Wednesday, 10 October 2012

On time and on budget

Today I want to look at some of the problems we have here in the UK with defence procurement. I've been flicking through some old National Audit Office (NAO) reports lately about various programs and the conclusions they make seem to be fairly consistent, cropping up time and again. It's also obvious that politics and unforeseen circumstances have more than a little to do with many of the issues that we encounter. This is not intended as any kind of comprehensive review of procurement, just a starting point hopefully for a wider discussion.
The first and probably most consistent issue to come up will surprise precisely nobody that has followed the procurement woes of the MoD for any length of time; over specification. There are other terms for this of course. "Gold Plating". "Buying the 100% solution when 80% would do", etc. Essentially the premise that when purchasing shiny new toys, the MoD (likely driven by the senior service chiefs involved) has a tendency to accept nothing but the very best from day one.
There is some merit in this approach of course. For a start, nobody wants to buy duff kit. You want equipment that works and works well. In particular due to smaller procurement numbers, it's vital that the equipment we buy is capable of performing at a very high level. It also helps to avoid embarrassing headlines about not buying the very best for front line forces, as the British taxpayer is very keen to see the forces equipped with the very best kit that money can buy (as long as they don't have to pay more for it).
The problem is that the very best equipment also attracts the very highest premiums. On top of that, often we have a tendency to go after "the next big thing" in many regards, seeking to put as yet immature technologies onto the latest purchases. While the desire to break new ground is admirable, it often prompts hefty delays when the technology ends up needing a certain degree of tweaking before it's ready to enter service.
The Future Rapid Effect System (FRES) is a great example. The program to develop and deploy a brand new armoured scout vehicle for the army followed by a more general service version has - in one form or the other - been around for years now without deploying a single piece of equipment into service.
Much of the delay centres around the desire to take an otherwise perfectly adequate current design and spec it up to the hilt with new engines, drive train, radios and a new turret, complete with a brand new gun using an as yet untested form of new ammunition. This is symptomatic of many defence programs in the UK, with a desire to accept nothing but the very best, cutting edge capabilities.
The NAO however proposes a perfectly reasonable halfway solution; buy a decent vehicle to start with and then gradually improve it.
In the case of FRES this would (have) involved simply buying an off the shelf design to start with, replacing the terribly ageing Combat Vehicle, Reconnaissance, Tracked (CVRT) Scimitars now, whilst running a concurrent program to develop future upgrades. As the various new technologies reached maturity they could be incorporated into new build vehicles, purchased in procurement blocks, with older vehicles being brought up to the latest specifications at a later date during periods of deep maintenance.
In a sense this approach is being adopted with the Typhoon fighter and the Type 45 Destroyers. Type 45 is fitted "for, but not with" certain extras like harpoon anti-ship missiles and phalanx close in weapon systems. As older ships go out of service their harpoon and phalanx weapons can be removed and transferred on to the new destroyers.
This approach was also tested with the Sea Viper missile system used on the Type 45. Tests of the system were done while the ships were being built, using test barges for live firings to prove the technology while manufacturing of the ships had already begun.
With Typhoon the approach to developing its capability has been done incrementally, starting with achieving its air to air capabilities, then air to ground, and now looking to the future it will gradually integrate the Brimstone and Storm Shadow missiles, followed by a new Active Electronically Scanned Array (AESA) radar at a later date.
This incremental upgrade program allows equipment to be brought into service earlier and with less delays, while unproven technology is developed separately in the background. Any problems with the background technology development affect only that program and don't delay the main equipment program.
Looking forward at the program to develop the Type 26 frigate there is much hope that by using proven technologies to start with (such as the Artisan radar and 2087 sonar) costs will be controlled in the initial stages, while not ruling out the possibility of future upgrades that can be developed separately from the core Type 26 program.
This is certainly a promising start and I'd hope that the MoD will use this approach more often in the future to introduce much needed equipment into service on a reasonable time and cost scale, while incrementally increasing performance through future enhancements.
Moving on, the second major issue that crops up repeatedly is the lack of realistic planning for both time and cost. The NAO has found on several projects that the MoD was guilty of optimistic assumptions regarding the time it would take and the cost in would incur to introduce new equipment into service (the fabled "conspiracy of optimism").
All too often it would seem that the MoD is sold on contractors slick marketing, either through a lack of appropriate investigation into likely costs or simply to get projects approved, knowingly accepting time and budget scales that it suspects wont be met in order to get the ink on the contracts initially, which are then much harder to undo by future governments.
If there is one thing we never seem to learn it's that we always seem to get caught up in the promise of quick and cheap procurements. Returning to the Type 26 is probably a good example. While measures appear to have been taken to reduce costs, I still think the MoD's estimate of about £250 million per ship is a little low.
The Dutch Navy has recently ordered four Holland-class off shore patrol vessels, of which three are now in commission. The price was around 470 million euros, or about 117 million euros for each ship. Considering these vessels are much smaller and less capable than what is anticipated to be produced by the Type 26 project (a project that wont start for several years, by which time a fair amount of inflation will have kicked in) I suspect the Type 26 would more realistically be priced at £300 million.
