defence acquisition · penny mordaunt mp (conservative, portsmouth north) sandra osborne mp...

Published on 5 February 2013 by authority of the House of Commons London: The Stationery Office Limited

House of Commons

Defence Committee

Defence Acquisition

Seventh Report of Session 2012–13

Volume II

Additional written evidence

Ordered by the House of Commons to be published 29 January2013

Defence Committee

The Defence Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Ministry of Defence and its associated public bodies.

Current membership

Rt Hon James Arbuthnot MP (Conservative, North East Hampshire) (Chair) Mr Julian Brazier MP (Conservative, Canterbury) Thomas Docherty MP (Labour, Dunfermline and West Fife) Rt Hon Jeffrey M. Donaldson MP (Democratic Unionist, Lagan Valley) Mr Dai Havard MP (Labour, Merthyr Tydfil and Rhymney) Adam Holloway MP (Conservative, Gravesham) Mrs Madeleine Moon MP (Labour, Bridgend) Penny Mordaunt MP (Conservative, Portsmouth North) Sandra Osborne MP (Labour, Ayr, Carrick and Cumnock) Sir Bob Russell MP (Liberal Democrat, Colchester) Bob Stewart MP (Conservative, Beckenham) Ms Gisela Stuart MP (Labour, Birmingham, Edgbaston)

Powers

The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk.

Publications

The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/defcom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Alda Barry (Clerk), Dougie Wands (Second Clerk), Karen Jackson (Audit Adviser), Ian Thomson (Inquiry Manager), Christine Randall (Senior Committee Assistant), Rowena Macdonald and Carolyn Bowes (Committee Assistants), and Sumati Sowamber (Committee Support Assistant).

Contacts

All correspondence should be addressed to the Clerk of the Defence Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 5745; the Committee’s email address is [email protected]. Media inquiries should be addressed to Alex Paterson on 020 7219 1589.

List of additional written evidence (published in Volume II on the Committee’s website www.parliament.uk/defcom)

Page

1 ADS (UK Aerospace, Defence, Security and Space industries) Ev w1

2 Dr Robert Dover (Loughborough University) and Professor Mark Phythian

(University of Leicester Ev w7

3 EADS Ev w8

4 Finmeccanica UK Ev w12

5 Intellect Ev w15

6 Professor David Kirkpatrick Ev w21

7 Logica Ev w22

8 Public and Commercial Services Union (PCS) Ev w26

9 Royal Aeronautical Society Ev w28

10 Saab Ev w31

11 Trevor Taylor and John Louth Ev w33

12 Prospect Ev w39

13 Alenia Aermacchi Ev w44

14 Jag Patel Ev w47

15 Christopher Donnelly Ev w51

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Defence Committee: Evidence Ev w1

Written evidence

Written evidence from ADS

About ADS

ADS is the trade organisation advancing the UK Aerospace, Defence, Security and Space industries.Farnborough International Limited (FIL), which runs the Farnborough International Airshow, is a wholly-owned subsidiary. ADS has offices in England, Scotland, Northern Ireland, France, and India. ADS comprisesover 900 member companies within the industries it represents, of which over 850 are small and mediumenterprises (SMEs). Together with its regional partners, ADS represents over 2,600 companies across the UKsupply chain.

ADS also supports SC21, Sustainable Aviation, Defence Industries Council, RISC, Defence Matters andhosts the Aerospace & Defence Knowledge Transfer Network.

The Defence Industry employs 314,000 people in the UK—directly and through the supply chain. Theindustry is highly skilled, with 59% of workers holding a university degree or equivalent. The industry invests8% of annual sales revenue in research and development—amongst the highest in industrial sectors.

Summary

The National Security through Technology White Paper provides some individual measures that are helpful,particularly on security, exports, SMEs and defence technology.

The key industry issues are:

— Highlighting the links between the White Paper and the National Security Strategy prioritieswould strengthen the overall impact of the paper and assist in mapping out a strategy for thedefence and security sectors.

— There is a danger the White Paper creates the impression through minimal operationalsovereignty requirements and the emphasis on the “global market” that inward investment isno longer a sensible business choice. It is, however, important that the UK retains the abilityto design, manufacture, develop and modify complex technologies and systems necessary forthe “freedom of action” and “operational advantage” the UK Armed Forces require.

— Implementation of the White Paper and subsequent clarity around PR12 must together providethe medium and long term position to give industry clearer signals on where it should andshould not invest to support the UK’s national security.

— Industry believes that the Government can help significantly by identifying future priorities andthe future resource allocations to address them, and is keen to be actively involved in discussinghow cost-effective solutions to meeting national security requirements can be provided. Thecommitment to publish a 10 year Equipment Plan is important in this regard but there needs tobe sufficient detail to allow Industry to plan.

— Industry supports the Government’s undertaking to be more open, to simplify its processes andto give more information on its equipment plans. This approach is consistent with theGovernment’s broader policy and we look forward to further developments in this area as someprocurement processes still remain impenetrable to many small suppliers.

— Industry would welcome BIS playing a stronger role in promoting broader governmentalunderstanding of the UK defence and security industrial base, ensuring the arguments forinvesting in it are given due weight in Whitehall, and promoting it in global markets.

— Investment in Science and Technology (S&T) is important to industry and the wider UKeconomy. However reductions in S&T budgets over the last decade have impacted the UKknowledge base. The real impact will not be felt for five to 10 years. If we are to remaincapable of delivering equipment to the frontline that can adequately protect our service menand women, remain relevant as a strategic partner of choice to our key allies and retain theedge in the global export market, then the UK must increase spending to recover some of theadvantage that has been lost over the last 15 years.

— Making best use of scarce S&T and R&D resources will require approaches such as thedevelopment of long-term technology roadmaps between Government, academia and industry.Roadmaps could also include stronger links between defence and relevant civil technologies toensure dual-use potential is fully exploited eg for autonomous systems. The extent to whichoff-the-shelf procurement will undermine the UK’s ability to export needs to be considered.The UK will find difficulty exporting what it has previously imported and this conflict betweenthe UK’s export drive and an emphasis on COTS procurement must be addressed. To maintain astrong Government-backed export drive, the Intellectual Property and manufacture of exportabletechnology has to reside in the UK.

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Ev w2 Defence Committee: Evidence

— A COTS policy taken to extremes, could result in the demise of UK sovereign capability.Intelligent application of COTS however can provide a step forward in the development process.This will require a strong integration framework, which means open systems, open standardsand a modular and incremental approach to procurement. It will be critical for Industry to retainthe integration skill sets to be able to modify off the shelf products, and this requires continuedinvestment in R&T and the development process.

— UK Industry is at a disadvantage when taking part in joint programmes with industries whichare better supported by their national defence industry strategies. The international defencemarket is a complex arena and often does not offer normal market conditions seen in otherindustrial sectors. Stability of Government intent is most important to deliver confidence inlong term programmes.

— Industry believes that choices on balance of needs and resources within the Armed Forces,when to initiate projects and equipment budget oversight are all for HM Government as thecustomer to decide. The customer has to be an intelligent one to decide between competingsolutions and to this end MoD should be mindful of the skills it chooses to retain in the faceof budget cuts.

1. Defence Reform

The interaction between and mutual compatibility of the Gray and Levene reforms, and the extent to whichthe reforms are achievable in the light of the current and foreseeable restrictions on resources, includingpersonnel, and the need for MoD Head Office and Defence Equipment and Support to continue to performtheir primary functions

1.1 The Review of Acquisition which CDM authored prior to joining the MoD pointed to the need to bringequipment plans into line with available resources and to improve equipment programme planning,management and delivery. It is in industry’s interests to be able to interact with a world class acquisitionorganisation with excellent commercial and project management skills which works in tandem with thecapability customer to deliver front line needs in an affordable manner.

1.2 Industry believes that these reforms are broadly compatible and indeed, will mutually enforce the movetowards a more efficient procurement process.

1.2.1 These reforms represent the biggest change programme for a generation and industry believesthat the MoD cannot put off decisions until such time as reforms are seen to be “complete”.

1.2.2 Without the appropriate skilled personnel in place none of the reforms considered elsewhereare likely to be implemented effectively. The staff cuts expected over the period of the CSRare also likely to affect the performance of programmes and industry would urge MoD toconsider the impact of staffing changes.

1.2.3 A challenging aspect of raising employee performance at DE&S is promoting a change inculture. To achieve this, staff should be better incentivised. For instance, rewards should be inplace for decisions taken in a timely and cost-effective delivery; while the establishment ofprofessional career paths would avoid the major dislocations that happen when key personnel,both military and civilian are promoted out of major programmes after short tours of duty.Industry looks forward to continuing engagement on the developing Materiel Strategy whichseeks to address this matter.

1.3 However the biggest industry concern is that this extensive change programme will mean around twoyears of uncertainty to industry as to how the interface with both DE&S and separately the Front LineCommands, will be operated.

2. Resources

2.1 How the requirements of national defence and security and the required capabilities are determined

2.1.1 With the exception of cyber-security, the White Paper does not show any link to priorities in theNational Security Strategy (NSS) despite being billed as covering defence and security.

2.1.2 The NSS sets out the UK’s national Defence and security requirements. In its response to the Inquiryon the National Security Strategy by the Joint Committee on the National Security Strategy, ADS noted thatthe NSS and the National Security Council (NSC) which oversees it “should seek to deliver greater levels oftransparency around the Government’s requirements and policy priorities in so far as they relate to the defenceand security industries. The Government should also remain committed to providing adequate levels ofinvestment in all aspects of national security including defence, counterterrorism, security, intelligence,resilience, cyber security and policing”.

2.1.3 ADS noted then, and continues to believe that the NSC should develop and maintain an active interestin overseeing the implementation of the Government’s White Paper.

2.1.4 Industry needs both transparency of future intent and stability of intent to enable essential strategicbusiness planning. Since SDSR there has not been the necessary clarity.

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2.2 How decisions are taken between alternative solutions and on whether and when projects should beinitiated; How the balance of needs and resources is allocated between different services and commands;How the provision of support to the required capabilities is integrated into the acquisition; oversight ofequipment budget

2.2.1 ADS believes that these are choices for HM Government as the customer to decide. This customer hasto be an intelligent one to decide between competing solutions and to this end MoD should be mindful of theskills it chooses to retain in the face of budget cuts.

2.2.2 There are however principles which industry believes should guide MoD’s decision making:

2.2.2.1 ADS believes that Government needs to go much further in identifying its priorities for thefuture and how it intends to allocate resources to address them. Industry wants to be drawn into discussion of how it can provide cost-effective solutions to meeting national securityrequirements.

2.2.2.2 The commitment to publish a 10 year Equipment Plan should provide industry with furtherclarity of future requirements.

2.2.2.3 There is a need to assess programme risk more accurately, to avoid constantly shiftingrequirements, to build risk reduction into the early stages of new programmes and improve themanagement of residual risk.

2.2.2.4 It is integral that support to the required capabilities are considered part of the acquisitionprocess as the majority of equipment costs are now incurred in maintaining and upgradingexisting systems through life, rather than in the acquisition phase.

2.2.2.5 However, neither the existing depth and breadth—and success—of the support services alreadyprovided by industry to MoD are reflected in the White Paper nor the potential to do more. Inthis sense, ADS sees the White Paper as a missed opportunity to consider what contributionthe support sector can make to driving ever greater efficiency in MoD expenditure.

2.3 MoD’s relationship with industry

2.3.1 Industry engages constantly with MoD as part of the working relationship. At a strategic level, MoDmeets regularly with industry through the Defence Suppliers Forum (chaired by Secretary of State) and alsothe SME Forum (chaired by the Minister for Defence Equipment, Support and Technology). Industry has foundthese Forums productive to date.

2.3.2 The White Paper acknowledges that SMEs have often found it difficult to engage with the MoD andsets out steps that MoD will take to improve its relationship with SMEs. These include SME awareness trainingfor officials involved in SME procurement and strengthening the role of MoD’s senior “Supply NetworkChampion” to include a responsibility to maximize SME participation at prime or subcontract level. Suchactions are supported by the SME community. Expectations in Industry have been raised.

2.3.3 Responsibility for industry lies beyond MoD, therefore industry is working closely with otherDepartments, in particular the Department for Business, Innovation and Skills to achieve common goals forthe growth of the industry. Cooperation and common understanding across all Departments is improving slowlybut there is much to be done.

3. Procurement

3.1 The procurement processes used and relationship between principles of open competition andtechnological advantage

3.1.1 Industry would argue that Government has used open competition as its primary method of acquisitionsince the 1980s and has been open to inward investment. There is a danger the White Paper creates theimpression through minimal operational sovereignty requirements and the emphasis on the “global market”that inward investment is no longer a sensible business choice. It is, however, important that the UK retainsthe ability to design, manufacture, develop and modify complex technologies and systems necessary for the“freedom of action” and “operational advantage” the UK Armed Forces require.

3.1.2 Despite the creation of paths to respond to Urgent Operational Requirements, the majority offundamental technological advances are needed from, and continue to be dependent on, sustained long terminvestment in the UK. The UK cannot be sure of the willingness of other countries to offer it access to cuttingedge technology and the UK therefore needs to continue to sustain its science and technology base by all themeans open to it, civil and military. If procured from overseas it also needs to look for international partnershipsthat offer security of supply.

3.1.3 The White Paper reinforces the Government’s position that it will look first to buy off the shelf withonly very limited exceptions. It is industries view that a COTS only policy would ultimately result in thedemise of UK sovereign capability. Intelligent use of COTS can be advantageous as it can provide a stepforward in the development process. To do this, there needs to be a strong integration framework, which meansopen systems, open standards and a modular and incremental approach to procurement. However there are



disadvantages: the risk of integrating COTS with existing systems and the implications of supporting COTScomponents in a system through an extended service life.

3.1.4 The critical issue is that UK industry sustains the technical skills to do the tailoring and the commercialskills to negotiate rights to the COTS platform for UK, and for export.

3.1.5 The Government must be a sophisticated intelligent customer to gain the benefits from COTSacquisition. Government buyers need access to technical knowledge and expertise together with access tosupplier independent simulation, test and evaluation as well as IPR for maintenance, support and additionalsuppliers.

3.1.6 A COTS approach on the global market does not create the immediately accessible “body ofknowledge” which allows UK forces to adapt, modify and extend their equipment, so as to be able to operateat the edge of the performance envelope.

3.2 Input from industry (including SMEs)

3.2.1 ADS believes that industry, including SMEs should be brought into the procurement process at anearly stage.

3.2.2 The MoD has been encouraging consolidation which has removed potential contenders. In a numberof capability areas there is little competition, as major contracts are awarded directly. It is important that theMoD retains the ability to contract directly with SMEs, particularly in the areas of R&T and innovation andsimilarly does not overlook the importance of the Prime Contractor and Systems Integrator that are able tomanage greater risk and have the skills required to manage complex projects and programmes.

3.2.3 The White Paper states that MoD will consider encouraging approaches from consortia of smallcompanies that may be better able to offer a solution and accept risk than individual SMEs. Such a decisionshould give SMEs a greater opportunity to access new MoD business. However the costs of forming aconsortium and dismantling one at the end of the project may mitigate this approach.

3.2.4 Government already has processes and codes of practice for procurement. ADS proposes that MoDengages with trade associations to agree to the removal of unreasonable and unnecessary terms or conditions,which will benefit industry and Government.

3.3 Making the chosen acquisition strategy work

3.3.1 Industry will work with Government to ensure that the chosen acquisition strategy is put into place aseffectively as possible. ADS would caution that Government should consider the strategic as well as economicimpact of its choice, and should avoid the one-size-fits-all policy.

3.3.2 ADS would also like to see clear and transparent guidelines from Government as to the process andimplementation timeline for an acquisition strategy.

3.4 Recruitment, training and retention of skilled personnel at both customer and procurement roles at alllevels

3.4.1 Industry recognizes the need for an intelligent customer within MoD. Amongst its own employees,industry has made key investments to ensure the training and retention of skilled personnel.

3.4.2 BAE Systems for example, has developed an overarching skills strategy for its employees called Skills2020. This sets out an integrated skills and education programme for its UK businesses over the next 10 years.With around 1,000 apprentices at any one time, BAE Systems has also invested in improving the quality of itsapprentice programme.

3.4.3 Finmeccanica’s Project Management curriculum includes extensive training in order to retain andpromote personnel with the necessary competencies to provide quality of delivery and secure longer-termconsistency of their programmes. When coupled with the Finmeccanica Phase Review; an independent auditof all programme activities by a dispassionate assessor; the company has the ability to ensure rigorous close-to-real-time programme measurement and monitoring of performance.

3.5 Transparency and accessibility of the processes; monitoring and control of projects

3.5.1 It is too early for industry to judge the transparency and accessibility of the new processes put forwardin the White Paper. Involvement of Industry early in the acquisition process would improve transparency, scopethe art of the possible (eg the industrial risk inherent in particular approaches) and improve exportability.

3.5.2 Industry welcomes participation in the Research and Development Board on which industry has a non-executive seat at the table. The Board is active and gives the R&D process some transparency.

3.5.3 The Public Contract Regulations and Defence and Security Public Contract Regulations give minimumrequirements for transparency and accessibility. Whilst MoD frequently exceeds the minimum standards, theprocess remains impenetrable to some small suppliers.



4. Impact of the White Paper

4.1 The maintenance of the UK military industrial base, support for exports and the extent to which off-the-shelf procurement is compatible with this

4.1.1 The White Paper appears to re-enforce the Government’s position that it will look first to buy off theshelf with limited exceptions. When this policy is compared with that of other countries towards their defenceindustries, a decline in the UK defence industrial base seems inevitable.

4.1.2 The extent to which off-the-shelf procurement will undermine the UK’s ability to export depends onthe definition of off-the-shelf. To maintain a strong Government-backed export drive, the Intellectual Propertyand manufacture of exportable technology has to reside in the UK. The UK cannot export what it has importedand this conflict between the UK’s export drive and off-the-shelf procurement must be addressed.

4.1.3 Industry would welcome BIS playing a stronger role in promoting broader governmental understandingof the UK defence and security industrial base, ensuring the arguments for investing in it are given due weightin Whitehall and promoting it in global markets. This has been part of the BIS role in the past but has beendownplayed in recent years.

4.1.4 Industry believes that the Government would gain through assessing the economic benefits of the UKdefence and security industry as well as the unique strategic value of the industry to the nation and to UKnational security. It also offers advantages for other Government concerns such as bilateral diplomacy,international affairs, and wider science and technology base.

4.1.5 Technologies and capabilities originating in the defence arena are deployed across numerous sectors(civil aerospace, oil and gas, civil, nuclear etc) the lower down the supply chains one goes. The elimination ofaccess to developing future business/capabilities in the defence sector will impact on the subsequent ability ofa number of other supply chains to develop broader business opportunities.

