Wednesday, 1 May 2013

Your Budget, should you choose to accept it....

With the recent confirmation that the government is going ahead with its assessment into the future of the Defence Equipment and Support (DE&S) organisation, with particular attention being paid to the prospect of using a Government Owned, Contractor Operated (GOCO) model going forward, I thought it might be a good time to sit down and write some musings on procurement.

I'm particularly worried by the prospect of this GOCO model, partly because everything I've seen and heard so far about it from ministers such as Phillip Hammond seems to suggest that the government has already made up its mind that this is the answer they want, and now it's just a case of making sure that the assessment comes up with the "right" conclusion.

And partly because I can't see this being anything other than a disaster in the making. Government procurement is difficult enough as it is. The idea that palming it off to a private company is somehow going to magically correct all of the many faults in the procurement system seems optimistic at best, and at worst an ideologically driven move that will tie future governments into contracts from which they have no hope of extracting themselves, at least not for a long time (so much for the principle of no parliament being able to bind a future parliament to its decisions...).

This seems to be driven by of one of the great myths about government business; that simply by privatising something you make it inherently more efficient and cost effective. This - to anyone who understands the process in any degree of detail - is clearly bollocks. Private companies are only more cost effective in the sense that they are driven by profit, thus have a reason to reduce costs. The same effect can be achieved by simply hiring someone to take change of a department with the same mandate; reduce costs. 

If we look at many of the previously publicly owned businesses that were shipped off to the private sector, most of the "revolution" that took place was simply a case of closing down unprofitable sectors of the business, reducing staffing levels in others, and generally lowering wages. This is something that could have been achieved under public ownership by simply hiring someone to look at the various businesses in this same light. Dr. Beeching springs to mind. 

But I digress.

Over the last few years I've been looking at defence procurement from a number of angles and presented here today is a small list of some of the things that strike me as being the most important in reforming the procurement process. This is by no means an exhaustive list and indeed it's all very well to commit such things to (e-)paper, it's quite another to get them working and implemented the way you want.

It's a starting point though. And we all have to start somewhere, otherwise we'd never get round to discussing anything. So let us begin.

What was I just saying above about wages etc? Well, that's where we have to start. Fundamentally wages are one of the biggest costs of any business and the law of diminishing returns tells us that we should start in the biggest areas of controllable expense first.

Based off numbers collected in 2010 the DE&S organisation alone costs around £0.67 billion annually to administer. A huge chunk of that cost is accounted for by the more than 4,800 service personnel engaged directly in DE&S activity. Now while some of those are simply irreplaceable (the commander of a Naval shore base for example), there are a lot of places that really need not be filled by service staff.

Simply put, military personnel have two main advantages when included in procurement; 1) their military expertise and 2) ensuring that items and services procured live up to the standards required. If it's commercial expertise you're after, then you're probably going to go looking for people outside the military. As such, the first thing I'd suggest doing is taking a fairly hefty axe to a lot of the military posts and down sizing the DE&S. 

Some senior posts remain to over watch various areas of interest, essentially serving as the representative of the "end user" (the services) and some posts remain as needed for their operational expertise. But most of the jobs should be handed to civil servants, partly because they're cheaper and partly because they're more likely to have (and indeed you can recruit people with) the required skills to manage the business side of things.

Even that is not far enough. The number of teams/departments could do with a bit of trimming as well. Having multiple Senior civil servants all on pay band one/multiple senior service personnel, each heading up one of four or five departments which are essentially all tied together anyway (Director ships, Head Capital Ships, Head Surface Combatants, Head Destroyers, etc) or having four or five sub groups for ISTAR all led by Pay Band 1 Senior civil servants is just not realistic in the current circumstances.

If money flowed from trees, fine, you might want to break down something like ISTAR into very specific groups that deal with very limited core sets of capabilities such as air, land, sea, CBRN, each with a very senior bod in charge. But when times are tough, merging such groups together and giving them a much broader scope offers the opportunity to save some reasonable sums of money.

European Partners
Seeking partnerships with other nations has been a staple of UK defence procurement policy for a long time now. The principle is, on paper at least, completely sound.

If a project is estimated to cost £3 billion in development costs and you can find another partner who wants the same end product then theoretically you can share the burden with them. Say you pay £2 billion and they pay £1 billion, in exchange for them getting a say in the design and development and a share of the industrial work to compensate them for their initial outlay.

Except that for the UK, partner sharing has consistently proven to be somewhat disastrous. One word in particular can be used to sum up many of our partnering woes; 


Elaborating on that point, basically France and the UK occupy a very similar playing field when it comes to procurement. Both see themselves as the sort of nation that should be leading defence procurement projects and both see themselves as worthy of the greatest work share. Germany is in a similar boat.