This issue also reared its head in the Astute submarine program. A design tool that was supposed to significantly reduce the time and cost of producing detailed designs for the program turned out to be insufficient for the task, and indeed ultimately did the opposite of what was expected, significantly hampering and delaying the design work.
As expressed by the NAO, any team involved in a new procurement project should look to recent history - both in this country and abroad - to help it identify realistic expectations for cost and time to project completion, not withstanding delays that are out of its control. Starting from a more grounded assumption about the necessary budget and development time should help the MoD manage its books more effectively in the future.
However, as I mentioned briefly above, delays and cost over runs are not always the fault of those involved in the project.
Politicians routinely use defence as a way to save cash, and one of the premier choice methods of helping to balance the defence budget in any one year seems to have become the practice of "pushing things to the right", or in other words, deliberately delaying an otherwise on track project in order to move the cost into future years, thus making short term balance savings.
This can take the form of delaying key decisions that would then require a financial commitment, or slowing work on an already existing project in order reduce in year spending, while pushing the delivery date out further and thus costing more overall.
A classic example of this has happened with the Astute submarine project. An enforced delay in the program, slowing production to reduce any gap between the Astute program and a future replacement for the Vanguard SSBN's has resulted in almost £1 billion of additional cost being added to the project, a cost that is entirely out of the hands of the project managers and that couldn't have been predicted when the program was first being organised.
Political interventions don't stop there though. Next comes multi-national projects.
The theory behind the multi-national project is to spread development costs over multiple nations, while at the same time procuring a common vehicle/aircraft/ship. As the Typhoon fighter project has shown, this optimistic assessment often fails to come true.
The initial requirement for what would become Typhoon was issued back in 1979. The first flight didn't occur until 1994, over 15 years later. Service entry didn't begin until the early 2000's. How does something like this happen?
The answer is political wrangling and issues over requirements. Different nations have different needs and expectations out of their equipment. And in the case of Typhoon one of the biggest issues initially was agreeing the work share. Who would build what, how much work would each partner nation do, whose industry would reap which benefits. It was this back and forth discussion, debate, dialogue and disagreement that caused the project to take such a long time in getting off the ground, so to speak.
The grand irony of Typhoon is that the UK ended up doing the bulk of the early development work (and funding it) alone anyway, as British Aerospace (BAe) produced the Experimental Aircraft Programme (EAP) mostly off its own finances, with some later input from the British government. Using fly by wire technology that had been tested on a modified Jaguar, a tailplane from a Tornado and a pair of RB.199 engines from a Tornado, BAe produced an aircraft that would be very similar to the final production Typhoon. A second prototype had been planned, funded by Germany, but the Germans decided to cancel and only the initial prototype ever made it into the skies.
This multi-national project has also caused a great deal of problems even to the present day. Modifications to the design require consensus, as do most areas of the program. Multi-national procurement has brought with it a dependency on other nations in order to make any progress with the project while at the same time adding layers of bureaucracy that have increased costs and delays when the whole point of going multi-national was because of the cost savings it would produce.
Sticking with Typhoon, it also demonstrates how decisions made in other parts of defence can impact on projects in a way not previously anticipated. Perhaps you could call this an example of a lack of "joined up government" to use that most despicable of all forms of language; management speak.
The decision to retire the Jaguar aircraft from service prematurely (to save money) ended up affecting the schedule for Typhoon as now the Typhoon was expected to speed up integration of its attack capability in order take over the Jaguars attack role. The later retirement of the Tornado F.3, air defence variant then necessitated a priority back to the air to air role once more.
In this way, Typhoon helps to illustrate to us the problems with government decisions that have a knock on impact on various projects, decisions that are sometimes made without due consideration to the effect they will have, and serve as a warning to the MoD in future to come up with a coherent plan for how to compensate for changes (re; cuts) that it makes across the whole spectrum of defence. Sadly the current "gapping" of the Maritime Patrol Aircraft (MPA) capability demonstrates that such lessons have not sunk in yet.
The next issue highlighted is one that has been brought to light again recently by the NAO, and that's the issue of the Senior Responsible Owner (SRO). In many projects the MoD is criticised for not appointing an SRO at an early enough stage (the Voyager PFI project was only given an SRO in 2007), not giving the SRO enough freedom to make decisions in dealings with the various contractors, not including the SRO in important decision making groups and meetings (like the group that handles exports for Typhoon), and not keeping these SRO's in their positions long enough for them to see through and coherently manage various stages of the project.
Strong leadership is critical to getting any project delivered on time and on budget. A project manager needs to be appointed from day one, and such a leader must be informed of all the facts, privy to all discussions regarding the project, have the freedom to make decisions that affect the ability of the project to come in on time and on budget, and must be given the opportunity to stay with the project for several years in order to see their decisions through.