4.2 The provision of UK R&D by both MOD and Industry

4.2.1 S&T investment will become increasingly important in maintaining the UK knowledge base, essentialif we are to buy intelligently off-the-shelf and maintain freedom of operation, against the overall decline inplatform programmes and Urgent Operational Requirements (UORs) as frontline spending decreases.

4.2.2 Industry welcomed the acknowledgement that the S&T budget must not fall further and has put inplace a floor of 1.2% of the Defence Budget; however S&T spending has more than halved over the pastdecade, down from 2.6%. When economic conditions allow, it is essential this is reversed if lasting damage isnot done to the knowledge base and the sustainment of skills, which have been utilised so effectively duringrecent crises.

4.2.3 Industry supports the increased remit for the Centre for Defence Enterprise to include both defenceand now security, as well as the added emphasis on exploitation. There however remain concerns around IPand commercial arrangements. Real emphasis needs to be placed on improving the exploitation of ideasgenerated. This could be achieved by more active involvement of companies with the potential to invest in theCD E process.

4.2.4 The UK owes its current military capabilities, prominence in the export markets and ability to deliverUORs/new equipment to meet rapidly evolving threats, to the vision of our predecessors and to the investmentin R&D made 20 years ago. We have however been living on the legacy of this spending and the effects ofthe declining in R&D investment will begin to become clear over the next few years. Industry is very concernedthat skills and Intellectual Property will be lost abroad if the decline of the last two decades is not reversedimmediately and that the UK will slip behind the USA, other European nations and emerging economiesseeking to grow their defence capabilities whose R&D investment vastly outstrips that of the UK.

4.2.5 The SDSR highlighted that procurement and our strategic security would rely on bilateral relationships,principally with the US and France. The UK is able to engage with those nations because we are on the sametechnology level as they are. As our technology edge falls away our ability to remain a strategically andoperationally relevant partner to our key allies will also decline.

4.2.6 The White Paper notes the “global availability of technology”. Industry would concur that technologicalinnovations come from all parts of the world, but MoD should not expect that it will be able to acquire andexploit the technological investments of the countries that it feels able to purchase equipment from. Thisapproach could also lead to acquired capabilities being several years behind the cutting edge.

4.2.7 Investment in R&D is also an investment in skills and expertise that assist in the UK not only being ableto buy intelligently off-the-shelf but also to bring off-the-shelf equipment into UK use through the integration oftechnology and doctrines.

4.2.8 Making best use of scarce S&T and R&D resources will require vehicles such as the development oflong-term technology roadmaps between Government, academia and industry. Roadmaps could also includestronger links between defence and relevant civil technologies to ensure dual-use potential is fully exploitedeg for autonomous systems.



4.3 How far the White Paper has provided Clarity for Industry

4.3.1 The White Paper, of itself, has not provided the clarity industry had hoped for. The Implementation ofthe White Paper and confirmation of PR12 must together provide the medium and long term position to giveindustry clearer signals on where it should and should not invest to support the UK’s national security.

4.3.2 As the Government seeks increased defence and security exports and is increasing the involvement ofindustry in support of front-line operations by the Armed Forces overseas and by the police and other agenciesat home, it must recognise the need for industrial investment in the UK to sustain future capability.

4.3.3 With the exception of cyber-security, the White Paper does not identify the key areas of capability inwhich Government will invest resources for the future and, as such, is not sufficient enough to encourageindustry to invest in the UK’s national security.

4.3.4 The implementation of these large scale MoD reforms will take considerable time. DE&S will have tomaintain an operating capability whilst suffering major staff number reductions and an outflow of experienceand expertise. It is not clear to industry how will they achieve this in the midst of ongoing operations.

4.4 How lessons have been learned from past successes and failures (including UORs)

4.4.1 UORs have been lauded for their speedy provision to the Armed Forces. However it is worthconsidering that much UOR activity relies on priority access to industrial capability and the Testing andEvaluation process. This cannot always be guaranteed and there is a risk that “assured off-shore access” couldchange over time and is not exempt from unpredicted political constraints or third party export regulatoryregimes.

4.4.2 In addition, UORs are mainly suitable for less complex equipment. Their speedy procurement was alsoat the expense of a competitive market, which would clearly be at odds with MoD’s policy at set out in theWhite Paper.

4.4.3 Industry would welcome early engagement with MoD as part of the procurement process as this willhelp speed it up.

4.4.4 A structured approach to relationships with industry is key to delivering value. Partnering has deliveredsignificant value to MOD over recent years and MOD should be encouraged to capitalize on these successesat a time when the falling number of staffs make it even more critical to the process.

4.5 The implications of bi- and multi-lateral procurement

4.5.1 Collaborative programmes offer opportunities for the UK industry to maintain vital defence capabilitiesin a time of constrained budgets.

4.5.2 UK and French R&T budgets are of similar size and the two nations are engaged in similar operationswhich require similar capabilities. Joint R&T programmes that lead to collaborative procurement programmescan be an efficient way of delivering capabilities to our armed forces that might not be affordable on a purelynational basis. However the UK must continue to fund R&T adequately or UK industry will not experienceoptimal benefits from the Anglo-French Treaty.

4.5.3 UK Industry is at a disadvantage when taking part in joint programmes with industries which aresupported by their own national defence industry strategies. Stability of Government intent is the mostimportant factor as the enables better, longer term industry partnerships.

4.5.4 When considering bi and multi-lateral procurements, Government should also consider the opennessof the partner market and if it will provide UK industry with reciprocal openness. ADS supports Government’sambition to promote open markets elsewhere to create a level-playing field in the global defence market.

4.5.5 Joint procurement also needs to take into account exportability aspects as well as the long term effectson UK defence industry. Industry and Government should discuss this topic in more detail. Industry needs tobe clear what Government means by more effective use of budgets to determine the appropriate model. Doesthe government desire more cost effective individual capability, more exports, more value in terms of GDP,growth in high value jobs and growth in the science and technology base? Different models will achievedifferent effects and will also vary with the complexities of the acquisition.

April 2012



Written evidence from Dr Robert Dover (Loughborough University) and Professor Mark Phythian

(University of Leicester)

We would like to provide some brief views and analysis for the members of the Committee on this topic onthe general context within which it sits, and in terms of the specifics of the policy area.

The February White Paper broke the historic link between UK defence procurement and UK based defencemanufacturing. This is a serious blow to those manufacturers without a well-developed presence in thirdcountry markets. To those manufacturers who are global brands, it provided a further (perhaps erroneous)signal that the UK no longer provides a supportive environment for their activities. A similar signal had beensent to the defence manufacturing sector in 2008 by the removal of DESO in 2008, and the creation of DSO,which the smaller element of the manufacturing sector feels has seriously hampered their ability to drive theirown growth. It should be noted, however, that this move was roundly applauded by anti-arms trade campaignerswho had worked hard to try and remove DESO as a marketing/lobbying tool for industry.

The demonstrable contraction of the defence manufacturing sector will continue to have an impact in thewider economy as well. There is good evidence of a revolving door between research intensive industries (suchas defence and motor manufacturing, and within materials engineering) and thus the contraction of defence notonly impacts on the existing labour pool, it will have a future impact on those seeking higher education trainingin cognate subjects, and the world research carried out by universities in these areas. In short there are largeimpacts not only on this one industry, but the knowledge economy in general, and the government will haveto take quite drastic steps to mitigate these effects on the labour market, universities, schools and the country’sresearch and development culture.

We have noted that both the government and the opposition (via an independent report) have placed anemphasis on procurement via the Urgent Operational Requirement mechanism. We think placing such anemphasis is a grave mistake. Extending the use of UORs can only be premised on the following logic:

That equipment will be available to be bought on a short-time frame. This implies equipmentsurpluses within the global market. It also implies (with an emphasis on the UK being able tomaintain and adapt this equipment) that there will be a retained capacity within the UK defenceindustries to cope with this demand.

We think that an emphasis and reliance upon UORs represents poor value for money: historically, within thedefence sector, value only comes from well-planned work programmes. We also think that UORs, by their verynature, represent a failure to adequately predict and identify future threats. The SDSR was very sound, in ourview, about the need to improve the UK’s capacity and capability to accurately identify emergent threats andthen to effectively plan for them. It is to this end—for information—that Robert Dover (and Michael Goodmanfrom King’s College London) hold an Arts and Humanities Research Council Grant to explore with officialswhat lessons for future analytical capacity can be learned from contemporary security history.

To round off our views on UORs we also think that whilst the government’s capacity to predict emergentthreats needs to be improved in order to allow for more sensible and value for money planning to be done(and the developments in Libya and Egypt are cases in point), we also think that there is a fundamental tensionbetween the sensible, stated position in 2010 of the SDSR being a logical consequence of the National SecurityStrategy and the problem that then resulted from a divergence from the logic of the SDSR in the UK’s decisionto pursue military options against Colonel Gaddafi’s regime (Operation Ellamy). We have commented in a“Defence Studies” article that we felt the SDSR was “lost over Libya”, and the decision to commit to Ellamywas as much about a reworking of Blair’s position of intervening to secure democracy and freedom, as it wasto demonstrate to the United States that the “Europeans”—manifest in the UK and France—were able toshoulder some of the security burden in their near-abroad. We also felt that the broad statements of nationalinterest contained within the SDSR were mainly aimed at appeasing policy and military audiences that theSDSR was more than a Treasury led review of defence. The line that the SDSR was focussed on deliveringcapability to the NSS priorities has been harder to sustain as time has gone on. We agree with the broadconclusions of the Public Administration Select Committee’s report in October 2010, just prior to thepublication of the SDSR. The PASC suggested that the UK requires a better understanding of strategy (inabsolute terms) but also in the practical terms of the UK’s positioning in the world, and about what kinds ofmilitary tasking it will be involved in, in the future. To us, this work is still urgently required.

It is clear to us that the current relationship between the MoD and industry is dysfunctional. There are twovariants of an improved relationship dynamic that we could envisage. The first is a modern-day reversion tothat which existed after the Second World War, where competition between manufacturers existed but thegovernment’s role was to sensibly allocate research, development and manufacturing tasks (and therefore profitand risk) between manufacturers. This was, therefore, a sensible and profit-friendly version of nationalisedindustry. Our second model is wildly different: this would be about exploring ways in which the services couldprioritise their own spending, and regiments could become lead purchasing authorities (a free-market approach,outside of bounded national logics). The current relationship seems to be typified by an unhelpful proximity:the feel of “one-ship’s company” with a strong reality of an adversarial relationship, and because of tightlybounded contracts, the steep escalation of costs with every contract amendment. Reforming the relationship



between contractors and government could go a long way to addressing the cost escalation in the defenceequipment budget.

26 March 2012

Written evidence from EADS

Introduction

1. EADS UK welcomes this opportunity to respond to the Defence Select Committee’s inquiry intoDefence Acquisition.

2. We would welcome the opportunity to contribute to any further work investigating a broader range ofissues beyond the scope of this present inquiry.

About EADS

3. EADS is a global leader in aerospace, defence and related sectors. The EADS Group of companiesincludes Airbus, the leading manufacturer of commercial aircraft, Eurocopter, the world’s largest helicoptersupplier, Astrium, the European leader in space programmes from Ariane to Galileo, and Cassidian a leadingprovider of cryptography and other security solutions. EADS is the second largest aerospace and defencecompany in the world and a major partner in many of Europe’s largest aerospace projects, including EurofighterTyphoon. EADS has a major industrial presence in the UK. Over 16,800 highly-skilled jobs are directlyemployed at EADS’ 25 key UK sites, and a further 135,000 jobs are indirectly supported throughout the UKsupply chain. EADS invests around £2.8 billion annually on research, of which £390 million is spent in the UK.

4. EADS is responsible for the supply of Eurofighter (with BAES and Finmeccanica), A400M, FSTA,Skynet 5, DII (Secure Network), Cormorant, crypto and (through MBDA) Storm Shadow, ASRAAM, FASGWand Brimstone.

Executive Summary

Scale of Change Proposed

5. Cohesion in the Gray and Levene reports is found in their aims; however, the changes that are proposedare so radical that the process of implementation will go beyond current timescales. There is considerableuncertainty due to the second Gray report being overdue.

6. Capability requirements will now be the responsibility of four Command HQs and the MOD staff forStrategic Requirements which means DE&S and industry will have to deal with five organisations.

7. The definition of a balanced future military capability will be more complex under the proposedreorganisation.

8. Delegation to the Commands is likely to result in a short term view, whereas the MOD is currently moreinclined to take a more long-term and a more political view.

9. The loss of highly skilled and competent personnel during the transition is one of the greatest risks.

10. Despite recognition of TLCM, support solutions continue to be separated from their acquisitionprogrammes.

Maintaining Sovereign Capability

11. The UK’s own sovereign defence industrial capability will diminish over time if off-the-shelfprocurement leads to an increase in the number of solutions being supplied and supported from overseas.

12. Open market, off-the-shelf procurement and competition procurement concepts can become anoxymoron.

13. When considering OTS acquisition it should be remembered that operational requirement modificationscan lead to a final cost greater than that of a developed solution.

Easy Government Industry Partnership

14. Trust between industry and MOD needs to be increased. The continental European model, whereprocurement officials move regularly between government and industry, can lead to better mutualunderstanding.

15. The White Paper is a short to medium term policy paper does not provide a longer term strategy. Thiscould only be addressed by a national industrial strategy that includes defence and security.



16. Despite the bi-lateral agreement with France there is no evidence France is opening its defence marketto UK companies. The French industrial strategy is becoming the point of reference for the industrialimplementation of the bilateral agreement.

Defence Acquisition

The interaction between and mutual compatibility of the Gray and Levene reforms, and the extent to whichthe reforms are achievable in the light of the current and foreseeable restrictions on resources, includingpersonnel, and the need for MOD Head Office and Defence and Support to continue to perform theirprimary functions

17. The two reports we have seen so far are clearly aimed at providing clarification, efficiency, delivery andvalue for money. In this respect there is a degree of cohesion. This said there is an aspiration for fundamentalchange in the way delivery will be achieved from the key parts of the MOD. Indeed the changes required areso radical that the process of implementation will take years rather than months and the current timescales aretoo short to complete and embed the transformation. In particular, the potential loss of expertise during thetransition process from MOD HQ (especially in the case of military personnel) is likely to cause a hiatus inthe delivery of near and medium term deliverables.

18. Gaps in manning could stall the working relationship between MOD Head Office and DE&S at theworking level. This would not only be caused by the loss of posts, but by a loss of understanding of how thenew organisations are supposed to work together, where the responsibilities will lie and where decision makingwill take place. In addition, there are other complexities:

(a) DE&S will now have to deal with five organisations with responsibility for CapabilityRequirements ie four Command HQs and the MOD HQ Staff for strategic requirements. Thiswill be made more difficult by the relative immaturity of the newly-formed Joint Command. Inaddition, while the outsourcing of programme management introduces an additional layer ofactivity that could provide efficiencies, it could also cause a significant disconnection. Thiswould pass on responsibility but not necessarily risk, which would still lie with CDM. If DE&S has much reduced capacity then the question arises “Who will oversee the outsourcedprogramme management?”.

(b) The capability requirements function was difficult enough under the former organisation, but atleast it was co-located with planning and finance staffs, and there was a joint approach. Inaddition, the single Services may drift into specifying “stovepipe” requirements with thepotential effect that a shorter term view may be taken.

How the requirements of national defence and security and the required capabilities are determined; howdecisions are taken between alternative solutions and on whether and when projects should be initiated; howthe balance of needs and resources is allocated between different services and commands; how the provisionof support to the required capabilities is integrated into the acquisition; oversight of the equipment budget;and the MOD’s relationship with industry

19. There is a key flaw in the Levene report. It is a return to a system that failed (pre-Heseltine reforms)and is likely to create more not less incoherence.

20. Under the proposed re-organisation the definition of a balanced future military capability will be morecomplex. The different cultures across the Commands and the potential increase of “tribalism” may causedifficulty in achieving cohesion and agreement on issues that involve more than one Service. Not all issuesthat cross Command boundaries will be dealt with by the Joint Force Command, although it might have to berepresented in each Command capability area.

21. There is a clear aspiration to reduce MoD Staff, but the added complexity which will result from thetransformation is likely to have the opposite effect. The management of a complex matrix like capabilityfunction will require numerous committee and consultation structures to provide the coherence to achievebalanced and joint capabilities. The difficulties in achieving this with reduced staff can only be imagined.

22. Financial delegation to the Commands has been recommended. However, HMT and MOD will probablyretain some, if not all, control above a certain level of budget. There are cultural differences in financialmanagement in the MOD compared with the Commands. MOD has taken a longer term and more politicalview, whereas the Commands, by necessity, have tended to take a shorter term view. Although notinsurmountable, there is potential for conflict and confusion in the early years.

23. Although MoD has for some time recognised the need for TLCM, support solutions continue to beseparated from their acquisition programmes, for a variety of reasons which are generally funding-related. Thiscan lead to incoherence, delay, and/or an unsatisfactory introduction to service or transition programme. Also,MoD needs to understand whether recent moves towards greater competition in support actually deliver bettervalue, or just lower cost in the short term.



The procurement processes used; relationship between principles of open competition and technologicaladvantage; input from industry (including SMEs) and from the end military user; making the chosenacquisition strategy work; recruitment, training and retention of skilled personnel at both customer andprocurement roles at all levels; transparency and accessibility of the processes; monitoring and control ofprojects

24. Open market, off-the-shelf procurement and competition concepts can become an oxymoron. Complexoff-the-shelf solutions would not necessarily attract competition. With a reduction of defence spending in theUK and elsewhere in Europe, there is a high probability that a significant number of future solutions will besupplied from overseas eg the replenishment ships from Korea. This prospect will, over time, dilute the UK’ssovereign defence industrial capability and diminish the levels of investment, development of future UKtechnologies, and the ownership of intellectual property and Design Authority. This will undermine the abilityof industry as well as the capabilities of defence forces and reduce our sovereign ability to adapt, integrate andimprove equipment.

25. The advantage of off-the-shelf procurement lies in avoiding development costs, except wheremodifications have to be included for legal and mandatory reasons. However, it usually requires compromisesin performance, characteristics, cost of ownership and sovereignty. The advantages to the end-user are shorteneddelivery timescales, possible use of established training systems and other user operational support equipment.The down side is that desired modifications may not be possible or affordable. Finally, the dialogue throughoutUK industry will not largely be available except through consultants. There will be little incentive for UKdefence contractors to invest large sums of money to develop the next generation of off-the-shelf equipment—in the hope that someone will buy it.