That creates problems when it comes to deciding who gets to lead and who reaps the most reward from a particular project. Both parties want to be number one and often neither can agree to the others terms. There is a more general rule here and it applies to working with big partners vs small partners. Big partners are countries like France and Germany. Small partners I would consider to be countries like Italy.

When we look at projects like the Typhoon fighter procurement, we begin to see the perils. Finding and negotiating with partners did a lot of bad for the project. It delayed it tremendously, it caused a significant loss of UK work share, and ultimately it tied the UK into an unwieldy series of negotiations every time a partner nation wanted to make small adjustments to the project.

Even then, after the UK and Italy funded the first EAP prototype, Germany refused to fund the second. So much for sharing the development burden then. This partnering arrangement also caused significant delays to the selection of the engine and radar, further delaying the project.

When we look at it in retrospect, it's entirely feasible that had the UK opted to either go it alone, or to partner solely with Italy (who did much work on one of the wings of the EAP) then the UK may even have had Typhoon flying by the time the first Gulf War rolled along. It certainly would have entered service far ahead of any of the other so-called "Euro Canards", and back at a time when a lot more countries had the money to play with to purchase new fighters (along with a greatly increased industrial work share).

Partnering with smaller nations is less risky because they often lack the funds to attempt such a project themselves, so are more amenable to the whims and demands of the major partner. The UK and other nations involved in the much maligned Joint Strike Fighter program have essentially two choices when the US makes decisions about it; stick with the program or leave. Their input into the requirements and management of the program is almost non-existent.

So I would say that is a lesson for the future. Don't try and partner with a major nation like France or Germany. Either go it alone, or find a much smaller partner, in the Italian/Swedish type mold.

Budgets and Schedules
I'm always impressed by peoples seeming inability to grasp the concept of what a "budget" really is. If I were to give you £5 and say 'go and buy some hot snacks for lunch', I'd expect you to return with two hot snacks and plenty of loose change. If you were to return with two hot snacks and no change, but indeed to ask me for another pound because you promised the lady at the counter that you'd give her six quid, then I can tell you now that you'd be fishing in your own pocket for the money.

A budget is exactly what it says on the tin, it's the absolute limit for how much someone is willing to spend on something. Ideally you should always be able to deliver the expected goods or service for less than that. You should be biting your nails if the price starts creeping towards the budget limit, not once you've gone over it. If I wanted you to spend six quid on hot snacks, I'd have given you six quid in the first place, not five. 

And so we come to budgeting and schedules. Every time the National Audit Office (NAO) produces a report, not just on defence procurement but on most government procurement projects, I almost guarantee you that it will include a piece along the following lines; "The initial cost and time estimates were far too low and amounted to a conspiracy of optimism between company x and the government,"

We see this time and time again. Projects that are so hopelessly optimistic in price and time scales that they are practically guaranteed to over run before the ink on the contract has even dried. Why this happens is obvious; because both the contractor and the customer want to get approval for the item. In order to do that, providing a rosy business case is certainly the right way to start.

But it leaves the project doomed to a bad press from that moment on. The project itself might indeed come in at a price that isn't bad for what it is, but basing procurement decisions on overly generous time and cost scales leads to problems down the line when the numbers for the overall budget stop adding up the way they should, as we've seen with the fabled "black hole" in the defence budget of late.

It also strikes me that once a budget and time scale has been agreed then any delays and over runs, providing they weren't caused by the government, should be funded from the pocket of the contractor with no additional government help. That's what contracts and budgets are for. Fixed price, with certain allowances made for government induced changes.

Comparative analysis of previous projects should also give us much better time and cost estimates, which allow defence planners to more realistically budget their programs for the future.

Requirements Creep
Even well planned and costed programs are - sadly - not safe. A big factor in this is requirements creep, both in terms of the number of items required and the performance values of the end product.

Remember the days when the last government assessed that the the UK needed 12 new Type 45 Destroyers? Then money was needed elsewhere and lo and behold, now suddenly we needed only 8. Then 8 became 6, and any pretence that the numbers being procured were based on need and not financial skullduggery was gone, taking the initial development outlay and spreading it over half as many vessels in the process.

Which isn't the worst thing that has happened to a project. Even though the per item cost went up, the reduced order means that the total expense came down, albeit with the final number of ships coming down to. 

Compare with something like the TSR.2 project for example, that started off as a fairly modest proposal and by the end had become a high end death star from above. 