If this sounds familiar to you it's because it's a fairly standard practice in the private sector. Most projects, from big to small, will be assigned a project manager, a single point of authority who handles a project.
They become the expert on that subject, if not already so. They know every nook and cranny of the design, they know all the details on budgets and time scales, they have the freedom to make decisions that affect the ability of the project to deliver on time and on budget, and they will either stay with the project until its completion (earning salary, bonus and title increases for hitting certain objectives) or at the very least will be with the project for a large part of its course before passing on all their knowledge to a successor.
That's standard procedure in the private sector. The absolute basic that you would expect. Hopefully the MoD is taking steps towards this line of thinking when it comes to project management.
Another crucial stage of project management which the NAO has repeatedly criticised the MoD for is poor visibility of underlying costs. This most recently came about with the Voyager PFI deal. How can you tell if you're signing a competitive deal unless you know how much a competitive deal is worth?
In modern times, defence contractors often prefer to sign "cost plus" contracts for major projects, where the government meets all the contractors costs and then pays a mutually agreed amount of profit on top. But in order to do something like that you need to have a good understanding of how much the various components and work cost, in order to avoid being fleeced by unscrupulous contractors (not that defence companies would be so callous...).
Ensuring that defence contractors are transparent about costs and that the MoD develops and maintains the ability to investigate further the costs incurred, as well as being able to accurately assess the market for various products, will be necessary to make sure that the MoD is not hoodwinked (I love that saying) by defence companies out to make a quick buck.
Finally I have to address the issue of what you might call "production sustainment". This is not something referenced by the NAO but something I've been thinking about myself over the last few weeks. Essentially what we're talking about here is any action or decision that is made purely for the purposes of maintaining work at a facility in order to keep it in business, protecting jobs and especially keeping the facility open for future work.
Again this leads us back to the Astute submarine project, which is being stretched out and sustained beyond the length the Barrow facility actually needs to produce the remaining submarines. The purpose is to reduce or indeed eliminate a gap between the end of the Astute program and the start of the successor submarine that will carry Trident.
In principle I understand the purpose of these actions. You want to keep skilled staff in employment and expensive facilities in productive work, ready for the next project. But I also think it's the wrong approach.
Can we justify spending additional money now to save a bit of money in the future? In the case of submarine production the gap isn't that bad. £1 billion spent to save possibly a few billion pounds that might be needed to regenerate the future submarine construction capability, although even then it's not clear how much that regeneration would actually cost.
However, I also sit and think to myself "what would a normal, properly functioning private business do in this situation without an effective government subsidy?". The answer is that they would sustain those skilled staff who would otherwise be likely to leave and be difficult to replace, and they would do it off their own back.
Because without them you will lose future business. What's a few million pounds in sustaining a specialist work force while potentially putting certain facilities into hibernation, when the eventual pay off from a future contract will more than cover the expense?
Indeed, those facilities need not lie fallow. They can be used to produce other shipping (the Albion class landing ships were built at Barrow), including a possible export order for something like a diesel powered submarine.
There was a time, as we saw earlier with the EAP prototype that eventually became Typhoon, when private companies would invest their own money in developing experimental or prototype projects, in order to demonstrate their capability to potential customers and to win orders by anticipating customers future needs and creating the basic design of the project that they would eventually order.
"BAE Systems Maritime - Submarine" (such a catchy title that really roles off the tongue) have already suggested possible designs for the successor SSBN, so why not use the gap in between the full speed production of Astute and the SSBN to design and build a prototype hull; smaller, with cheaper materials, conventionally powered and lacking many of the fancy gubbins that go into a proper submarine, in order to serve as a proof of concept for some of the more ambitious design aspects. If the project succeeds and can control its costs sufficiently, it could probably get the government to pitch some money in, or retroactively pick up the tab.
It just strikes me that as far as defence is concerned British companies are not doing themselves any favours with the constant threat to close facilities unless the government forks out large sums of cash to subsidise them, when they know full well that without the facilities they will not win future work and will end up out of pocket or indeed out of business.
While it's right that the government should invest money in future capabilities and spend on research and development, the defence industry needs to play its part and shoulder more of the burden itself for designing and prototyping the equipment of the future, actively competing to win domestic and international orders off its own endeavours rather than expecting the government to swoop into the rescue every time they threaten to close some yard or factory.
And the MoD needs to start rebuilding its corporate knowledge on procurement, in order to avoid the mistakes of the past and help contractors to deliver projects on time, and on budget.


