was a positive development in articulating the necessity of a strategic partnership with industry and defining how it should take shape. Many parts of the DSIS have been progressed, including initiatives jointly developed with industry across a range of areas. These include the publications of the Land Industrial Strategy & Defence Artificial Intelligence Strategy and launch of the Defence Technology Exploitation Programme (DTEP). ADS has seen a change in how the MoD interfaces with industry, and that progress over the last few years is much welcomed. However, while good progress has been made there is a need for acceleration in other areas to ensure that the DSIS is fully implemented, such as wider procurement reform to modernize and update regulations.

 

5.2.            The DSIS established that social value would be considered in competitive tenders and while this is a welcome step and positive in principle the implementation of it needs refining. It needs to be applied consistently and there should be appropriate allocations for domestic prosperity considerations alongside wider social value criteria. Social value considerations being applied consistently and proportionally in tenders is seen as vital by industry. Inconsistent application and guidance on social value considerations by government risks undermining the principle and making the concept less effective.

 

5.3.            Additionally for the concept to be effective, the MoD should clarify and communicate that social value delivered in the UK should receive a higher weighting in tenders than social value delivered outside of the UK. This would support the government’s levelling up agenda and would be in line with the government’s plan in the social value model to ‘help businesses create better, higher-paying jobs in every part of the United Kingdom’[1].

 

5.4.            To help matters, detailed guidance documents and successful case-studies could be shared with industry and delivered in a simple and clear format for a wider audience to fully understand the model. There also needs to be consideration around whether the social value threshold is appropriate for all tenders, regardless of value and complexity. Consideration needs to be given to SMEs who may not have the resources to fully deal with the social value agenda and for the process to not unfairly prejudice their ability to score effectively and win tenders.

 

5.5.            As previously mentioned, the UK’s recent history of defence procurement has also shown there needs to be a closer understanding of longer-term strategic requirements between industry and government. One lesson from the war in Ukraine is about the importance of continuous multi-year investment with a drip feed of continuous orders being preferable to a boom-and-bust approach as this maintains the capability and production lines. It is much easier to ramp up an existing production line to meet new requirements than to put a new one in place from scratch at short notice.

 

5.6.            Another lesson from the UK’s recent history of procurement is that there is a tendency to define capabilities requirements for new equipment that are too complex, due to limited resources. Therefore, rather than asking for a few core capabilities that a new system can do very well, requirements ask for numerous ones, which can lead to challenges in the procurement and delivery of these sorts of systems. Requirements can also evolve and change which can complicate and delay the procurement programme.

 

  1. What can the UK learn about defence procurement from international comparators? Which countries have a particularly strong model and track record and what can the UK learn from them?

 

6.1.            One lesson the UK could incorporate from international comparators is taking exportability considerations into account when making procurement decisions, which has been done in France for example. This concept was set out in the 2021 Defence and Security Industrial Strategy (DSIS), which emphasised that there should be a focus on export success at every stage starting from the requirements definition. If this is fully implemented and deference procurement requirements are not overly UK specific, it could meet the broader requirements of international opportunities and boost export success for UK industry.

 

6.2.            Exports success could be further boosted if government and industry collaborated to pursue international export opportunities. The delivery of exports could be helped through the use of a government-to-government commercial mechanism for defence and security exports. This concept was also set out in the DSIS but has yet to be implemented.

 

  1. Does DE&S have the right set of skills and incentives to succeed in its tasks?

 

7.1.            ADS has seen an improvement in the way the senior MoD and military personnel think about and interface with industry and the requirements they need to procure. However, more engagement and collaboration with industry in the early phase of development of capabilities and requirements would be welcome, which would enable better procurement and implementation at a later stage. Upcoming government reforms to public procurement have promise but will take time to have an impact and it is important to start to implement changes now, especially in terms of culture and training.

 

7.2.            One of the key barriers to adopting innovation inside Government is the culture of risk avoidance in procurement decisions. This leads to a focus on cost at the expense of innovation, hindering SMEs from entering marketplaces to offer new and innovative solutions to National Security threats. An approach to procurement that promotes a culture of risk understanding and active management would be welcomed by industry.

 

7.3.            Programme teams and commercial officials should also be encouraged through guidance and training to focus on defining a desired effect or outcome in a tender and avoid over-specifying requirements. This would allow industry to develop innovative solutions to the problem facing the end user.

 

7.4.            Finally, the rotation of senior responsible officers also needs to be considered. A three-year rotation, particularly at the ideational phase of new capability, can cause difficulties when the direction changes because of personality differences.

 

31st March 2023

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[1] The Social Value Model, Government Commercial Function. Edition 1.1 - 3 Dec 20, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/940826/Social-Value-Model-Edn-1.1-3-Dec-20.pdf