26. The contribution of industry to the acquisition thought process has been achieved by dialogue mostlywith the Capability Branch and DE&S. This must now be conducted with four Command HQs, DE&S and anoutsourced management organisation. Clearly, this additional burden will increase the costs for industry. Thisprocess of dialogue is a key activity to inform MOD of what would be possible and it is also vital to industryfor planning purposes. Any break in this liaison would be detrimental to industry, the MOD and the Commands.

27. Acquisition strategies are both complicated and often not available to UK industry at the beginning of aprogramme. Under the new arrangements for acquisition there will be a need for a more agile approach to thisaspect. This will have to involve the same organisations that currently exist, but with the added input from theCommand Capability and Command Secretaries departments.

28. The new acquisition system will require training of both former MOD Head Office and Command HQpersonnel. This has been a failure in the past due to resourcing, time limits and the challenge of high turnoverrates. An example of this is KPMG’s TLCM training recommendations where training was insufficientlydistributed beyond MOD HQ, or took a long time to roll out to everyone who needed to use the new processes.A comprehensive training package which is available throughout the new organisations is imperative.

29. The retention of personnel will be a challenge and a concerted effort to convince people of the future willbe needed. During change, good people tend to move jobs, particularly those who are particularly competent orexperienced. The loss of highly skilled personnel during the transition is one of the greatest risks and could becatastrophic to the implementation of the transformation.

30. MoD has never been any good at transparency. This includes future capability requirements andacquisition processes. In recent times, formal briefs to industry on requirements have stopped. These haveceased due to programme uncertainty or by ambivalence or perceived sensitivities. This interaction needs tobe reinstated because if industry is to be effective and efficient, and focus R&T investment, it needs ameaningful input from the MoD at an early, pre-concept stage of the acquisition process.

31. Monitoring and control of projects is a process that is based on a principle of “review and assess”. Thisis often when adversarial behaviour begins to emerge due to industry’s exclusion from much of the acquisitionprocess and ongoing decision-making. This is also where industry disagrees with the allocated risks becausecontinual dialogue has not taken place. It is strongly recommended that industry becomes an integral part ofpolicy making, from the formulation of the acquisition strategy onwards. Although Smart Acquisition advocated“integrated working” the practice is variable across MoD. It is observed that the less confident the MoD teams,the more they are inclined to secrecy.

32. Despite recent efforts to replace an adversarial approach by partnership, deep mistrust persists,particularly at desk level, centred on a belief on the one hand that the defence industry is determined to “rob”the taxpayer, and on the other a belief that DE&S has little grasp of real commercial issues and the need forbusiness to make a reasonable return. An overdue streamlining of acquisition processes is needed, of whichthere is little evidence so far, but it must be accompanied by a change of attitudes on all sides. The continentalEuropean model, where procurement officials move regularly between government and industry, can lead tobetter mutual understanding of the requirements and drivers on both sides.

33. Paragraph A.127 of the Chancellor’s Autumn Statement in 2011 stated that “The Government willintroduce a presumption against the use of the competitive dialogue procurement process unless it can bedemonstrated that it delivers value for money.” Procurement processes that reduce the bid costs for industrywill lead to lower costs for the Customer.



Maintenance of the UK military industrial base; the provision of UK research and development by bothMOD and industry; how far the White Paper provides clarity for industry; support for exports and thecontext to which the principle of off-the-shelf procurement is compatible with this; how lessons have beenlearned from past successes and failures including in acquisition of Urgent Operational Requirements; andthe implications of bi- and multi-lateral procurement

34. The White Paper is a short to medium term policy paper but does not provide a longer term strategy.The gradual demise of the defence industry in Europe is not acknowledged and apart from government supportfor exports, little is expressed that is encouraging. Indeed, some ideas expressed are potentially contradictoryin their outcomes. Off-the-shelf acquisition rarely satisfies the full operational requirement so modifications areusually required. These can be expensive and the final cost can be more than a developed solution. An exampleis ASTUTE where, despite its delays and cost over-runs, it is estimated that it will be cheaper than an off-the-shelf acquisition of a similar submarine from the USA. Other examples are Nimrod R replacement andREAPER, where the systems will be controlled fully by FMS and ITAR regulations. Neither provides value toUK industry, nor do they stimulate investment in research.

35. The White Paper’s feeble support to British Industry is in striking contrast to the model in continentalEurope (see para 38), where for major projects a cross-Departmental approach focuses on cost and value tothe nation as a whole. There appears to be no mechanism in the UK to measure the cross-government impactof a contract going overseas, where short-term redundancies and long-term loss of skills shift the problem fromMOD to the DHSS and other Departments: good value for money for MOD perhaps, but poor value forthe nation.

36. The White Paper has provided clarity with regards to its policy on technology as the basis for security,keeping an open market and procuring off-the-shelf where possible. Research funding will be limited to 1.2%of the defence budget ie ~£400 million per annum. Much of this will be spent paying for the MOD to be anintelligent customer. In addition, the areas of technology investment will be limited to those critical to the nationeg Cyber. Moreover, the implication that industry will invest in future technology when the UK Government isunlikely to purchase the resulting product is fundamentally flawed. It should be remembered that defenceexports have always depended on a strong home market and on the effective endorsement by the UK forcesthemselves.

37. The Government’s support for exports is welcome and has been effective in securing opportunities forSMEs. However, exports will reduce in line with the decline of the industry because of two key issues; thecost of exporting in terms of required investment in customer countries and the resulting shortage of cash toinvest in future technology. It is clear that the current support for industry applies largely to the short andmedium term.

38. The greatest threat lies in the longer term because UK does not have an effective national defence andsecurity industry strategy. This is in contrast to France, Germany and most other advanced industrial countries.The result is beginning to show with France, where the UK is beginning to adopt or be guided by the Frenchindustrial strategy. Recent statements by the French Ambassador in London, to UK industry groups, indicatethat other European nations will be held at arms length by France and UK and only engaged at a supplierlevel. There is currently no counter to this because of an absence of a UK Industrial Strategy. The bi-lateralagreement with France is supposed to be just that, two-way. But there is no evidence that France is openingup its defence market to UK based companies, yet the UK actively encourage French companies to go afterUK domestic defence contracts. Recent announcements on UK-French collaborative Unmanned Air Systemsshowed that the technology study contract is to be let by DGA, not MOD UK as originally planned. In addition,the French Government won its argument against competition and is now dictating who might join and atwhich level. In all, there has been no competitive process whatsoever in the UK or elsewhere in Europe.

39. The principles of procuring against an Urgent Operational Requirement are not a panacea. Its advantageis that those with authority who normally slow down the process, sometimes for cultural reasons, are disinclinedin times of war to take the risk resulting from blocking a proposal. This MOD culture of pushing back on anyproposals needs to change to be more agile. However, UORs do not provide proper through life support and,like any off-the-shelf procurement, require compromises and limitations. In addition, they are by definitionaimed at a particular scenario.

40. Bi-lateral and multi-lateral acquisition presents the only way that many capabilities will be realised inthe future. This is true, despite criticism in the past, and in the future, consideration needs to be given torevisiting the principles involved. Bilateral arrangements are easier to manage but get muddled if managed bygovernments. This also applies to a multi-lateral approach but this can be alleviated if industry, notgovernments, provides the structure and management. In future the only way that affordable major capabilitieswill be produced will be via multi-national arrangements because of funding issues and a loss of economies ofscale. The fact that some multi-lateral programmes have caused problems in the past does not justify completelyignoring their future potential. In many instances, a bilateral programme will not provide sufficient economiesof scale to justify the investment required.



Conclusions

41. The transformation plans for MOD defence acquisition are radical and will be complex to implement.The creation of five requirements organisations will require a considerable bureaucracy to achieve coherenceand coordination. Industry engagement with these organisations will incur additional costs and restrict thecontinuity of dialogues.

42. The GOCO proposals for DE&S may produce better delivery because of more expert involvement, butthis will not transfer risk away from CDM and may raise questions over “Who will manage the programmemanagers?”.

43. A radical change at DE&S must be accompanied by a shift in attitudes between MOD and Industry: inshort, trust needs to be rebuilt.

44. The White Paper clarifies the Government’s policy of limiting investment in research, buying off-the-shelf, retaining an open market and providing support for exports. However, this is only valid in the short andperhaps medium term. A national defence industrial strategy is required to address the long term and to ensureUK’s military and industrial independence.

2 April 2012

Written evidence from Finmeccanica UK

Summary— Finmeccanica has made considerable investment in the UK defence sector, retains on-shore IP in

some world-beating defence technologies and is the second largest equipment supplier to the MOD.

— The Government’s current policies have significantly reduced the “visibility of intent” by whichindustry might make capacity judgements and investment plans for the future.

— The risk of rapid reductions in personnel with no parallel changes in structures and processes requiredfor acquisition generates uncertainty for industry.

— The implementation of the Materiel Strategy further imposes a prolonged period of uncertaintybefore industry can assess the implications of a new interface model with DE&S.

— Programme uncertainty also persists for industry with the delayed PR12 announcement on theoutcome of the re-balancing of the equipment programme.

— The White Paper—by design—does not articulate a defence industrial strategy. Rather, it assumesthat off-the-shelf should be the default acquisition approach whilst paying little regard to the currentvery capable domestic technology and industrial base.

— The White Paper ignores the significance of the “Body of Knowledge” that exists across the Defencecommunity—including in industry—that allows the UK to maintain its top league military capability.

— The White Paper does not provide the framework within which this Body of Knowledge mightcontinue to exist and grow; rather, it may see its decline and with it the UK’s ability to maintain itsstatus as a major military power.

1. This memorandum is intended to add to the Committee’s body of evidence by highlighting the industrialconsiderations encapsulated in the fourth group of questions. However, to place these considerations in context,this submission first makes some general comments on the Defence transformation agenda which embracesboth the Levene Defence Reform work and the DE&S Materiel Strategy. Thereafter, it focuses on the truerequirement for operational sovereignty in a nation which seeks to maintain its position in the top league ofmilitary powers.

Context

2. Finmeccanica’s defence businesses in the UK consist of the helicopter prime, Agusta Westland, and thedefence electronics companies of Selex Galileo, Selex Elsag and Selex Systems Integration, which are soon tobe consolidated into a single company. Vega Consulting Services provide MOD with both client-side adviceand with customer solutions on secure information systems. Vega is at the heart of Finmeccanica CyberSolutions. Overall, Finmeccanica is the second largest equipment supplier to the MOD and is rated as the topmanufacturing company in the MOD’s supplier relations assessment. In total, Finmeccanica employs some9,500 people in the UK and, as a technology leader, maintains six centres of research and developmentexcellence. The UK supply chains typically embrace 1,300 SMEs representing a contract value of £450 million.With a UK turnover of over £2.2 billion, Finmeccanica invests some £200 million per annum in R&D ofwhich, historically, about 70% has been co-funded principally with MOD.

3. The Government’s Defence transformation agenda, coupled with the need to reduce public sector debt,has generated considerable uncertainty for industry in terms of MOD’s structures, process and programmes.With regard to future structures, the need drastically to reduce both Service and civilian manpower will resultin an accelerating outflow of experienced personnel. This down-sizing is being conducted as a slimmer MODCentre delegates much capability planning and acquisition authority to the front-line commands. While the



parallel restructuring of the Defence Equipment and Support organisation—which sits between the end-userand industry—is to be applauded, it is yet unclear as to how these new arrangements will be effected and howindustry will dovetail into the resulting processes.

4. Secondly, the Materiel. Strategy recommended that the DE&S should become either an Executive Non-Departmental Public Body or a Government Owned—Contractor Operated entity. Both these outcomesrepresent profound change and will require the appointment of one or more commercial strategic partners.While this approach should ultimately provide greater certainty in acquisition outcomes, there is littleunderstanding as to how the resulting new boundaries will operate. For industry, two separate cross-boundaryrelationships will be of key importance: those with the front-line commands; and those with the strategicpartner. The strategic partner, of course, also needs to deliver value for money for its own services. Of moreimmediate concern is the time required to effect this major transition, during which the DE&S will continueto reduce its manpower and inevitably lose some of its key expertise. Again, a voluntary Rotor Systems,Electro-Optics and Night Vision, Electronic Warfare and Self Protection, Airborne Fire Control and ActiveElectronically-Scanned Radar, Information Assurance and Cyber Security, and Counter-IED redundancyapproach allows little harmonisation with ongoing requirements. More importantly, the DE&S headquarters willhave to survive at a much reduced manpower level for a considerable period ahead of the full implementation ofthe Materiel Strategy. This represents further uncertainty to industry in that both the structure and the associatedprocesses by which acquisition will be conducted are likely to remain undefined for an extended period.

5. Thirdly, prolonged uncertainty has arisen over the MOD’s attempts to balance the equipment budget.Several SDSR initiatives, such as the conversion of the Merlin Mk3 to the amphibious lift role, are subject toscrutiny and may need to be resized or removed from the future plan. These capability decisions often do nottake into account the implications for the underlying industrial base, impacting plans by major contractors asthey transition their business model to accommodate lower MOD activity while expanding exports and civilproduction whilst also preserving key design and development engineering skills. In the medium term, thedelay in endorsing the Typhoon capability growth programme undermines the incentive for industry to investin the associated key technologies and the related knowledge base.

6. Taken together, these contextual factors are indicative of a lack of visibility of intent by the Government.Defence manufacturing is a long-term business with leading-edge technologies often taking more than 20 yearsto reach operational maturity. Investment in people and technology thus has to be seen in the same light, yetthe lack of firm decision-making and the propensity to switch course, even where current programmes areconcerned, has rendered even short-term investment planning highly risky at best. Against this backdrop,industry was looking for clear, unambiguous guidance from the White Paper on the Government’s strategy onsovereign technology requirements and future industrial capacity: we have been disappointed on both counts.

7. The declared policy to default to off-the-shelf acquisition has effectively relegated defence industrialstrategy to the exception rather than the rule. This is almost unique among nations with an extensive andcapable defence industrial base. In fact, the opposite is true in almost all cases. What seems to be missing inthe UK is a clear appreciation of where UK industry effectively contributes to the UK’s premier military effectand what it takes to retain this edge cost-effectively. Equally, there appears to be little understanding of wherethis capability may be leveraged to best effect with other nations whilst also encouraging and sustaining thetransition of industrial capacity to other market opportunities to reduce unsustainable levels of dependence.

Industrial Strategy and the White Paper

8. It has to be assumed that the White Paper was intended to be a logical extension of the SDSR. The SDSRarticulated the way in which that the UK would preserve its strategic position on the world stage, inter alia,through the use of its armed forces in combat across the spectrum of conflict. In these circumstances, othernations in the top tier of military powers would regard their defence industrial base as a strategic resourcewhich would need to be managed actively to avoid either the loss of operational sovereignty or the prospectof effective industrial capacity reducing below critical mass through the unintended consequences ofgovernment defence spending decisions. The Defence Industrial Strategy of 2005 sought to provide just thistype of blueprint. Lack of adequate funding has been cited as the principal reason why this strategy has neverbeen implemented.

9. The White Paper does not promote a defence industrial strategy. Rather, it articulates an argument wherebya minimalist approach to operational sovereignty is gap-filled by a wholesale preference for off-the-shelfacquisition. In recognition of the likelihood that such an approach would reduce the UK’s defence industrialbase below critical mass, the paper extols the virtue of exports and pledges strong government support. But,this belies the fact that the power of “Brand UK” depends on the UK’s armed forces actually using theequipment that is the subject of such export campaigns. This is clearly unlikely under an off-the-shelfacquisition policy, where the likely source would rest off-shore, and would see vital technologies (some ofwhich are considered sovereign) wither, with little hope of future regeneration. Such a result would also behastened by diminished Government R&D investment. Overall, the White Paper provides little guidance bywhich industry might assess its required capacity or future investment in the UK.

10. Of more concern is that the failure to articulate an industrial strategy indicates that the Government doesnot have an appreciation of the role of industry in the way that the UK armed forces approach combat and



how they actually fight. In this respect, the UK’s armed forces operate at (and sometimes beyond) the edge ofthe envelope often extracting more capability from their equipment than it was ever designed to provide. Thesame is true in terms of the capability of the Services’ personnel in that they train hard and realistically,maintaining high-readiness for the unexpected. Few nations’ armed forces seek to match either the sameapproach or the same level of capability. In leveraging this “edge” to date, the UK has been able to optimisethe application of resources to achieve “operational advantage”. This military gearing has earned British forcesan unparalleled recognition internationally, with the associated political and diplomatic goodwill that itengenders.

11. Precisely when and how force generation needs to occur is unpredictable and depends on the context inwhich operations are to take place. The rapid onset of operations in Libya is a classic example of the way inwhich operational uncertainty, political complexity and legal ambiguity have to be overcome in order to meetnational military objectives. The associated mission analysis reveals where increments in capability are requiredand where risks need to be mitigated. To enable Ministers to make the necessary political and legal judgmentsand, in order to exercise command and control, military officers and officials need to be able to demonstratean end-to-end understanding of the ingredients of the associated military capability. The ability to generate thislevel of understanding is at the heart of operational sovereignty—it represents the “Body of Knowledge” thatunderpins our Nation’s military capability.

12. On-shore industrial IP contributes significantly to this Body of Knowledge. This has held true in the pastand will be even more compelling in the future as “softer” technologies—rather than platform numbers—prevail in determining the edge in military capability. For example, the Typhoon’s systems’ flexibility wasexploited in Libya to evolve its mission from air superiority to air-to-ground attack on the same sortie. Equally,the ability to operate UK Apache helicopters from a maritime platform in support of the Libya campaign couldnot have been achieved so readily by an off-shore Design Authority. AgustaWestland, with its history and vastexperience in designing helicopters to operate in a harsh maritime environment, was able to test, adapt andcertify the Apache to operate effectively from HMS Ocean. This involved the design and development of ablade fold system, corrosion prevention measures, definition of the Ships Helicopter Operating Limits, alongwith safety procedures for operating in a demanding electro-magnetic environment.

13. Equally, modern surveillance systems are multifunctional and multi-spectral: autonomous data fusionand analysis are key multipliers of detection capability. Onboard integration of technologies, across andbetween platforms, is now fundamental to the design of those platforms and their systems. These aspectsrepresent the direction in which defence capability is heading for the future where unfettered access to IP isparamount, not only to the understanding of the limits of operational performance but also in ensuring that itcan be adapted, modified or enhanced, without impediment from non-UK authorities.