  1. Good article Chris,

    I particularly agree that defence companies seem to be failing to invest in their own R&D. This is entirely Government influenced. Until BAe starts trying to 'build to export' the company is going to be entirely dependent on taxpayer money to fund it's profits and any losses.

    Having said that I worked in motor-sport where contracts can be lost and whole teams disbanded. My company tried both approaches, 1.internal investment 'a sabbatical' focusing on development and 2.disbanding the team and redeploying/making redundant. In both cases the best talent left and future results were so materially affected the business was effectively nonviable. So I would keep production consistent. In the astute's case another one would have been a better idea, funded by BAe's cashflows with delayed future promised payment.

  2. Hello Op3, good to see you.

    The irony of the slow down to the Astute program is that it more or less cost the same of what one additional boat would have cost, although through life (maintainence and personnel) there is a saving.

    As for building to export, I always look slightly enviously at our neighbours in France and Germany, who seem to have a talent for designing products for export. Be it subs or corvettes, they design products clearly targetted at customers other than their own national governments. They seem to grasp the concept that their own government might not be able to cover their bills permanently, so they seek deals abroad by designing more appropriate yet often innovative solutions.

    I'm depressingly impressed.

  3. Hi Chris, a good read but I would have mixed in the Defence Industrial Policy papers, too. The NAO reports are mainly for parliamentary oversight, and as some of the audience is clearly non-expert, the reports will have to follow a template, to remain readable and facilitate comparisons and recent trending. Whereas the Policy papers are what it says on the tin, and clearly express intent (or the lack thereof).

    Cheers, ACC