Unfortunately there is little that can be done about this. One government leaves office, another enters, and suddenly it's all change because money needs to be found for overseas aid or more healthcare spending or education etc, and as such the defence budget gets raided. 

A classic trick, as seen in both the CVF and Astute submarine programs is to order a slowdown, delaying the in service date of the project in order to buy space in the short term annual budget, but only at the expense of increasing the long term cost of the project overall.

The lesson here would be once you've committed to something, stick to it. Stop messing with the requirements, stop extending the time scales, stop wasting money. Let the producer get on and build.

Single Responsible Lead
I was amazed to find out that the PFI deal for the RAF's new Voyager air tankers had no single person in charge of the overall project, according to the NAO. This to me seems like a fundamental error. 

Quite what level of individual you choose to put in charge of a particular project is dependent on the nature of it, but certainly for the big stuff like carriers or the Voyager aircraft you would expect to have someone with the authority to approach the Defence Minister directly, and whom would cast an eye over every single last aspect of the project.

Revolutionary vs Evolutionary
At times it is necessary to throw out everything you previously clung to and start a fresh. A radical new design, from the bottom up, taking in the latest of a variety of technologies. That's fine, as long as you appreciate the fact that it will take more time and more money to develop than a less ambitious plan.

We're talking revolutionary versus evolutionary. Clean sheet versus modest improvement. One thing that concerns me is that many, many UK procurement projects seem to take the revolutionary step over the evolutionary step, despite the record of declining budgets.

Now the Type 26 Frigate promises to take the evolutionary path, essentially just being an upgraded Type 23 in a new hull form. As a result, the proposed cost of the project certainly looks a lot more modest right now than we've seen on previous works, assuming all goes to plan (I still think the estimates are a little short, especially when normal inflation doesn't appear to have been factored in yet).

The question is not about whether we should do one or the other. There are times to be evolutionary and then there are times to be revolutionary. The issue is about understanding when we should each of the above, and about understanding that revolutionary steps cost a lot of money and take a lot time, therefore they should be handled differently and it should be made clear to everyone that this is happening.

Off the Shelf vs Bespoke
One of the things that often gets thrown around when talking defence procurement is the idea of off the shelf vs bespoke products. One side says that off the shelf products are cheaper, the other says that this is a false economy because bespoke items built at home pump tax money back into your coffers (I've been working on trying to put a value on this "pump" and at the minute I have it down to just 12-15%).

The example I think of immediately with this is the Future Rapid Effect System (FRES). So the MoD had a choice between the Spanish ASCOD and BAE's CV90. They went with ASCOD, but I'm struggling to see why. 

The CV90 seems to meet all the criteria, certainly no less so than the ASCOD which is currently undergoing a program of upgrades as part of the initial development stage. One upgrade taking place is the creation of a 40mm main gun, with Cased Telescopic Ammunition. One would ask at this point (for one has entered posh mode) why we need this bespoke solution, considering that the CV90 already comes equipped with a 40mm gun, albeit without the fancy ammunition. I'm sure the Swedes would permit BAE to let us have the 40mm version in exchange for the badly needed jobs. 

Instead we're essentially creating a new vehicle when there is an answer out there already that is sufficient. This reminds me also of the Urgent Operational Requirements (UOR) system, where I see the operative word as being "Urgent". To me a UOR is either urgent or it's not. If it is urgent, then it means finding a solution off the shelf now, not in four or five years time. It means buying whatever is on the shelf, or even plundering the inventory of an ally in exchange for cash, as long as it meets the requirement. Not sitting around on our arses waiting for an entirely bespoke solution that largely reinvents the wheel.

And it's here that I'm going to stop because - ironically enough for an article complaining about late delivery - it's been nearly a week since this was supposed to go up.


  1. Excellent post Chris. Good points; and I to have my doubts about privitising the DE&S. I suppose time will tell...

    Also agree about the CV90; much prefer to ASCOD and although the telescoped 40mm would be superior, is any improvement worth the extra cost over the Bofors 40mm?

    1. Gareth you double posted, so I've deleted the second copy.

      The thing about CV90 is that it has a 40mm gun now, which means it could be brought into service today and meet the requirements re; firepower (and what an excellent, versatile gun it is).

      Then if we insist on this bloody telescoped ammunition that no-one else uses, we can always do an upgrade program in the future, along with engine and transmission etc. Could have saved £500m faffing about with the development of ASCOD at a time when belts are tightening.

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  3. Sorry about that. Not sure how that happened.

    1. It's the Internet, stuff like that happens all the time without explanation. I once had one of my own replies to a comment syphoned off as spam. How does something like that even happen? Only Blogger knows....