14. Routinely, the need for on-shore IP is appreciated in the provision of Urgent Operational Requirements(UORs) by which to extend the combat envelope or mitigate risk. Here, speed of response drives the need forimmediate and open access to all aspects of IP associated with a capability, not least integration expertise.UORs often focus on systems upgrades to in-service platforms, such as the addition of equipment to a helicopterto protect it from missile attack. Consequently, deep integration expertise is required in order to guarantee thatenhanced operational performance results whilst maintaining the safety integrity of the aircraft. Conducted atspeed, these processes are iterative and represent the collective contribution of the front-line operators, theMOD’s acquisition teams and industry. While some solutions might be available from off-shore suppliersduring a crisis, they might be subject to constraints, even in the case of otherwise reliable allies.

15. However, UORs are only the tip of the iceberg in terms of true operational sovereignty. In reality, theUK needs continuous access to the industrial elements of the Body of Knowledge in order to develop itsdoctrine and to generate understanding of the risk and legality of conducting demanding military operations.The level of assurance required by Ministers in signing-off a military campaign plan and by the law officersin agreeing a particular targeting strategy relies on end-to-end understanding of the functioning of theunderpinning technology of the capability in question. Equally, in command and control terms, militaryoperations in novel circumstances make extensive calls on this Body of Knowledge. The rapid introduction ofthe dual-mode Brimstone in Afghanistan and later Libya is another example.

This Body of Knowledge has three dimensions in that it has:

— a vertical, hierarchical dimension from which flows assurance and command and controlcapability, including the ability to make legal judgements on the use of particular weaponsystems;

— a horizontal, geographical dimension in that it links the war fighter in the foxhole to the softwareengineer in the laboratory; and

— a temporal dimension in that decisions made today in terms of research and development (R&D) affect military capability decades hence.

16. The Defence Body of Knowledge has been created over many years of intimate exchange between thearmed forces and industry to optimise the UK’s military capability in the knowledge that fleet sizes andplatform performance are constrained by economic pressure: on operations, there is now not a vast secondechelon of equipment waiting in reserve. For these reasons, as well as Duty of Care, combat losses have to beminimised. Equally, a platform lost to a safety issue is equivalent to one lost through enemy action. As a threat



develops, the application of technological advances, while an important discriminator, is but one response.More commonly, the solution is formulated across a spectrum of options, often tweaking legacy systems withappropriate modifications and insertions of both hardware and software. This flexibility demands a strongdomestic industrial base in support and is a key differentiator when making comparisons with other nations.There are a number of allies and partners that operate sophisticated military equipment. But they cannot securemaximum combat advantage—nor do they seek to do so—in the same way as does the UK. They do not seekto operate at the edge of the envelope nor they do they have the indigenous industrial capability on tap. Giventhe nature of the UK industrial base, its possession of world-leading technologies and a skilled and experiencedwork force, stimulated over many years by challenging domestic customer requirements, the investment toretain critical on-shore IP would be minimal. What these financial implications truly are, and whether theymay or may not be affordable, have never been effectively tested against the broader canvas of capabilitygeneration to meet SDSR objectives.

17. In conclusion, the UK Government is faced with a choice that cannot be fudged. If the UK is to remainin the top league of military powers, as expressed in the SDSR, it needs to accept that its enabling Body ofKnowledge relies extensively on the domestic defence industrial base, which therefore needs to receiveappropriate attention. Alternatively, if the UK’s defence aspirations are driven by a minimalist definition ofoperational sovereignty, which reverts to an off-the-shelf acquisition policy and reduced investment in R&D,the UK’s military capability may decline to an extent that the Nation would no longer be deemed to be at thetop table of military powers. Of course, in the latter case, the effects are unlikely to be immediate but willoccur insidiously over the future years: the military capability demonstrated in both Afghanistan and Libya hasroots in investment from the distant past and little of it has its origins “off-the-shelf”.

11 April 2012

Written evidence from Intellect

Purpose

This report provides Intellect’s response to the Defence Committee’s inquiry into defence acquisition. Thetopics covered in this submission include:

— Compatibility between the Gray and Lord Levene reforms.

— If these reforms are achievable in light of personnel and resource restrictions.

— The ability of DE&S and the Head Office to continue to perform their primary functions.

— MOD’s relationship with industry.

— MOD’s procurement process.

— The relationship between open competition and technological advantage.

— The training and retention of skilled procurement personnel.

— Transparency and accessibility of process.

— Monitoring and control of projects.

— The provision of UK R&D by both MOD and industry.

— How far the white paper provides clarity for industry.

— Support for exports and if OTS is compatible with this.

— Implications of bilateral and multilateral procurement.

The content of this report stems from a series of workshops Intellect held in late February and early Marchto gauge members’ views of the announcements made in HMG’s National Security Through Technologywhite paper.

Background

Intellect is the UK trade association for the IT, telecoms, and electronics industries. Its members account forover 80% of these markets and range from blue-chip multinationals to early stage technology companies.Intellect’s members include many of the strategically important companies involved in the UK’s defence andsecurity markets. Our primary areas of focus in defence and security are in the fields of Information Superiority(iSup), also referred to as C4ISTAR, and cyber security.

Summary

— Intellect supports defence transformation and is hopeful that implementation of the Defence ReformReview’s (DRR) recommendations and the reorganisation of DE&S will result in a more efficientlyorganised MOD that is underlined by an effective governance structure.



— Intellect is largely supportive of the announcements outlined in the National Security ThroughTechnology white paper. In order for these aspirations to be achieved, the MOD will need to reviseits relationship with industry, shifting from a “customer-supplier” relationship to a “partnering”approach.

— Intellect strongly supports the MOD’s intention to adopt incremental and modular acquisition, spiraldevelopment, and open systems. Intellect members are eager to work with the MOD in resolving thechallenges the ministry will face in adopting these approaches.

— Intellect supports the MOD’s announcement that it will acquire capabilities through opencompetition, as this will enable the MOD to purchase the most cutting-edge technology availableon the market. Intellect members also support the MOD’s intention to “buy off-the-shelf (OTS)where appropriate”.

— Intellect believes that defence R&D and S&T should be conducted by the body best placed to delivervalue for money (VFM) and pull through to fruition while, at the same time, recognising the highlysensitive nature of this work. Intellect, therefore, recommends that the MOD outline the R&D itintends to conduct in the public sector and what it expects to be undertaken in the private sector andacademia—linking these R&D activities with a development roadmap and integration plan.

— Intellect welcomes the MOD’s decisions to share its capability requirements and investment prioritieswith industry early and to publish its S&T themes annually. However, Industry requires furtherclarity on what the MOD means by “technology advantage”, “operational advantage”, and “freedomof action”.

— Intellect recommends that HMG develops a defence export strategy that is coherent with the MOD’spolicy of purchasing OTS and sourcing solutions from abroad.

— Intellect understands the MOD’s need to “generally favour bilateral collaboration on technology,equipment, and support issues”. It is important, however, that when entering into these partnerships,business opportunities emerge for companies from both countries.

Intellect’s Input into the Defence Committee’s Inquiry: Defence Acquisition

Compatibility between Gray and Levene reforms

1. While Intellect has seen the output and early decisions being taken in response to Lord Levene’s DefenceReform Review (DRR) and is also familiar with the three options CDM Gray is considering in the MaterielStrategy, we lack an overarching view of the specific activities the MOD is carrying out as part of defencetransformation. As a result, it is difficult for Intellect to gauge the compatibility of these two activities.

2. That said, from the information that Intellect has gathered, it does seem that these two activities arereasonably in line. Ultimately, however, while the organisation of the Head Office and DE&S are of relevanceto the defence ICT industry (in particular, the governance surrounding these models), of greater importance isthe development of an agile defence acquisition process that delivers equipment to time and budget. There isa sense that defence reform is distracting the MOD from this pressing issue.

3. Intellect is, however, hopeful that the DRR recommendations will result in a more efficiently organisedMOD underlined by an effective governance structure. Intellect members feel that the MOD’s existinggovernance structure is one of the key problems affecting its ability to procure defence solutions affordably,effectively, coherently, and efficiently.

Reforms achievable in light of personnel and resource restrictions

4. Intellect members do feel that personnel reductions will impact the MOD’s ability to effectively adoptpan-Government and MOD reform initiatives and, at the same time, fulfil its mission. For example, the MOD’sadoption of open and off-the-shelf (OTS) procurement will result in an increase in the number of suppliersbidding on contracts at a time when DE&S is shedding personnel. The result, therefore, will be the slowerdelivery of solutions. The same effect will be caused by the MOD’s adherence to the Government ICTStrategy’s requirement for public sector bodies to break up large contracts into multiple, lower value contracts.In order to conform to these strategies amidst a backdrop of a shrinking DE&S, Intellect recommends that theMOD develops and applies a process that enables DE&S to identify the relevant (and weed out the irrelevant)bidders. The PQQ process has worked effectively in fulfilling this objective in the past—as long as the PQQis completed relatively quickly and the length of the PQQ conforms to the complexity of the requirement.Another option is for the MOD to develop frameworks for purchasing commodity-type items.

Ability of DE&S and Head Office to continue to perform their primary functions

5. There is concern that the sheer number of defence transformation initiatives coupled with theimplementation of the white paper can result in a MOD that is essentially “on pause” for a number of years asit evolves to its intended end-state. This would not serve the MOD’s objective of obtaining agile and adaptableforces, industries’ financial security, or wider-Government’s agenda of stimulating economic growth for UKPlc.



MOD’s relationship with industry

6. The National Security through Technology white paper outlined a number of aspirations that Intellectmembers support; however, these activities represent a fundamental change in how the MOD currently doesbusiness.1 In order for these aspirations to be achieved, the MOD will need to revise its relationship withindustry. In particular, this relationship will need to change from one of customer-supplier to more of apartnership relationship.

7. Intellect’s Alternative Models for Bringing Information Superiority Solutions into Service More Affordablyand Effectively report examined this partnership approach in great detail (See chapter 8 of enclosed hardcopyreport). One of the biggest challenges the MOD faces in shifting from a customer-supplier relationship to apartnership-style approach is ensuring that its engagement with industry does not contravene HMIs competitionrules. This is a significant concern for both the MOD and industry and one of the largest barriers toimplementing a more affordable, efficient, and cheaper acquisition process. Intellect, therefore, recommendsthat the MOD, HMT, and industry work together to develop a collaborative relationship where there are clearlines delineating the cooperation and collaboration phase of the acquisition process from the competition andselection of a supplier phase of this process. This model would enable the MOD and industry to work togetherto develop the “art of the possible” in the requirement-shaping phase without sacrificing commercialsensitivities or industry’s ability to bid on future projects or programmes. This relationship must be underpinnedby an appropriate contractual framework that allocates risk intelligently and engenders mutual trust and ashared vision by encouraging constructive behaviour and open and honest two-way communication.

8. A first step in moving toward this partnership approach would be for the MOD and industry to jointlyexamine proven, successful, and innovative contractual and commercial models in other sectors. A number ofdifferent partnering models exist within the MOD, the wider public sector, internationally, and in thecommercial sector, including: the MOD’s model of working with the defence maritime industry, the HeathrowTerminal 5 model, and the pilot industrial investigation model. An examination of these existing models willhighlight the importance of enshrining the right incentivisations in the commercial framework. This requiresthe customer to understand what drives the supplier and vice versa. Over the past 12 months, Intellect hassought to establish a workshop between Intellect members and the heads of IS&S and ISTAR within DE&S todiscuss what drives industry as a means of improving incentivisation in defence contracts. Intellect will seekto revive this workshop later this year.

Procurement process used9. Intellect strongly supports the adoption of incremental and modular acquisition, spiral development, andopen systems. By attempting to procure all aspects of a desired capability at once, the MOD is undertakingan approach that inevitably elongates the timescale of procuring a capability. Adopting these alternativeacquisition and development approaches will, however, be a challenge for the MOD. Intellect’s response tothe National Security Through Technology white paper highlights these challenges and recommends methodsof overcoming these barriers. This response has not yet been published; however, we will forward thisdocument to members of the committee once it is completed.

Relationship between open competition and technological advantage

10. Intellect supports the MOD’s announcement that it will acquire capabilities through open competition.Open competition conforms to EU law and Intellect’s view that the MOD’s acquisition strategy should resultin a level playing field whereby companies from all countries and of all sizes are treated equally. In addition,open competition enables the MOD to purchase the most cutting-edge technology available on the market.There are, however, a number of potential challenges and/or negative consequences that the MOD must beprepared to accept/manage in pursing open procurement, including:

— an increase in cost and time in selecting a supplier, and therefore, in delivering a solution (seeparagraph 4);

— a potential loss of domestic design capability, which could erode defence exports;

— integration challenges (however, implementing open standards and systems would mitigate theimpact of this);

— difficulty in the MOD possessing good visibility of the marketplace; and

— contractual issues, as the MOD’s contracts are not designed to meet the pace of thecommercial world.

11. While open competition can result in the MOD acquiring the most up-to-date solutions, purchasingsolution OTS can result in a degradation of the MOD’s technological advantage by increasing the likelihoodthat security of supply can be disrupted and that the MOD and its adversaries possess the same capabilities.Nevertheless, Intellect members support the MOD’s intention to “buy off-the-shelf where appropriate”. TheMOD, however, must factor these possible negative implications into its decision making when determininghow it will procure a solution.1 Examples include modular and incremental acquisition, open systems and open standards, and spiral development.



Training and retention of skilled procurement personnel

12. Intellect detects a mismatch between the MOD’s aspirations outlined in the white paper and the skills ithas to fulfil these goals. For example, the white paper asserts that the MOD will begin moving toward applyingincremental and modular acquisition approaches (page 22, paragraph 42). While Intellect applauds thisambition, these approaches would require the MOD to take on the design authority role, which would renderthe MOD responsible for defining the architecture—an activity that requires significant technical assessmentskills that industry believes the MOD currently lacks.

13. The MOD also needs to improve its systems integration and engineering skills. The retention of theseskills is critical for both the defence industry and the MOD. Without experienced systems integrators andengineers, a newly acquired sub-system could seriously disrupt the functioning of existing systems, not workas initially envisaged, increase cost, or inhibit operational agility. Achieving interoperability of commercial-off-the-shelf (COTS) components and capabilities requires the challenging task of implementing open systems,standardisation, and modular and incremental acquisition—all of which must be enabled by strong systemsintegration and systems engineering skills. It will be challenging for the MOD to develop and maintain thesecritical skills as the best systems engineers and architects tend to gravitate toward the supplier community—where total employee compensation (ie, pay, pension, and terms and conditions) is more competitive. If theMOD truly wants to augment its cadre of skilled personnel it will need to “compensate” at the same rate asindustry for these skills.

14. DE&S must also grow a pool of commercial experts within its ranks. Intellect members feel that DE&Slacks the intelligent customer experience and skills needed to make smart decisions about how to contract forinformation superiority (iSup) capabilities and services. DE&S’ commercial personnel are very familiar withdeveloping contracts for platforms, which are characterised by a firm pricing paradigm. They have much lessexperience and skill in developing contracts for ICT capabilities and services, which require a more flexibleand agile contract. With personnel cuts on the horizon, DE&S is on the verge of experiencing a further loss ofcorporate memory in terms of commercial expertise and skills. Intellect recommends that DE&S takes steps tocapture the commercial knowledge it possesses before these cuts are enacted.

15. In addition to this shortage of commercial skills, Intellect members also note that DE&S’ commercialpersonnel apply contract terms in a broad-based manner, rather than in a project-specific or project-byprojectapproach. Industry is afraid to question the relevance of specific terms or conditions in PQQs or contracts outof fear that their bids will be disqualified—this closes the door to industry offering innovative solutions thatcould save both the MOD and industry money. Industry’s current experience contrasts dramatically withIntellect members’ past experience, where DE&S’ commercial officials were open to negotiate on contractualterms, recognising that cost and time benefits could be obtained by applying different approaches. Part of thisproblem stems from the MOD commercial staff’s lack of sufficient commercial skills; however, this is alsocaused by the MOD’s overly complex governance structure (whereby the ministry’s commercial officials lackthe authority to make these decisions) (see paragraph 18 below) as well as DE&S’s risk aversion. Rectifyingthese problems will be critical in the MOD obtaining VFM in its equipment programme (EP).

16. The MOD—and DE&S in particular—must also monitor and understand its suppliers’ capabilities andcapability road maps. This activity would enhance the MOD’s ability to be an intelligent customer, enabling itto make smarter decisions on where, how, and when to procure new capabilities and services. Currently, theMOD’s procurement personnel do not undertake this activity sufficiently. The MOD would, however, obtainsignificant cost savings if it had visibility of the options its supply base already possesses (the MOD couldthen employ a straightforward purchase of these existing solutions). The UOR process conducts this activityeffectively. Intellect, therefore, recommends that the MOD invests in developing mechanisms that enable itsprocurement personnel to understand solutions that already exist in the marketplace. The MOD should alsomake greater use of existing mechanisms that can provide it with visibility of its industrial base’s capabilities,including:

— Intellect’s Innovation Den;2

— the MOD’s quarterly innovation showcases;

— the OSCT’s technology demonstrator series;

— NATO’s ACT programme, which issues a set of capability categories that suppliers can brief iton; and

— the CDE’s themed calls, where the CDE issues a call for the specific outcomes it is seeking toacquire and runs an industry day for the supply base to brief it on the “art of the possible”.

Over time, these activities would inevitably save the MOD money if some of the ideas and technologies are“pulled through” into a future procurement. “Pull through”, however, remains a key challenge for the MODand industry alike. More information on this challenge can be found in Annex 7 of Intellect’s AlternativeModels for Bringing Information Superiority Solutions into Service More Affordably and Effectively, which isenclosed with this submission.2 Innovation Den is an activity that Intellect conducts, which is modelled after the Dragons Den TV Show. These sessions offer

small, innovative businesses the opportunity to pitch their ideas to panelists from central and local Government and large publicsector suppliers.



Transparency and accessibility of process

17. Intellect members require greater clarity on how the MOD will apply the open procurement principle.While Intellect members noted that the diagram outlining the MOD’s “new” procurement approach representedgood intent, members felt that it lacked sufficient detail on how the process’ steps would be implemented. Inparticular, industry requires an understanding of the mechanisms the MOD will use when pursuing openprocurement and how it will ensure that these mechanisms are transparent and available to all parts of thesupply base (including new entrants and SMEs). It would also be useful if the MOD clarified the areas whereit intends to apply this principle and the areas where it will not: for example, does the MOD plan to re-openexisting contracts in order to apply the open procurement principal? Intellect recommends that the MODengages with industry to provide greater clarity on how it intends to implement open procurement. Similarly,industry requires greater clarity on tenders how it intends to purchase solutions (ie, OTS, modified OTS, orbespoke)—similar to how it labels its tenders as Category A, B, or C.

