SMART PROCUREMENT
151. One of the first conclusions to emerge from the Strategic Defence Review was the need for a radical reappraisal of the way we carry out defence procurement. We spend some £9Bn a year on equipment, spares and stores. Despite previous efforts to improve our procurement process, many of our projects take longer and cost more to bring into service than we planned. The 1997 National Audit Office report on major programmes reported an average delay of 37 months, unchanged from 1996.
152. This is not only poor value for money but also brings operational penalties. The length of the procurement cycle means increasingly we are not keeping pace with the rate of technological change which in many areas is now commercially led. The 'Smart Procurement' initiative announced by the Defence Secretary in July 1997 was aimed at adapting our procurement processes to meet these challenges.
Current Weaknesses
153. Early work in the Review identified some common problems. These included the transfer of commercial and technical risk to contractors unable to absorb it, insufficient pricing pressure on inflation and the delays involved in decision-making on collaborative projects.
154. The consultancy firm, McKinsey, were commissioned to carry out an analysis of underlying weaknesses in the present procurement process and organisation. Their report confirmed that although there has been improvement, major weapons systems are still taking some twenty years to bring into service, costs continue to exceed planned levels and reliability and maintainability of new equipment frequently remains a problem.
155. A particular weakness has been a failure to strike the right balance between cost, time, and performance in the very early stages of a project. Insufficient investment in risk reduction at this stage has cost us dear later on. Other contributing factors have been a tendency to use the same approach to procurement for widely differing projects, failure to give project managers sufficient delegated authority, and failure to provide properly targeted incentives to both contractors and staff.
Keys to Improvement
156. Working groups involving industrial representatives were also set up to look closely at ways of modernising specific aspects of our procurement practice. Similar messages emerged, emphasising the need for fuller early planning to allow faster development and production; a through-life approach covering both acquisition and in-service management; and more of a partnership between MOD and industry. Especially in areas of rapid technological change, we need to be prepared to take a more incremental approach, setting less ambitious targets for the initial capability of new equipment but followed with pre-planned upgrades. We also need to bear down on defence inflation by pricing contracts of up to five years in cash.
157. Two central concepts emerged. First, adopting separate procurement approaches for major and minor projects and for commodity and other low risk items. Second, that we should adopt a through-life approach to projects covering both acquisition and in-service support. To do this we will bring together the requirements, technology and evaluation, procurement and logistics functions into a single project team. The team would also include industry representatives except during competitive phases of the project.
158. We also propose to simplify our approvals procedures to allow greater responsiveness to technological change while preserving proper levels of scrutiny. There will be two rather than three major decision points in a project cycle. The first would be the launch of a project initiation phase which would involve spending up to 15% of cost to reduce risk and to develop an acquisition strategy looking right through to in-service support. This would be followed by the main investment decision on whether to proceed to demonstration and manufacture, involving international competition or collaboration if appropriate. Ministers will, of course, continue to take the decisions on larger or contentious projects.
Future Organisation
159. The Review concluded that MOD would, like most very large purchasers, continue to need its own specialist organisation for the core management of complex projects, although there is scope for outsourcing acquisition of more routine items and in some specific areas. But delivering the improvements outlined above will require radical changes in the Procurement Executive and in its relationship with the rest of MOD and the Armed Forces.
160. The central needs are to achieve greater clarity in internal customer/supplier relationships and greater flexibility in personnel matters without reducing the scope for interchange with the rest of MOD. This will be achieved by turning the Procurement Executive into a Defence Agency and by creating a single, central defence customer in MOD headquarters. Since the Procurement Executive already meets many of the technical requirements of an Agency we hope that it will achieve this status by 1 April 1999 and we anticipate a reduction in its operating costs of around 20% by 2001/2.
Benefits
161. We expect these changes to lead to faster, cheaper and better procurement with improved in-service support and savings in through-life costs. It will take some time to realise their full potential as the greatest impact will be new procurement or projects at a very early stage. Nevertheless, we are determined to implement the reforms as quickly as possible and a full-time implementation team is being set up, including industry and consultancy assistance. Our initial estimate is that, over the next ten years, we should be able to achieve a reduction of some £2Bn in acquisition costs.
Industry and Collaboration
162. The British defence industry is outstandingly successful and a vital national asset. It provides jobs for over 400,000 people and earns the country around £5Bn from exports each year. From a defence point of view a healthy and competitive industrial base is crucial to ensuring that we will be able to continue to procure the right equipment for our forces at competitive prices.
163. The Government's manifesto contained a commitment to maintain a strong British defence industry. The MOD will continue to support and promote defence exports within the strict criteria which the Government laid down in July 1997 to avoid their misuse for aggression or internal oppression. The reduction in the scale of Western armed forces, including our own, following the end of the Cold War has naturally created difficulties for the industry. It needs to find new ways of exploiting defence technology and expertise in civilian markets. This is also important if we are to preserve a healthy defence technology base to support our future military needs.
164. For both reasons, fulfilling a manifesto commitment, the Government has announced proposals to set up a Defence Diversification Agency within the Defence Evaluation and Research Agency to foster, in partnership with industry, greater two-way technology transfer between the military and civil sectors. The details were set out in a consultative Green Paper (Cm 3861) published in March. Decisions on the way ahead will be announced when the results of consultation have been assessed. We will harness the opportunities offered by a Public Private Partnership to strengthen the Defence Evaluation and Research Agency's ability to continue to provide world class scientific research well into the next century.
165. The costs of high technology defence research and development and smaller national production runs also make it essential to secure long term competitiveness by achieving economies of scale through international collaboration and industrial restructuring. This logic applies equally to all our Allies and partners, to governments and to industry. For industry, long-term competitiveness is about survival.
166. These pressures have already driven a dramatic and rapid rationalisation and concentration in the US defence industry, despite the relatively large size of its domestic market. On 9 December 1997, the United Kingdom, France and Germany declared that there was an urgent need for a similar restructuring to create an efficient and globally competitive European aerospace industry. It is primarily for industry to decide how this should be done but the three Governments - now joined by Italy, Spain and Sweden - have launched an initiative to facilitate the process and to capitalise fully on the benefits that it can bring.
167. Wherever possible, European governments should harmonise the requirements of their Armed Forces and pursue co-operative solutions. This not only avoids unnecessary duplication of development and production costs but makes sound operational sense. As part of their initiative, the Defence Ministers announced on 20 April that they would give high priority to resolving a number of governmental issues - for example relating to security and intellectual property rights - which could hinder restructuring and would sign a Letter of Intent setting out a timetable for this on 6 July. The creation of a multinational organisation, OCCAR (Organisme Conjointe de Co-operation en matière d’Armament), involving Britain, France, Germany and Italy to undertake common procurement also has an important part to play.
168. The outcome of the Strategic Defence Review fully reflects the importance that the Government attaches to maintaining a strong and healthy British and European defence industry combined with a continuing commitment to competitive procurement. The Review's forward equipment plans include a range of major European collaborative projects including Eurofighter, Horizon frigate, and the Multi-Role Armoured Vehicle (MRAV). We will be seeking to ensure that there are realistic European options to be considered for our longer term requirements such as the replacement for the Tornado bomber and improved strategic air transport.
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