Monitoring and control of projects

18. Intellect believes that the MOD’s governance structure for procuring capabilities and services is over-complicated, over-populated, and ineffective. In general, there are too many stakeholders involved in a singleproject. As a result, authority and accountability for the completion of a particular project is unclear and noone within the MOD is willing or able to make trades between different requirements in order to lower costs.In order to resolve this, the MOD must make a single person accountable for a particular programme andempower that person to make these trades. Intellect is hopeful that the reforms outlined in the Levene reportalong with the forthcoming reforms to DE&S will resolve these governance issues.

Provision of UK R&D by both MOD and industry

19. Intellect believes that defence R&D and S&T should be conducted by the body best placed to deliverVFM and pull through to fruition while, at the same time, recognising the highly sensitive nature of this work.Thus, Intellect recommends that the MOD outline the R&D it intends to conduct in the public sector and whatit expects to be undertaken in the private sector and academia—linking these R&D activities with adevelopment roadmap and integration plan. Intellect supports the MOD’s publication in late March of itscriteria for the procurement of S&T, which outlines “the circumstances under which capabilities or tasks must... or may best be retained in Government”. While this assists industry in understanding the rationale forspecific S&T activities being undertaken in HMG, industry would benefit more from understanding the specificS&T activities the MOD seeks industry to conduct. The white paper’s commitment that the MOD will annuallypublish its R&D and S&T themes will be a step in the right direction in providing industry with clarity on theMOD’s existing and future S&T needs. These themes, however, must contain sufficient detail to guideindustry’s investment and provide it with the confidence and ability to develop a business case for investingits own PV funding.

20. More importantly, however, Intellect believes that the MOD is not investing enough in R&D and S&Tin order to meet its objective of possessing adaptable and agile defence capabilities. Sustaining a minimumlevel of R&D funding at 1.2% of the defence budget is not nearly enough to achieve this goal. With the speedof technological progress increasing, it will be necessary to invest more in R&D just to keep pace with ouradversaries. Therefore, Intellect recommends that the MOD invest at least 2% of its defence budget in R&D.

21. Intellect recommends that this R&D and S&T funding be invested in critical capability gaps, key battle-winning differentiators, and mechanisms to enable the rapid deployment of new iSup capabilities throughmodular and incremental acquisition. MOD R&D investment should also focus on developing a “test bed”environment. Dstl’s neutrality renders it the appropriate body to take on this test bed role, which would createan environment whereby all of industry (including new entrants) and the MOD can come together and workas a team to make better use of R&D and S&T budgets. In order for this to be possible, the MOD must firstresolve the tensions that exist between competition and working in partnership with industry (see MOD’srelationship with industry above). Dstl may also require increased funding.

22. In addition to developing a test bed, Intellect recommends that the MOD also develops a portfolio ofmechanisms for bringing the MOD customer and its suppliers together to work out the best solution for itschallenges. Accordingly, the MOD should continue to use historical and existing mechanisms such as Towersof Excellence, DTCs, tiger teams, and the CDE. At the same time, the MOD must continue to invest in R&Dand S&T in its industrial base and to exploit mechanisms for engaging with academia.

23. While it is important that dstl and industry’s roles do not overlap (see Paragraph 19), Intellect believesthat it is essential for dstl to maintain a minimum level of expertise in areas that industry operates in order forindustry to have an intelligent customer, or partner, to engage with. This, for example, will be critical if theMOD is to succeed in moving toward a modular and incremental approach. Similarly, if dstl is to take on therecommended test bed role, it will need to have expertise in the areas it is testing. Therefore, Intellectrecommends that dstl conducts activities that are essential for national security, but also, ensures that it has aminimum necessary understanding in other areas of R&D in order to ensure that the MOD is both an intelligentcustomer and an open and neutral partner with industry.



How far the white paper provides clarity for industry

24. Intellect welcomes the MOD’s decision to share its capability requirements and investment prioritieswith industry early. Early insight into the customer’s problems is something Intellect recommended in its inputinto the white paper. The key to early engagement for the MOD will be to ensure that this activity is bothtransparent and equitable. Trade associations, such as Intellect, can play an active role in ensuring that theseengagement opportunities are circulated to all components of the defence supply base. Therefore, Intellectmembers eagerly await the publication of the MOD’s capability requirements and investment priorities. Intellectrecommends that the MOD shares these forward plans with industry urgently—as this will foster investment,innovation, agility, and optimisation by the defence industrial base, leading to a more flexible and adaptablesupply base.

25. Similarly, Intellect applauds the MOD’s decision to annually publish its defence and security S&Tthemes. This activity will enable industry to align its research with the MOD’s priorities and capability needs.It is critical, however, that the right level of granularity is provided in this annual publication. For example,while the six critical outcomes and the seven priority challenges outlined in the white paper offered industryuseful contextual information, the paper did not contain sufficient detail to convince a company to invest inthese areas.

26. Industry also requires greater clarity on what the MOD means by “technology advantage”. The whitepaper’s description of this phrase is not sufficiently detailed for industry to understand and benefit from thisconcept. Intellect, therefore, recommends that the MOD more clearly defines what it means by “technologyadvantage” by outlining the specific technologies that the MOD sees as falling into this category. This approachwould potentially encourage UK companies to direct their investment in these areas. Defining “technologyadvantage” in terms of specific technologies would also benefit the MOD by bolstering security of supply.Similarly, industry requires greater clarity on what the phrases “operational advantage” and “freedom of action”will mean in practice. Industry would have a better understanding of these phrases if the MOD outlined thespecific technologies that fall within these categories. This would enable UK industry to focus its R&D andS&T investment in areas that require it.

27. Intellect also urges the MOD to provide greater clarity on how it defines COTS, as there is no singlerecognised commercial model for procuring COTS. In addition, industry requires a clear definition of what theMOD means by open standards. Industry felt that this was not sufficiently addressed in the white paper, asthere are multiple versions of open standards. As a result, Intellect recommends that the MOD develops a listof open standards that it and industry must adhere to. The standards on this list must not be bespoke, UK-developed standards, as this would drive suppliers to developing bespoke capabilities, close off export markets,and make it difficult for the MOD to purchase OTS solutions. Instead, the MOD should leverage commercialand international standards (where they are the norm) when drafting this list—this would enable both the MODand industry to tap the widest possible market.

Support for exports and if OTS is compatible with this

28. While Intellect supports the MOD’s intention to “purchase capabilities off-the-shelf where appropriate”,this policy can potentially damage UK defence firms (in particular, these firms’ export potential), if mitigationmeasures are not taken. If the MOD purchases a large portion of its defence capabilities from offshore and viaCOTS, there will be a concomitant drop in the number of defence and security solutions designed andassembled onshore, and therefore, a drop in the UK’s defence exports. Thus, Intellect recommends that HMGdevelops a defence export strategy that is coherent with the MOD’s policy of purchasing COTS and sourcingsolutions from abroad. This strategy should make clear to industry which items the MOD will seek to purchaseOTS; this would help the defence industrial base focus its R&D and S&T investment in capability areas thatrequire innovative solutions (see paragraph 17 above). This strategy must also recognise that export potentialis dependent on the retention of certain skills and capabilities in the industrial base.

29. Industry believes that the single most important success factor for UK companies seeking to export asolution is if that solution is already being used by the UK’s Armed Forces. Intellect members experience hasillustrated that it is difficult to export a solution if the company cannot first sell it on the domestic market.Once a solution has been sold in the UK, the export deal can rapidly follow. Therefore, Intellect recommendsthat the MOD develops a reference programme that formally marks products and services purchased by theMOD as “Used by UK Armed Forces”. This is a very powerful endorsement when selling abroad and wouldcertainly facilitate an increase in export sales. Intellect members have noted that, at times, it is difficult forcompanies to obtain this sort of reference from the MOD.

30. Intellect members have also noted that they are not receiving sufficient support from HMG in exportingdefence solutions to Europe. Intellect recommends that the MOD delegation at NATO and EDA be bolsteredin order to better assist UK companies in selling to these multilateral organisations.

31. On a more positive note, Intellect members have noted that the MOD and UKTI DSO are getting betterat assisting UK companies in selling their solutions abroad. While UKTI DSO continues to be more reactivethan proactive, industry has seen progress in UKTI DSO’s interactions with industry. The creation of UKTIDSO account managers and the sharing of UKTI DSO’s agenda of trade missions with suppliers are viewedby industry as steps forward. That said, the quality of UKTI DSO’s overseas personnel performance remains



erratic—some missions are very useful and have facilitated exports for companies while other missions haveproven to be much less effective. Intellect members would like UKTI DSO to be more proactive in approachingcompanies about specific business opportunities. In particular, UKTI DSO should provide companies andcountries with a “brokering service”, linking up companies and their specific capabilities with countries seekingto procure those capabilities. In order to ensure these opportunities are advertised to SMEs, UKTI DSO shouldcirculate opportunities to trade associations who can tap into a much larger portion of the supply base.

32. Intellect also urges HMG to expand its Government-to-Government (G2G) activities and ministerialinvolvement in promoting UK defence firms and their products, as these activities are beneficial to industry.

Implications of bilateral and multilateral procurement

33. Intellect understands the MOD’s need to “generally favour bilateral collaboration on technology,equipment, and support issues” (white paper, page 30, paragraph 79). This is a pragmatic method for the UKto obtain the defence and security technologies it demands but cannot afford to develop or procure on its own.Similarly, there are occasions when multilateral procurement makes sense. It is critical, however, that whenentering into these partnerships, business opportunities emerge for companies from both countries. SomeIntellect members, for example, were critical of the UK-France Defence Cooperation Treaty and the UK-USDefence Cooperation Treaty, noting that France and the US operate industrial policies that favour domesticcompanies over external competitors. Other Intellect members disagreed with this view. Ultimately, however,bilateral equipment collaboration must be pursued with partner countries that can offer reciprocal opportunitiesfor domestic firms.

Written evidence from Professor David Kirkpatrick

1. The White Paper on National Security through Technology (Cm 8278) is full of aspirations and goodintentions, but it fails to address rigorously the key problems which for decades have bedevilled the UK’sdefence acquisition policy.

2. The White Paper appears to be torn between an ideological faith in open competition, reinforced by itsperception that the UK’s defence requirements “are in many respects just like” other areas of publicprocurement, and its admissions elsewhere that defence procurement is fundamentally different and that theglobal market for defence goods and services is very imperfect (so open competition may not yield the optimalresult derived from classical economics). Cm 8279 echoes the aspiration, in the 2010 Strategic Defence andSecurity Review, to sustain the UK’s Technology Advantage (defined as operational advantage over potentialenemies through superior technology, etc, and freedom of action to undertake military operations alone andindependent of any other nation) but it appears to be uncertain whether this policy is affordable.

3. Cm 8278 recognises (in its small print if not in its headlines) that the UK cannot have assured freedomof action in a wide range of potential scenarios in tandem with an acquisition policy of open competition. Witha policy of open competition, it is inevitable that at least some equipment would be acquired from globalsuppliers, which might in a crisis withhold supply or support. However the White Paper fails to distinguishbetween those UK military capabilities in which independent freedom of action is regarded as essential oraffordable (like nuclear deterrence and hostage rescue?) and those other military capabilities in which relianceon foreign allies is acceptable and autarky would be prohibitively expensive. Cm 8278 offers only a fewgeneric examples of the military capabilities which it regards as essential for UK sovereignty and of thetechnologies which accordingly need to be maintained onshore (and it notably shorter and vaguer than the2005 Defence Industrial Strategy and the 2006 Defence Technology Strategy), but it does promise at somefuture and undefined date to identify those military capabilities which would be needed to retain the UK’sTechnology Advantage in some future scenarios essential to national security. Until it can determine thosemilitary capabilities, and the budgetary consequences of protecting the relevant onshore technological andindustrial capabilities, the MoD apparently intends to rely on the mantra of “value for money” to select projectsfor procurement on a case-by-case basis.

4. The “new” approach to equipment acquisition is presented in an admirably-clear flow diagram, but it begsseveral enduringly-important questions:

— For which projects is the UK’s national security a sufficiently-important consideration tooverride budgetary constraints?

— How can this project-based approach take account of the synergistic effect of complementaryprojects on the UK’s military capabilities, and the economic effects of concurrent projectswithin the same industrial sector?

— Can the requirement definition process incorporate additional objectives (however desirable) onexportability and the supply chain without unacceptable penalties on equipment effectiveness,cost or timescale?

5. I unreservedly welcome the commitment to retain sufficient technological expertise within government tomake the MoD an intelligent customer in all areas of defence equipment acquisition, and to give the UKTechnology Advantage in at least some critical scenarios. This policy should reverse, at least partially, the



misguided and extravagant privatisation of Qinetiq, and should institute a better-considered approach to thecurrent reductions in the MoD’s civilian staff and the consequent outsourcing of their activities.

6. Cm 8278 recognises the enormous benefits obtained through preceding MoD investment in defence scienceand technology, while admitting that in the past decade the MoD has drastically reduced the level of suchinvestment, from 2.6% to 1.2% of the defence budget. It now plans to sustain defence research at or above1.2% of the defence budget. However the White Paper offers no justification for its selection of that particularlevel, except for the (fortuitous?) coincidence that it corresponds to the present actual level; in any case fundingfor research should be related to the variety and sophistication of defence equipment in the MoD’s futureprocurement programme rather than to the UK’s defence budget as a whole.

7. Responsible and well-regulated exports of defence goods and services can promote the UK’s influenceabroad and help to sustain its defence industry. But these exports account for only a small fraction (not morethan 3% in recent years) of total UK exports, so their macroeconomic effects (on employment and balance oftrade) are very limited. The potential financial benefits of exports to the MoD are often eroded by the need toset low prices in competitive export markets, and are generally insignificant; Cm 6278 discreetly refrainedfrom quantifying the scale of such financial benefits in recent years. The government’s latest initiatives tosupport defence exports should have some favourable effect, but they do not address the key issue of providingsufficient funding for research and for development of new, cost-effective projects to sustain the UK’s portfolioof potential exports; such projects would be rare if the MoD relied heavily on open competition. Nor does thediscussion of these initiatives acknowledge that predicting exportability in the initial stages of a new project isa very inexact science, highly dependent on assumptions regarding geopolitical developments, the budgetaryplans of future customers and the emergence of competitive products over the next quarter century.

8. Cm 8278’s emphasis on open competition reincarnates the principal reform introduced by Mr. Peter (nowLord) Levene soon after he was appointed Chief of Defence Procurement in 1984. Before then the UK defenceindustry was regarded as a national asset, and the MoD(PE) and its predecessor departments had an explicitresponsibility to promote the UK’s aerospace and electronics industries. UK-based defence contractors initiallypraised the Levene reforms, welcoming the stimulating effect of open competition and the end of the “cosyrelationship” between the MoD and its suppliers. However through the 1990s these contractors becameprogressively less happy about facing (subsidised?) foreign competition for the MoD’s (increasingly-infrequent)defence equipment contracts, and more resentful of the adversarial attitudes of MoD officials. In 1998 SmartAcquisition instituted cooperative “partnering” on individual projects between the MoD and a prime contractorwhich had been earlier chosen by competition. In the 2005 Defence Industrial Strategy (DIS) the MoD wentfurther away from the Levene approach and accepted, after two decades of relying on open competition, thatit did have a strategic responsibility to sustain sufficient onshore technological and industrial capabilities toconfer “appropriate sovereignty”, allowing the UK to undertake some critical operations independently of othernations. That DIS systematically reviewed all sectors of the defence industry, and identified some of thecapabilities which should be sustained onshore. It did not identify the additional budgetary costs of supportingsuch capabilities, but it hoped that they could be minimised by arranging with some long-term multi-project“strategic partnerships”, each of which would reconcile the scale and timing of the MoD’s requirements withthe workload and resources of a chosen UK-based prime contractor. Such strategic partners would have beeninsulated, to some negotiated degree, from open competition. However the MoD now plans to “rebalance” itsrelationship with industry and restore open competition as its primary procurement principle, departing fromthat approach only in a few very-exceptional circumstances. But the White Paper does not explain how theMoD expects to overcome the problems which beset that policy after 1984, and which inspired the 2005 DIS.

9. The MoD must give urgent priority to identifying those military capabilities in which the UK must retainTechnology Advantage, and the associated technological and industrial capabilities which consequently needto be sustained onshore. This challenging task will inevitably be made even more difficult by inter-Servicerivalries and industrial lobbying. But, until these capabilities for independent UK military operations areidentified, and are widely understood within UK government and industry, there are dangers that MoDacquisition decisions will be incoherent, that UK-based industry at all levels will lack the confidence to investin new products, and the UK’s foreign policy will be inconsistent with the limited resources available to itsarmed forces.

April 2012

Written evidence from Logica

Issue 1: The interaction between and mutual compatibility of the Gray and Levene reforms, and the extent towhich the reforms are achievable in the light of the current and foreseeable restrictions on resources,including personnel, and the need for MoD Head Office and Defence Equipment and Support to continue toperform their primary functions

(1) Gray Acquisition Reforms

(2) We welcome Bernard Gray’s efforts to reform defence acquisition against a backdrop of resourceconstraints and manpower reductions.



(3) We also welcome the momentum that now seems to be behind the move towards a service deliveryapproach, which has the potential to offer significant benefits to Defence. We are watching developments onthe Defence Core Network Services initiative with interest as this will undoubtedly provide lessons for the restof MOD in respect of both service delivery and multi-sourcing, and the benefits that can be derived fromeconomies of scale with commoditised IT services. We also hope that DCNS will demonstrate how improvedacquisition of core services can be achieved even in the context of continuing reduction in crown servantresources.

(4) While outsourcing core acquisition management functions may appear challenging, ultimately this maybe the most effective way to introduce the efficiencies into the system consistent with significant manpowerconstraints. Our view is that more pilot work in this area (with independent and stringent evaluation of itseffectiveness) is warranted.

(5) Through Life Capability Management (TLCM)

(6) The recommendations within the Levene Report aimed at the MOD Capability Sponsor organisation, andthe Gray Report aimed at the DE&S acquisition management organisation, have a common context in theTLCM framework which provides a blueprint for how these elements of MOD should work together.Optimisation of one of these organisations through business process transformation should not be done inisolation from the other. For example, a core tenet of TLCM is mutual understanding of “Supply” and“Demand” across all parties. It would be unfortunate if reducing headcount across the Capability Sponsororganisation were to lead to a reduced understanding of “Supply”, in turn resulting in capability requirementsbeing either too ambitious, or not ambitious enough.

(7) Through the consistent delivery of Defence projects using the TLCM methodology, the processes andstructures around TLCM continue to mature. We note that guidance is starting to appear and key knowledgeresources are developed to support the TLCM processes. Challenges still remain, however, around theimplementation of the System of Systems Approach (SOSA), and in particular enacting principles of servicere-use and minimising diversity. A compounding factor is the lack of conscious design of the defence enterpriseso that it becomes possible to articulate all of the contributing parts, what they do and how they connecttogether. Without this overarching view, application of the SOSA principles is likely to be localised andvariable, resulting in a piecemeal approach to acquisition with all the consequential inefficiencies.

(8) Our perception is that the governance element of TLCM remains immature. A number of the ProgrammeBoards seem to lack the ability or authority to enforce decisions. A possible reason for this is that the bulk ofthe equipment programme budget is held and managed at project level rather than programme level or higher,and this restricts the freedom of decision making for Programme Boards.

(9) One of the primary functions of a Programme Board is to manage opportunities, and we see a need forfurther improvements in this function (perhaps with stronger guidance). While the boards have a role in co-ordinating deliveries through the associated projects, and resolving issues escalated to them, this must bebalanced with provision of advice on delivery opportunities to the Capability Sponsor organisation eg withrespect to restructuring a programme to improve its ability to exploit re-use opportunities. There could also bea commercial dimension in respect of recommending or approving where Single Source contracting isappropriate.

(10) Appropriate handling of opportunities, by which we mean the systematic and well-informed exercise ofbalancing risk and opportunity, is critical to the success of SOSA, and therefore to real improvements in thedelivery of complex, information-rich systems of the type that Logica is in the business of supporting.

(11) There are encouraging signs, however. For example, we have been applying SOSA principles to thePICASSO programme in the ISTAR domain. On this programme, the capability sponsors have understood thatre-use of legacy and future legacy capabilities and services is necessarily associated with an increase independencies, and recognise the associated risks. A range of opportunities have also been identified, and arebeing actively managed which could lead to a significant improvement in operational capability or cost savingsfor the programme.

Issue 2: How the requirements of national defence and security and the required capabilities are determined;how decisions are taken between alternative solutions and on whether and when projects should be initiated;how the balance of needs and resources is allocated between different services and commands; how theprovision of support to the required capabilities in integrated into the acquisition; oversight of equipmentbudget; and the MoD’s relationship with industry

(12) How the requirements of national defence and security and the required capabilities are determined

(13) Our observation is that Defence capability continues to be procured piecemeal. From our experience,we believe that the application of SOSA principles, coupled with the use of Enterprise Architecture (EA) (amethod of analysis to link requirements at strategic, business and systems levels) supports of the definition ofconsistent requirements, and this approach would assist the delivery of coherent Defence capability. Althoughthere have been a number of initiatives promoting good practice in recent years, the use of SOSA and EA asthe preferred method for defining requirements is not yet widespread and where it is used, it is applied



sporadically. Among other things, EA is a tool by which requirements can be defined and monitored. Themandating of EA in this way would add rigour and clarity to the process described in Figure 1 of the “NationalSecurity through Technology” White Paper. In particular, we believe there would be benefit in using EA aspart of a more structured approach to requirements specification for projects—too often the requirements aregenerated using a “blank sheet of paper” and “whoever shouts the loudest” approach.

(14) EA, if applied consistently, has the potential to become the method by which a number of acquisitionissues could be addressed as:

— It provides a mechanism to capture corporate knowledge to help mitigate manpower postingsand/or reduction.

— Responsibility for maintenance could clearly be given to a contractor providing customerfriend support.

— Requirements would be clearly defined and maintained.

(15) Oversight of the equipment budget

(16) We acknowledge the work that has gone into developing the diagram shown at Figure 1 of the “NationalSecurity through Technology” White Paper, and its role in helping to assess the processes used to oversee theequipment budget. However, as affordability is such a key constraint, we believe it ought to feature muchearlier on in the process. Figure 1 gives the impression that a lot of work might be done before affordabilityis assessed and, in the event of the recommended solution being unaffordable, the process is revisited in itsentirety. Although we recognise that the figure is a simplification, and in practice there will be an iterativedevelopment of the solution, affordability is a critical factor, particularly in these resource constrained times,and we would expect an explicit recognition of affordability up-front in the requirements setting process. Thiswould assist with rejecting options that would be too costly as early as possible, therefore avoiding anyunnecessary money being spent on unaffordable options. In order to provide better oversight of the equipmentbudget it may be possible (where appropriate) to set broad affordability constraints prior to initial solutionassessment.

An analogy here would be with the software development world, where there is a move away from atraditional “waterfall” linear development lifecycle towards a more agile approach whereby the product isincrementally developed to deliver working versions in an iterative manner. Although not suitable for alldefence acquisitions, there are areas, such as in ICT projects themselves and in ICT-heavy domains such asISTAR, where this approach may pay dividends.

(17) The MOD’s relationship with industry

(18) The MOD often uses contractors in both “customer friend” and “supply side” roles in order to deliverprojects. However, the distinction between the two can become blurred and issues can arise, such as whencompanies merge or individuals change employer, moving to the other side of the fence.

(19) Currently the customer friend contractor provides advice or manpower support to the DE&S DeliveryTeam (DT) without necessarily having responsibility for decision making. This can result in a lack ofaccountability of the customer friend for the wider programme and provides the potential for misunderstandingor misinterpreting the advice on the part of the DT. In either case, there is a general risk of lack of clarity inthe transfer of requirements and/or knowledge from the MOD to the supply side. Recent moves towards anexpanded customer friend role that takes more of an active part owning the business problems and contractingand running appropriate competitions on behalf of the Authority is seen as an improved model. With a reductionin manpower at DE&S it will become even more critical that all parts of DE&S (including customer friendteams) work jointly to ensure the delivery of individual projects is coherent with the broader aims of theorganisation.

Issue 3: The procurement processes used; relationship between principles of open competition andtechnological advantage; input from industry (including SMEs) and from the end military user; making thechosen acquisition strategy work; recruitment, training and retention of skilled personnel at both customerand procurement roles at all levels; transparency and accessibility of the processes; monitoring and controlof projects

(20) Issues Identified with the Current Procurement Processes

(21) From our assessment of the current acquisition process, we have identified the following critical issues:

— Lack of opportunity for innovation. The overall concept and vision for a solution are frequentlyfirm in the Delivery Team’s mind before industry becomes involved.

— Lack of industry participation in “formation” of requirements. Manufacturers have detailedknowledge of technical aspects and development costs and how alternative approaches mayaddress identified capability gaps; exactly the type of knowledge that would be of benefit duringthe concept phase.



— Limited experience within DE&S regarding the art of the possible. Delivery Team membersoften learn on the job and may be insufficiently experienced by the time key decision pointsare reached.

— DE&S resource constraints hinder project development. Partly a lack of resources, but also thelack of sufficiently authoritative resources available at the required time.

— Inflexible approach. The safe option is to follow the processes somewhat slavishly. This mayresult in the “cheapest compliant bid” winning but limits the potential for innovative oralternative solutions to be offered.

— MOD budget constraints. RDEL and CDEL budgets have to be defined very early on in theproject lifecycle, often before the project definition becomes clear. The money is often difficultto transfer between funding lines further downstream imposing inflexibility.

— Competitive Dialogue is very costly. Whilst this approach addresses situations whererequirements are poorly articulated, the process encourages procrastination and escalates costsfor all parties involved.

— Assessment of Tenders. The process is designed for side-by-side comparison of proposals,making innovative approaches nearly impossible to evaluate and therefore rarely offered byindustry.

(22) Early Engagement by Industry

(23) The key change that could realise the most radical results is to encourage genuine innovation at a muchearlier stage. This can be best achieved by engaging with industry much sooner in the acquisition processahead of issuing an Invitation to Tender. The target for their initial effort should be how to achieve the required“end effect” rather than fulfil a detailed URD/SRD.

(24) We have examined the issues outlined in the section above and have analysed the strengths andweaknesses of various approaches that we have experienced within MOD and other Public Sector contracts.

(25) To encourage innovation, bringing the rewards of fresh concepts, ideas and approaches to address theidentified capability gap, we recommend that industry is involved both to a greater degree, and earlier than iscurrently common. At present, significant involvement only takes place after the ITT is issued containing theURD, sometimes even an initial SRD. By this time, the definition of what is required is too specific to enablealternative solutions to be considered compliant. The current Expression of Interest and Pre-QualificationQuestionnaire stages are to support the MOD’s down-selection of potential contractors and tend to have littleto do with shaping the solution. We suggest that the partnership between MOD and Industry needs to focus onhow to achieve the required “end effect” within an overall enterprise vision.

(26) Delivery Teams frequently experience significant resourcing issues where one or more of the candidatetechnologies are complex and often include some important subtleties that may not be apparent to aninexperienced team member. To help alleviate this, we recommend that an independent team of industry expertssupplements the Delivery Team to assist with the development of the requirements and shaping of the visionfor the design within the context of the overall enterprise. We would still envisage the significant input fromthe user community and other key stakeholders, but be less influenced by “what has been done before” andmore focussed on the art of the possible.

(27) As an example, Logica have successfully used this methodology for industry engagement within thePublic Sector domain to harvest ideas, relieving the Authority from assessing a proliferation of candidatetechnologies, and encouraging industry to become genuinely innovative. We sought and identified non-traditional suppliers to the MOD as well as those well known to the MOD. We considered multiple criteria foreach candidate technology including its maturity, suitability within a secure military context, IPR etc. At alower level we considered how readily these technologies could be integrated to provide genuine capability.

(28) This required an iterative process using a variety of media to reach out to this broad and diversecommunity, assess their replies, and shape the evolving detailed requirement that can then be issued forcompetition. The process has the added benefit that in the longer term it opens up the supplier base and drivesdown costs.

(29) This approach would reap most reward for larger programmes but it would also be useful for smaller,and in particular, those with complex technical requirements.

(30) Bringing innovation to defence requirements and fully engaging with industry at an early stage poses anumber of challenges for the MOD, particularly in terms of maintaining the competitive environment, but theseissues can be overcome with imagination and greater trust between the MOD and industry.



Issue 4: The procurement processes used; relationship between principles of open competition andtechnological advantage; input from industry (including SMEs) and from the end military user; making thechosen acquisition strategy work; recruitment, training and retention of skilled personnel at both customerand procurement roles at all levels; transparency and accessibility of the processes; monitoring and controlof projects

(31) Lessons learnt from the acquisition of UORs

(32) Our experience of UORs has sometimes been that they are treated, from a commercial perspective, asa routine procurement despite the tailored UOR “rules”. For example, under the UOR rules MOD can contract“single source” if this would clearly decrease delivery time. However, in our experience, MOD’s determinationto get “best value” impedes this as “value for money” is often believed to be best demonstrated throughcompetition. In certain cases, best value can be achieved by means other than competition such as “open book”and/or gainshare incentives. In one particular example, both of these were in place in a related project, but wewere not allowed to make use of them. This delayed procurement by almost 12 months and must have addedsignificant cost to the whole process, not to mention the operational impact of not receiving the capability untilmuch later.

(33) An additional concern with UORs is their potential lack of coherence with the rest of the equipmentprogramme. UORs are designed to fill a gap quickly, and only for a short period of time, and then thrownaway when they are replaced by the Equipment Programme solution. The reality is, however, that due to thelength of the main acquisition cycle, these solutions can remain in service long term. Such is the concern thatcoherency projects have now been established to manage the portfolio of UORs. While the UOR has been auseful commercial exercise in cutting through the layers of acquisition process and proving that Defence canprocure equipment quickly, until the main equipment programme can be as agile, there will still remaincoherency issues with running a UOR portfolio alongside the main equipment programme.

(34) The Role of Architecture in the Monitoring and Control of Projects

(35) In order to apply the principle of Open Procurement, we believe that MOD can do more to articulateand own the defence architecture, as originally advocated in the Defence Industrial Strategy. Methods forcapturing and validating architecture models have matured significantly in the last few years now that theMOD Architecture Framework (MODAF) has bedded down. Tool support has also improved as discussed inthe MOD’s Enterprise Architecture strategy document (JSP605).

(36) By specifying the capability components within an architecture context, MOD can have a reasonablelevel of confidence that suppliers who fulfil that specification will deliver equipment capabilities that fit intothe wider System of Systems. Logica’s own experience supporting MOD in this endeavour has led to theconclusion that some of the capability integration risk currently held within MOD in respect of delivery ofnon-equipment Lines of Development (for example, concepts and doctrine, information and training) can bebetter managed through the development of policies that are applied (and policed) enterprise-wide.

(37) As an example, MOD would gain benefit from more consistent application of policies around BusinessContinuity, which, if properly enforced, should lead suppliers to propose system solutions that have a level ofsystem resilience commensurate with defence needs. We believe industry would welcome clarity in respect ofpolicies of this kind.

April 2012

Written evidence from the Public and Commercial Services Union

Public and Commercial Services Union

— PCS is the largest union across the civil service and represents around 280,000 members in the civilservice and in private companies working on public contracts.

— PCS is the largest union in the Ministry of Defence representing around 14,000 members in defenceand privatised defence related services.

— PCS representatives are happy to give oral evidence to the defence select committee if required.

The Committee sought views on the following issues:

(1) The interaction between and mutual compatibility of the Gray and Levene reforms, and theextent to which the reforms are achievable in the light of the current and foreseeable restrictionson resources, including personnel, and the need for MoD Head Office and Defence Equipmentand Support to continue to perform their primary functions.

(a) There is a concern that the Gray and Levene reviews are not complimentary, in that Grayset out to address a number of issues that will be resolved by the implementation of theLevene Defence Transformation outcomes. This is primarily a function of the reviewshappening at different times. There has been little attempt to develop a coherent solutionas both programmes are proceeding in isolation to potentially contradictory conclusions.



(b) Specifically the Gray report sought to separate decision-making on capability fromdelivery and support of that capability. This is now addressed by Levene and it is our viewthat work on the Defence, Equipment and Support (DE&S) Material Strategy, specificallythat aimed at changing the structure and accountability of DE&S, should be paused whilstthe outcomes of defence transformation are delivered.

(c) There is significant concern that the reductions in MoD staffing, both service and civilian,will hurt support to the front line and delivery of reforms. This is supported by recentreports from the National Audit Office (NAO), the defence select committee and the publicaccounts committee. In particular, reductions of MoD civilian staff through natural wastageare running significantly ahead of departmental projections. Taken with the currentvoluntary early release scheme exits, this is having the effect of hollowing out supportstructures and leading to unplanned cessation of tasks and outputs. This is exacerbated bythe current freeze on recruitment, which is leaving vacancies where they fall.

(d) Despite significant reductions in staffing, both civilian and service, there have been fewreductions in outputs that the MoD is expected to deliver. Efficiency changes promised bythe defence transformation programme have yet to materialise. This is unsustainable.

(e) The reductions in staffing and the need to continue to support a high operational tempowhilst undergoing transformation is also having a significant negative impact on staffmorale and commitment. Recent employee engagement surveys (Your Say) have shownstaff confidence in senior management and the transformation programme at rock bottom.

(2) How the requirements of national defence and security and the required capabilities aredetermined; how decisions are taken between alternative solutions and on whether and whenprojects should be initiated; how the balance of needs and resources is allocated betweendifferent services and commands; how the provision of support to the required capabilities inintegrated into the acquisition; oversight of equipment budget; and the MoD’s relationshipwith industry.

(a) The White Paper identifies the need to preserve a lean but effective group of highlyskilled people within our defence and security establishment who are capable of acting as“intelligent customers” for such advanced technologies and support services. It definesbeing an “intelligent customer” as “having a clear understanding and knowledge of ourrequirements and of the products or services being supplied in response, including themanagement of their supply, as well as the ability to use those products or services safelyand effectively”. We have concerns that the drive to outsource work significantly weakensthe department’s ability to act as an intelligent customer. An example would be thecontinued problems with the future carrier project, where despite substantial additionalexpenditure and the assistance of multiple contractors and specialists the department isstill unable to deliver a coherent project.

(b) There remains a tension between the overall equipment programme, which seescapabilities delivered over time to meet defined requirements and the urgent operationalrequirements (UOR) process which sees fast procurement to meet specific, urgentrequirements. Examination of the equipment programme will see a number of capabilitieswhich, at face value, have been delivered if not supported through the UOR route butwhich continue to meet a requirement which may no longer exist.

(c) Over recent years, the MoD has used a prime contractor model for many of its majorprocurements. Although the White Paper argues that the key benefit of this approach isthat it transfers appropriate risk and responsibility for cost-effective delivery of the overallrequirement or capability from MoD to the contractor who can best manage it, in our viewthis risk transfer is illusory. The NAO’s major projects report continues to recordsignificant cost and time over-runs in major projects, which result in capability gaps onthe front line.

(d) One element of the Gray report we do support, which was not accepted at the time, is thatthe Chief of Defence Materiel should become a principal accounting officer. We believethat this would provide much greater oversight and scrutiny into the affordability of theequipment programme and would allow CDM to challenge Ministers and Front LineCommands over priorities and outputs.

(e) We also believe that Gray was right to argue that the role of the military should be reducedin DE&S. At the moment, many capability programmes are led by senior military staffwho owe their allegiance and career progression to their single service chiefs. This leadsto confusion in role and the potential for decisions to be taken for reasons other thaneffectiveness or efficiency. Having the end military user interests represented by the frontline commands alone, as recommended by Levene, would lead to more effectivedecision making.

(3) The procurement processes used; relationship between principles of open competition andtechnological advantage; input from industry (including SMEs) and from the end military user;making the chosen acquisition strategy work; recruitment, training and retention of skilled



personnel at both customer and procurement roles at all levels; transparency and accessibilityof the processes; monitoring and control of projects.

(a) The White Paper talks about the whole force concept, where the MoD is working withindustry to develop a concept known as total support force (TSF). This provides for afully integrated and sustainable military (regular and reserve), civil service, and contractorsupport force, which includes the use of contractors in the sponsored reserve role. TheTSF mantra will be “right person, in the right role, at the right readiness, with the rightskills at the right cost”. Our concern is that, by embedding industry further and further upthe support chain, it is difficult to ensure that the TSF mantra can be met other thanthrough industry as in-house resources, skills and expertise wither on the vine.

(b) The White Paper says that: “Without readily available access to specialised knowledge,we would lose the ability both to react quickly to urgent operational requirements and tomake reliable informed decisions as an intelligent customer, based on the correctinterpretation of complex underpinning scientific and technical data. The skillsdevelopment in and retention of our people is, therefore, fundamental to ensuring that thearmed forces and national security agencies continue to receive the essential technology,equipment, and support they need”.

(c) However an unintended consequence of the current civilian and military reductions is thatskilled and experienced staff are leaving the MoD, through redundancy/early releaseschemes and natural wastage. The NAO and the defence select committee both identifiedthat MoD was unable to define what future skills it needed post transformation and wastherefore unable to determine whether it was letting those skills leave the department now.

(d) Furthermore, the current recruitment freeze and moratorium on training mean that theskills base of the department is rapidly deteriorating, leading to an over-reliance onexternal support. A recent defence internal audit (DIA) report into the misuse of theframework agreement on technical support demonstrated significant use of the agreementto carry out core MoD work and replace skills lost through previous early release schemes.This was further identified in the White Paper, which says: “implement reforms to the“Framework Agreement for Technical Support” (FATS) arrangements from April 2012,which include—making it clearer that FATS is for short-term technical support and notfor long-term projects, nor for management consultancy”.

(4) Maintenance of the UK military industrial base; the provision of UK research and developmentby both MoD and industry; how far the White Paper provides clarity for industry; support forexports and the extent to which the principle of off-the-shelf procurement is compatible withthis; how lessons have been learned from past successes and failures including in the acquisitionof Urgent Operational Requirements; and the implications of bi- and multi-lateral procurement.

(a) There seems to be very little learning from experience in the acquisition reform process,despite there having been a number of significant studies into the issue culminating in theGray report. Successive programmes have moved greater elements of the process intoindustry, without reflecting on whether this has improved outcomes, coherence or valuefor money. Meanwhile the intelligent customer base has diminished, as staff withexperience of delivery have been transferred to industry or offered early release.

(b) Building on comments at 2b above, the Urgent Operational Requirements programme hasbecome the default procurement route for many capabilities, despite not delivering asupport component. This has led to a number of headaches, as equipment bought fornarrow requirements is unable to be used for future requirements—but has used upsignificant resources in the process.

April 2012

Written evidence from the Royal Aeronautical Society

Introduction

1. The Royal Aeronautical Society (RAeS) is the world’s only professional body dedicated to the entireaerospace community. Established in 1866, the Society has 16,000 members in over 100 countries and is aleader and provider of foresight within the aerospace community. A wide range of Specialist Groups, includingan Air Power Group, support the work of the Society. The Society also helps to fund an Air Power Fellow atthe University of Birmingham.

Competition and Open Markets

2. The White Paper reiterates the importance of maintaining operational sovereignty as the guiding principlefor procurement choices. Since its first appearance as a guiding principle in the previous government’s defenceindustrial and technological strategy documents, the concept has had various interpretations. In practice it



means that the Government has the freedom of action to do whatever it wants, and has afforded UK industrylittle confidence that its interests will be promoted.

3. In its current manifestation, the government will, wherever feasible, and where this does not compromiseoperational sovereignty, seek to retain an open market for defence goods. Indeed, it states that buying “off-the-shelf” remains the “default” position for UK procurement. This will help drive down the cost of UK equipmentand act as an incentive to ensure the competitiveness of UK industry. The validity of this statement has notbeen fully tested by analysis. However, based on anecdotal evidence, UK industry has benefited to a degreefrom competition. Where they have been able to bid for international contracts, UK companies have wonbusiness as “best athlete” in competition with native suppliers.

4. However, the UK remains unique as a major defence industrial power in defaulting to open marketsolutions; hoping that others will follow by example or by persuasion offers little protection in a harshcommercial environment where other national industries are well supported by government and access tomarkets closely monitored and controlled. Changes in EU procurement and competition law have made overtprotectionism more difficult to sustain, but European countries are still reluctant to embrace the virtues ofcompetition or to allow freely foreign investment in national defence companies. The US, while more open toinward investment, also takes care to ensure that major contracts are sourced from within the US and majorprogrammes led by American prime contractors.

5. In sum, the playing field is not level and the White paper fails to acknowledge this, nor does it say howthe UK will ensure its commercial interests will be protected on the tilted surface.

Maintaining Fundamental Skills and Capabilities

6. The White Paper recognises the importance of having a strong domestic defence industrial base. Thismakes a big contribution to maintaining the Ministry’s operational freedom and general capability to act. Thewider contribution defence industry makes to the economy is also noted. The paper notes the importance ofretaining the ability to assure the operation of “critical sub systems”, including access to controlling software.This may well require obtaining the necessary assurances from suppliers to ensure that operational and supportactivities are available. There will be a similar need to understand a “system as a whole”, with the ability tomodify and update as necessary, implying maintenance on-shore of systems integration capabilities.

7. These, and other core technological capabilities in materials, electronics and propulsion is the “noblework” that determines access to the highest value work in defence and our ability to capture critical elementsin joint ventures. However, maintaining these key integrative and design skills in UK industry is perhaps thesingle most important challenge for the Government over the next decade, when opportunities to participate inlarge new aerospace programmes will be limited.

8. Investment by the MoD in technology acquisition forms part of the “intelligent customer” requirement.However, the needs of UK industry need also to be noted and supported. The intention is to hold defence S&T at 1.2% of the Defence Ministry’s total annual spend. It will provide a set of principles that will underpinthe relationship with industry as the MoD invests more than £150 billion in military equipment over the nextdecade. This will halt a decline in S&T spending, holding commitments at about $600 million a year. But thelast decade has seen this budget line fall from 2.6% of defence spending, to around £400 million a year. Thiswill be insufficient to maintain UK capabilities, and while choices may have to be made between sectors, thewider needs of industry must not be neglected.

9. Without investment in new technology, UK industry will inevitably lose its current strong position as asource of advanced weaponry and its attractiveness as a partner of choice in international ventures. Thesubsequent loss of intellectual property will also have a deleterious effect on areas of civil technology wherethere is still a strong relationship between defence and civil activity, for example in propulsion and avionics.

Collaboration

10. Since the 1960s, the UK has tended to develop much of its major weapons, and nearly all of its aircraft(the Hawk was a rare exception) with international partners—mainly European, but with the US for severalkey projects, Harrier AV-8 and JSF. The experience has not always been happy, and has led to increased costsand delay, but given the economics of weapons development, the approach has been the only way to maintainkey capabilities on shore.

11. The Government reiterates the UK’s commitment to international collaboration for large projects and forsome aspects of S&T. But mindful of the need to promote greater efficiency and effectiveness of joint ventures,these should be bilateral programmes wherever possible. However, this will not exclude multilateralcooperation where it is to the clear benefit of the UK.

12. The need for efficiency in collaborative programmes is a vital caveat. Past practices have led tounacceptable cost growth and delay, which have in some cases undermined the viability and exportability ofprogrammes, notably the protracted development of both the Typhoon and the A400M. In both cases, technicalproblems were compounded by politically induced worksharing and changes in demand from partner states.



13. Generally speaking, while frustrations have been more evident working with European partners, thetechnological and industrial returns have tended to be higher than in collaborative programmes involving theUS. However, while working with the US as a junior partner has had its difficulties, primarily over technologytransfers, the US does provide huge economy of scale and access to the most advanced defence technologies.

14. Cooperation with the US should remain central to future joint ventures for industrial and operationalreasons in most cases. Trans-Atlantic cooperation will give access to cutting edge technology and improvedinteroperability. Implementation of the Defence Trade Treaty may improve both interoperability and industrialcooperation. Smaller companies will benefit from getting more information at a bidding stage to participate inUS programmes. However, the list of excluded technologies is quite extensive and in most cases, it will stillbe necessary to run treaty covered aspects alongside ITAR compliant aspects of the same programme, thusinviting companies to bear the overhead implied by two regimes.

15. However, the government must seek to promote wider UK industrial and technological interests infuture collaborative programmes, which should ensure adequate access to software source codes to facilitateincorporation and integration of national equipment and weapons where appropriate. This may inevitablyinvolve some difficult choices between US and European options; as a general rule, the key criterion shouldbe the maximisation of long term technological benefit to UK-based industry. Another emerging feature is theincreasing willingness of the US to countenance a role for European collaboration as well as US-UKcollaboration, for example in space-based surveillance. The UK should likewise participate in European militaryand dual use programmes where this is the case and thereby strengthen UK industry’s competitiveness.

Export Support

16. The government will also provide additional support for defence exports; this will include politicalsupport for sales and building exportability into specifications for new equipment. There will also be additionalsupport for smaller defence companies facilitating better contacts with the Ministry and high level politicalsupport for UK defence exports. But without attractive products and technology to sell, export opportunitieswill be limited. Given the dominance of air systems in past export success, the Government needs again to bemindful of the need to invest in a sector that has a proven track record in world markets.

17. The paper singles out the important role played by smaller defence supplier companies as sources ofinnovation and economic benefit. Similarly, the focus on SMEs, while in principle admirable, may obscure thepoint that without large prime contractors and OEMs working on substantive programmes, life will be hard formost UK based supplier companies.

18. However, the key aspect is that British developed and produced equipment is in use with the UK armedforces. This “brand UK” aspects stems from the respect that the UK armed forces enjoy globally because theyuse their equipment in testing operational circumstances and have high expectations of that equipment. Theyare thus highly discriminating customers. They are also world leaders in the support packages that followselection. At a stroke, buying off the shelf from off-shore loses UK firms this competitive advantage.

Impact on the Aerospace Sector

19. The White Paper deliberately eschews the sectoral analyses of the previous government’s output in thisarea, preferring to establish broad-based points of principle. Indeed, the paper details very few specificcommitments, although electronic warfare and cyber security are mentioned alongside the now traditionalreferences to nuclear technology. In some respects this is a retrogressive step and implies a return to the narrowdefinition of national technological requirements evident in the 1980s and 1990s. For example, the importanceattached to precision weapons in the previous government’s policy papers is not evident, although the recent£483 million commitment to a new family of sea-based air defence missiles, an outcome in part of the ComplexWeapons Working Group, is to be welcomed. Similar investment in uninhabited systems will also help todevelop future capabilities. By the same token, specific commitments to new space-based applications,mentioned in several earlier policy statements, would benefit the UK’s world class satellite manufacturingsector.

20. The White Paper is weak on the implications of procuring PPP services rather than systems. Industrystrongly endorses the service delivery approach as it (a) allows harmonisation of military and civil technologyinvestments and (b) allows the private sector to export these services often without the export restrictionsassociated with classical procurements. The Skynet 5 programme for long distance communications is anexcellent example of how this policy can work in practice.

21. In this respect, commitment to technology demonstration involving teams drawn from all tiers of industryand academia will be vital to maintain core aerospace capabilities and skills. This does not necessarily involveexpensive prototyping, but it does imply a commitment of resources significantly higher than presently allocatedto Research and Technology. Investment decisions should also be mindful of civil applications of dualtechnology.

April 2012



Written evidence from Saab

Summary

Saab welcomes the Government’s White Paper, National Security through Technology, and believes that itoffers the chance for significant progress in the British defence acquisition and procurement process.

We relish the opportunity to submit written evidence to the Defence Select Committee on this issue.

In summary, we believe that:

— the emphasis placed on value for money is an essential aspect of any Government’s futuredefence procurement policy, especially in these times of austerity;

— transparency must be included in policy, and at the earliest possible opportunity;

— the value of appropriate “off-the-shelf” procurement has been focused on correctly in theGovernment’s White Paper as this allows for the maximum amount of flexibility when dealingwith threats, as well as small and medium-sized enterprise (SME) involvement in theprocurement process—but this need not be at the expense of the UK supply chain, nor does itrequire the UK armed forces to settle for second best equipment;

— as the White Paper correctly outlines, open procurement is the best possible option, as it ensurescompetition, value for money and, if correctly managed, significant SME involvement;

— the Government’s commitment to provide information to the defence industry as early aspossible is welcome, but still more could be done to improve the clarity of the procurementprocess;

— it is important to pursue a policy which strikes the right balance between “off-the-shelf”procurement and supporting the UK’s defence industrial base;

— bilateral relations between the UK and France, and the UK and the US, are of course hugelyimportant in the defence and security fields, but:

— the UK has opportunities to broaden and deepen bilateral and multilateral cooperation to includeother allies, notably the Scandinavian countries.

1. Introduction: Saab’s Growing Presence in the UK

1.1 Saab AB is a global defence and security company, and we opened our London office in September2011 as part of a major expansion into the UK. We believe this emphasises our commitment to working andgrowing in Britain and being a growth engine for enabling UK defence exports. With 200 employees alreadybased throughout the UK, the new headquarters will become a hub that co-ordinates all in-country operationsand helps extend our reach into the UK defence industry.

1.2 We have a long and successful relationship with the UK, providing defence products and services to theUK armed forces over a significant period of time. These products and services include combat and counter-IED training for infantry soldiers and advanced radar systems deployed, helping to secure the lives of UK troopsdeployed overseas. Our new UK headquarters also houses an engineering design centre that will capitalise onthe UK’s maritime aircraft engineering expertise. Its first project will be to design a carrier-based version ofthe Gripen next generation multi-role fighter aircraft. Our design centre in London is a self-funded projectwhere we will invest up to £3 million in the UK economy this year, supporting highly skilled UK engineerswithin our own operations and those within our wider UK supply chain. The recent announcement in the 2012Budget that the Government will invest £60 million in a new UK aerodynamics centre hopefully means wecan develop our design centre operations alongside this.

1.3 The Gripen multi-role fighter aircraft—Saab’s signature product—successfully supported NATOoperations in Libya with the Swedish Air Force. Up to 36% of the Gripen air craft is manufactured here in theUK, where major systems such as the latest generation electronically scanned radar, and the landing gear,are made.

1.4 Saab has selected the Selex Raven electronically scanned radar to equip the next generation Gripenfighter as its main sensor. This radar is produced in Edinburgh, where the Gripen programme is protecting andsustaining this key UK technology, as well as being the launch pad for the Typhoon radar replacement. Gripenis an essential part of this programme, and is protecting the highest quality jobs, software engineering andtechnologies in the key UK aerospace sector.

1.5 All Gripen main and nose landing gear is produced by APPH in Runcorn, Cheshire, protecting keyadvanced manufacturing and design jobs and important UK manufacturing technology in the aerospaceindustry.

1.6 During 2012, we will also centralise our global underwater vehicle development and production in theUK. We are now in the process of merging the military underwater vehicles operations in Sweden with SaabSeaeye, a UK subsidiary based in Fareham, Hampshire. Saab Seaeye is the market leader in the design andmanufacture of remotely operated underwater vehicles for the off-shore market. The move to Fareham will



integrate all operations to benefit the company’s significant global customer base in the civilian and defencemarkets.

1.7 Our New Light Anti-tank Weapon, NLAW, is a joint program with the UK MoD. Designed by Saab inSweden and assembled by Thales in the UK, the NLAW was developed with a team of 14 British companiessituated in the north of England. More than 10,000 units have been produced with a strong UK supplier basefor the worldwide market. TEAM NLAW is a founder member of the Northern Defence Industrial Association.

1.8 Saab has a significant SME footprint in the UK, with the majority of our suppliers based here, comprisinga 100 firm supply chain nationally. Our activities in the UK put significant jobs and revenue into the nationaleconomy. Our business model, using suppliers from all around the country, directly contributes to the cross-party goal to rebalance the economy away from London and the South East through growing UK manufacturingand industrial output. Since 2003, Saab investment in UK companies amounts to £600 million.

1.9 Saab’s objective is to be seen as a trusted and dependable partner to the UK on all levels. We prideourselves on a track record of delivering exactly what we promise on time, on budget and to the highestpossible levels of quality and capability. Today, Saab continues to offer a different way of doing business,especially in defence and security procurement, where we “do more for less”. Indeed, our most recent Gripendelivery to the Swedish Government was delivered ahead of time and under budget.

1.10 With industrial cooperation vital in the global defence sector, we hope our enlarged UK presence willcreate the conditions for a wider, strategic partnership that will benefit both the UK and Sweden.

2. Topic 1 & 2

2.1 As previously mentioned Saab has a significant operations base within the UK and seeks to grow thisfurther in the future. We are keen to contribute to the work of the Committee in assessing the White Paper,National Security through Technology, although at this stage we feel that it may be premature for us to addressthe first two topics of the Committee’s inquiry in any length. We will therefore be focusing our written evidenceon topics three and four of the inquiry. However, we wish to state that Saab is a strong supporter andexperienced supplier of integrated support solutions from product development, all the way to turn keycapabilities; this involves innovative and unique financial models.

3 Topic 3

3.1 The procurement process outlined in the White Paper offers a chance for significant improvements onthe past and the emphasis on value for money is essential.

3.2 Transparency at an early stage is highly desirable, enabling industry to invest in advance leading to themost appropriate equipment delivered to Government. Providing clear information to industry on procurement,benefits not only industry by way of providing it with clarity and Research and Development (R&D)confidence, but also means the UK’s defence capabilities could be developed to the highest level to enabletimely and appropriate response to any future threats.

3.3 A flexible and responsive defence policy is absolutely essential for the UK and “off-the-shelf”procurement solutions have a major role to play in this. “Off-the-shelf” solutions can help to guarantee MoDbudgets are not overspent, delivering value for money on time, since the risk of developing the product mayalready have been undertaken and paid for elsewhere. “Off-the-shelf” procurement, correctly managed, alsoworks with the Government’s ambition as outlined in the White Paper to involve SME’s more in theprocurement process, as many “off-the-shelf” projects have a significant SME footprint across the UK.

3.4 As the White Paper makes clear, open procurement is the best policy and practice. When it isimplemented correctly it will lead to value for money and will ensure the best balance of “off-the-shelf”procurement and supporting the UK’s industrial base.

3.5 The Government’s White Paper places a great emphasis on SMEs and including them in the procurementprocess. This is an entirely justified position that we strongly support and it can be developed even further.Companies like Saab source a huge volume of their operations and materials from the British aerospace anddefence industry. For example over thirty% by component value of the Gripen fighter is manufactured in theUK. Additionally one of our main targets for the UK is to grow from our 200 plus strong foot print organically,and by transfer of technology from Sweden.

4. Topic 4

4.1 It is important to stress that Saab, although presently operating from a limited UK industrial footprint,seeks to build and develop a strong defence manufacturing base here in the UK. Indeed, we are doing our bestto strengthen it, and are grateful to the policies of successive UK Governments which have enabled this.

4.2 It is our view—shaped by our own experience—that an open and competitive UK defence market is notonly important for securing value for money for the UK taxpayer, it also permits overseas companies such asSaab to come into the UK in order to establish local operations and export from the UK with a strongcompetitive UK industry base.



4.3 Thus, for example, UK jobs and UK exports benefit significantly from any sales to third party countriesof our Gripen, NLAW and Live Training products, just as they will from any future sales of the underwatervehicles whose research base we are concentrating in this country. For that reason, we are grateful to thesupport over the years from UKTI in aiding our efforts to sell NLAW, Gripen and Live Training into the exportmarket. This benefits us, and enables us to benefit the UK.

4.4 This shows why the principles of “off-the-shelf” procurement and support for industry and exports areentirely compatible. For the Ministry of Defence to have an effective and balanced defence policy, to ensuregrowth and rebalancing of the economy, and for procurement to be as streamlined as possible, it is essentialthat “off-the-shelf” procurement is exercised in conjunction with maintaining the UK’s industrial base andretention of indigenous capability.

4.5 We believe that it is simply not true that a procurement strategy needs to be a choice between the UK’snational security and the UK’s economy. Furthermore, the Government can also safeguard SME involvementin the procurement process by following this policy, due to the high levels of UK defence industrial base inputin major defence projects.

4.6 It is becoming increasingly clear that current and future defence policy must include internationalcooperation with the UK’s allies. Under the Treaty on the Functioning of the European Union (TFEU) the UKis required to act fairly, transparently, and openly by opening competition for defence and security contracts atEU level. Please refer to article 101 and article 326 of the Treaty.

4.7 The Government’s White Paper focuses on the relationship between the UK and the US and that betweenthe UK and France. Of course those relations are very important, not least because of the long standing closeco-operation between the armed services of those countries. This is not in conflict with our positive argumentsabove about “off the shelf” procurement and a strong SME involvements and doesn’t exclude relationship withother parties and industries, as Saab and Sweden has been proving over the years.

4.8 In the recent Shadow Defence Review consultation document, the Labour Party made a specificcommitment to develop bilateral partnerships with Scandinavian and Baltic nations. We welcome this proposaland we hope the Government will consider it seriously when looking at future strategic defence partners. Itwould be highly desirable for the defence policy of the UK to have a wide range of bilateral partnerships inthe defence sphere, focusing on sharing developments in research and technology, and coordinating in areas ofprocurement. Developing bilateral partnerships with Scandinavian countries will enable the UK to increase itsability to respond to threats facing the country in the future, as well as being beneficial to the defence industriesof the nations involved.

4.9 We welcome the Committee’s timely and appropriate inquiry, and would be happy to furnish theCommittee with any further information in support of it.

April 2012

Written evidence from Trevor Taylor and John Louth

DEFENCE ACQUISITION REFORM AND ORTHODOXY’S TEN SACRED TRUTHS

Summary

Professor Trevor Taylor and Dr John Louth of the Defence, Industries and Society programme within theRoyal United Services Institute for Defence and Security Studies (RUSI) highlight the 10 sacred truths ofdefence acquisition orthodoxy, and locate them in the ongoing quest for reform. The paper argues that thedefence acquisition process itself in advanced industrial states is unavoidable complicated, but this should notbe confused with inefficiency or incompetence. The authors conclude with the following suggestions:

1. When using competition, the government should calculate the likely effects of a competitionon market structure, and should be focussing more attention on how effective procurement canoccur without competition being used;

2. There is a need to recognise that outsourcing which preserves flexibility is likely to be expensivebecause of the risks which the supplier must carry;

3. Project management metrics of time, cost and performance must be viewed as only part of thelonger and wider story;

4. The subjective term “value for money” should be outlawed for a period to put pressure onministers and officials to say precisely what they mean;

5. When the UK opts for technologically-demanding requirements, all defence stakeholders,including parliamentarians, should recognise a readiness to tolerate significant technologicaland managerial risk;

6. The MoD’s performance in major projects should be seen in the context of other departments’efforts and of the fate of major projects in civil engineering and information systems in theglobal civil sector;



7. There should be recognition of the stresses and even contradiction between working withEuropeans and the US on major defence projects;

8. There should be more emphasis on stability and the delivery of core business in an ethos ofpublic service within defence, and recognition of the dangers of incessant change efforts;

9. The different roles of research and technology and of project de-risking and development shouldbe clear in the minds of MoD officials and ministers as well as in the MoD’s budgetstructures; and

10. The emphasis on the potential contributions of SMEs should be moderated and more attentionpaid to how they operate with other companies higher in the supply chain.

Introduction

1. Defence acquisition reform in the UK (and the US) seems to share many attributes of the successful soapopera. The plots go on for years, major characters appear and then leave the screen, and there is little clearsense of progress. Is Coronation St or Albert Square a better place to live in 2011 than when theseprogrammes started?

2. We believe that defence acquisition for a state aspiring to play a major role in world military affairs inunavoidably a complicated and uncertain business where there should be wariness of any simple guidance orconclusions, and we seek to qualify significantly many pieces of what might well be seen as conventionalwisdom in the area.

Orthodoxy’s Ten Sacred Truths

3. Just as there seem to be common themes or narratives in popular culture so there is an overarchingdominant discourse that is applied to defence acquisition and discussions around how it is to be reformed. Thislanguage usually features a number of distinct themes or topics that we have come to describe as Orthodoxy’sTen Sacred Truths. These are:

(1) The benefits of competition;

(2) The gains from outsourcing;

(3) The centrality of project management metrics;

(4) The utility of the idea of Value for Money;

(5) The availability of both project certainty and technological advantage;

(6) The belief that defence acquisition projects are particularly prone to failure;

(7) The (naive) endorsement of partnering;

(8) The optimism that change management programmes are transformative;

(9) The assumption that science and technology and research and development are identical; and

(10) The faith that SMEs will help to build a New Jerusalem.

We shall take each of these in turn.

Sacred Truth One: The Benefits of Competition

4. Orthodoxy asserts that competition within the defence industrial base is the best way to satisfy today’simmediate requirements and tomorrow’s defence capabilities. The Defence White Paper of 2012 is very clearthat competition is the default setting for government defence and security acquisition policy. However,competitive tendering in many areas of defence can be self-defeating in the mid to long-term. With large,highly technical, assets or systems the costs of staying abreast of technological developments are significantfor defence companies whilst new orders from home nations are seldom a common occurrence. Those whofail to win a competition are often driven from the sector or amalgamate with the winner.1 Also, the financialand technological entry barriers are high for would-be new suppliers. Even the United States is down to asingle supplier in some areas of the defence market, although in that country contracting staff are quite openabout dividing work to keep at least two companies in the sector.

5. Those who resent BAE Systems’ dominance of UK defence should recall that the company owes muchto both GEC and Alvis selling their defence businesses due, in part, to poor future opportunities and profitprojections. Indeed, the authors can remember that there was little appetite by defence businesses to buy RoyalOrdnance from the government and, we suspect, the government was delighted that British Aerospace, as itwas then, would take it out of public ownership.

6. Moreover, whilst there is a common narrative around notions of a “conspiracy of optimism”, it needs tobe remembered that competition often drives companies, at the bid stage, to offer highly hopeful performance,time and cost parameters merely to generate a competitive price. Big UK defence contracts are so scarce thatcompanies, in their minds, often face the binary reality of winning or leaving the sector. Then, after a successfulbut artificially low bid, performance is inevitably squeezed, costs grow and delays occur. Also, to claw backprofits, future contract amendments can become over-priced.



7. So, whilst the first sacred truth is that competitive tendering is a force for good and may ease short-termfinancial pressures, in the case of large, specialist defence projects, it can often drive inappropriate behaviours,leave single suppliers within some parts of the sector and generate an unrealistic performance-time-costenvelope that can be stubbornly immune to project management interventions. Ironically at least parts ofGovernment have long been aware of some of these points: a report by the Office of Fair Trading in 2004found that “in some sectors the government is likely to be the largest buyer and thus in a position to affectcompetition through its purchasing behaviour” and referred to entry barriers that could affect the level ofcompetition. It endorsed the finding that “the public sector does not take sufficient account of the impact of itsprocurement decisions on the long-term structure of supply markets”.2 Moreover it is more than a decade thata former senior civil servant and industry employee, Michael Bell produced his own telling critique of theconsequences of competition within the defence sector.3

Sacred Truth Two: The Gains from Outsourcing

8. A second element is an emphatic belief in the merits of outsourcing tied, in part, to the quest for valuefor money and efficiency. Many aspects of the training, equipment, infrastructure, logistics and informationlines of development have been passed to businesses as investment appraisals have, somehow, demonstratedthat this represents greater benefits to the taxpayer and warfighter than the public sector could muster.

9. We know that in a defence contract the less risk perceived by the contractor, the better the price that canbe negotiated between parties. Also, if the government wishes to incentivise the contractor to invest at inceptionand throughout the life of the contract, than a longer-term contract is often necessary. This makes it difficultfor defence projects to be treated by government as a coherent investment portfolio, as flexing investmentsperiodically between projects in a world of outsourcing is far from straightforward. This is especially true asthe United Kingdom still embraces the rule of law, whereby contractual commitments cannot normally bediscarded if government wishes one project to cross-subsidise another.

10. The simple message is that, if government is looking for flexibility and to portfolio-manage its defenceinvestment, it must be wary of continual outsourcing and expect to be charged higher prices by the privatesector if it seeks contracts that can be easily reduced in scale or even abandoned.

Sacred Truth Three: The Centrality of Project Management Metrics

11. Following on, a third consideration is that both the Department and industry are wedded to projectmanagement techniques that often treat defence equipments as stand-alone entities. Techniques such as earnedvalue management, project costing and project (rather than enterprise) risk and opportunity management colludeto lock thinking into desired certainties associated with a specific project rather than the broader defenceacquisition portfolio. Equipment cost, schedule and performance at point of delivery remain the dominantconcern, despite the National Audit Office efforts to report on a wider picture. Whilst effective projectmanagement is important both for the taxpayer and the shareholder, defence projects should be seen as but onepart of a coherent, larger sovereign investment strategy, which puts the emphasis on effective requirementssetting, portfolio management and financial planning as the key governmental skills. A late and over-budgetproject can still be a success if it yields major benefits: the Houses of Parliament are a demonstration ofthis truth.

12. This binary, absolutist notion of “success” or “failure” is problematic, as a project that is late or over-budget is not necessarily a failure in terms of capabilities generated. As is widely recognised outside the PublicAccounts Committee, a project can look good because it was set-up with a generous budget and padded time-line. If it is late and/or over-budget, it is not easy to see whether this has been caused by poor management,bad forecasts, inappropriate funding or technical complexity—maybe, in part, all of these, but that does notnecessarily make for a bad project. Whether a project is ultimately judged a success will depend on the benefitsgenerated. Consider three projects from different walks of life and eras—St Paul’s Cathedral, the Houses ofParliament and the C17 aircraft—all late and over-budget but all now considered a significant functionalsuccess.

13. In this context, the cancellation of the Nimrod MRA4 project appears as gesture politics rather than goodcorporate or project management, not least because of the speed of the destruction of the aircraft and thepublicity attached to it. The project was late, over-budget and unfinished, yet the UK had spent some £3.5billion on developing and producing aircraft. Pessimistically, it may have cost another £1 billion to finish theproject (ie make changes to aircraft that had already been built and partially equipped) raising the total to £4.5billion. This is less than the US will spend on the development alone of the P8, and if the UK buys this aircraftin future in lieu of the MRA4 it can expect to pay a similar amount of money to that which would have beenspent completing the British aircraft (so long as the US does not charge the UK for any of the R&D effort)4

The UK, of course, will probably not get the exact capability with the P8 that US forces will enjoy: we wonderwhether the MRA4 will be seen by the military as the “missing capability” in the years ahead, causing us allto question whether the project was indeed poor.



Sacred Truth Four: The Utility of the Idea of “Value for Money”

14. The fourth sacred truth is the intellectual certainty that all defence acquisition activity is essentiallya search for “value for money”. Should any analytical reliance be placed on a term whose meaning is atbest subjective?

15. We know that defence acquisition choices frequently have an impact on our economy and foreignrelations as well as a specific area of defence. Even if government just focuses on the defence question of thisconceptual triptych, how much weight should be placed on an option that provides, say, national operationalautonomy because the system can be supported and modified from extant UK assets and supply base, as againsta choice that relies on external governmental and industrial support? These are matters of risk assessment,judgement, international relations and strategy, yet many in the UK appear to believe that “value for money”has some objective reality.

16. Government already knows that notions of value for money are difficult to properly grasp and,significantly, that competition does not of itself generate value for money within defence. Indeed, as noted,competition can have an adverse relationship to the generation of value for money, for:

Procurement processes may place undue emphasis on short-run competition at the expense of long-run, non-price competition. A narrow focus on short-run cost savings may undermine investmentand innovation incentives or may even force unsuccessful bidders out of the market.5

17. A glib suggestion is that, perhaps for a year, the phrase “value for money” is banned from public andinternal discourse in the Ministry of Defence. It would increase the pressure on ministers and officials to sayprecisely what they mean to each other and the public. More words may be spent, but clarity of thought andexpression would surely benefit.

18. Since value in defence depends much on the perspective of the stakeholder, there must be great warinessabout any proposal to place control of some £16 billion a year of public money in the hands of a body whichis not significantly directed by ministers.

Sacred Truth Five: The Availability of both Project Certainty and Technological Advantage

19. The fifth sacred truth concerns the Department’s focus on having both project certainty and technologicaladvantage. We perceive, however, that an ambition for leading-edge technology is not compatible with anexpectation of certainty in terms of performance, time and cost.

20. Global experience with advance defence systems is that they often take longer and cost more thanoriginal estimates suggest. This is because the project is complicated, research and development is seldom alinear conceptual process and much can go wrong so that there is almost always a variance in actualperformance from that planned. A basic rule is that the more time and money spent in the early phases of ahighly technologically-dependent activity, the more that is usually learnt and the less risk there should be todevelopment of the capability sought. Though with some projects, significant risk remains even late in the day,such as the experiences of Boeing and Airbus and the unexpected challenges in the manufacture of their,respective, 787 and A480 aircraft. Simply because politicians, financial managers and other stakeholders yearnfor precise cost data and management information, it does not follow that such data is accurate or meaningful.Pressing an often desperate commercial entity to accept fixed-price research, development and manufacturingcontracts does not change this consideration, it merely corrupts behaviours.

21. As a general rule we propose that any major project that is more than five years from system or productdelivery would seem to contain considerable risk. In simple logic, if a suite of outputs is going to take theeffectively coordinated activities of large groups of people more than five years to generate, it can hardly berisk free. The US Government Accountability Organisation has been very articulate in explaining how projectrisk is reduced only by the passing of time and financial spending, in urging a staged approach to projectdecision-making, and in advocating the notion of a five year development horizon.6

22. An inappropriate longing for certainty has been compounded by a reluctance to cancel struggling projectsfor fear of being accused of wasting public money. A better argument would be for governments to assert thatthe defence acquisition function must spend a certain amount of money to test the viability of a project and,as a consequence, it may be appropriate to abandon or significantly down-size that project once investigationshave sufficiently advanced. This could even be seen as good governance and protective of the public’s money;a stage-gate approvals system that the Smart Acquisition proposals of Initial and Main Gate promised, but onbalance failed to deliver.

23. The simple message is that defence projects are inherently risky and there is a need to recognise thatcertainty is not a feature of life in this sector. A portfolio-management approach with a central contingencyfund would assist, as would a greater readiness to scale-back and cancel projects if benefits are not delivered.

Sacred Truth Six: The Belief that Defence Acquisition Projects are Particularly Prone toFailure

24. The sixth sacred truth is that defence projects are, somehow, not like other complex governmental orcorporate activities, but inherently prone to failure. In reality, the MoD both does more major projects (see the



Government Major Projects Portfolio) and has more success than many other government departments. If thereis a wish to identify projects that went significantly massively over budget or failed completely, then attentionshould be turned to National Health Service information systems (and Private Finance Initiatives), the ScottishParliament building, the Channel Tunnel, the Fire Control project for the emergency services, and even theWestfield shopping centre. This is a perspective which even the staff of the National Audit Office recogniseand there is a wider case for arguing that it is the people who run large scale civil engineering projects whomost often get it wrong.7 Ironically the most problematic project in the current UK defence portfolio is onewhose management has been entrusted to the US authorities.8

Sacred Truth Seven: The (Naive) Endorsement of International Partnering

25. A seventh sacred truth is that partnering with others is a good thing for Britain. This refers to both thecountry “pooling and sharing” defence capabilities with other nations and developing joint requirements andmatching programme/project solutions bi- or multi-nationally. There is also the sense of partnering betweengovernment and industry, but for our purposes here we shall focus just on partnering among states.

26. The first point to note is that government has looked historically both to the US and to Europe when ithas sought partners, but has often failed to take account of the clashing pressures that can arise by trying to befaithful to all. At present we have the UK-US Defence Trade Treaty as well as legislation to enact the EUDirectives on Defence Procurement and Technology Transfer. The former is intended to ease technologytransfer restrictions on some goods, services and information moving from the US to the UK but will cause,in consequence, the tightening of UK export controls to the rest of the world including Europe. This, of course,is at a time when government claims it wants to champion defence exports. Significantly, the EU TechnologyTransfer Directive is meant to ease the cost of moving controlled goods within Europe. No wonder industrialistsare confused and frustrated, and government ministers fairly silent, on this inherent contradiction.

27. Beyond the partnering narrative, the UK strategy for defence acquisition should be based on a coherentlevel of commitment to a requirement for an ability to act nationally, to an understanding of where a level ofmutual dependence (or partnership, usually with Europeans) is acceptable, and where the risks of dependenceon the US are acceptable to our national interest or at least can be tolerated. A country with the ambition tobe a major international player enjoying considerable operational sovereignty should, without doubt, addressthose issues in that order.

Sacred Truth Eight: The Optimism that Change Management Programmes are Transformative

28. We note the optimism that a change management programme, project or multiple projects will, inevitably,transform for the better a defence organisation, service or process. We have had the Smart ProcurementInitiative which yielded to Smart Acquisition. Since then we have benefited from Defence Acquisition Reform,organisational change programmes within specific departmental functions and the front line commands, andwe await announcements on plans to transform DE&S, probably through the employment of a strategic partnerfrom industry. This is theology, not organisational management, as there is an overt belief-system that theresponse to any perceived problem is to implement a change management initiative. The virtues of stability,continuity, organisational learning and endurance seem to have been forgotten. Whilst this is not a call formaintaining the status quo or an argument for ignoring ingrained organisational problems, there is a sense thatstaff would benefit from just focussing on core acquisition activities for a while rather than attending yet morechange management workshops and briefings. It is two-and-a-half years since Charles Haddon-Cave reportedon the “change fatigue” present in many parts of the MoD,9 but the emphasis on change remains undiminished.Given the staff cuts being implemented in the Ministry, with their implications for new structures and processes,and probably more out-sourcing, the future looks to have stabilised into a condition of instability.

Sacred Truth Nine: The Assumption that Science and Technology and Research andDevelopment are Identical

29. The MoD appears to believe that science and technology and research and development are one and thesame thing and that an investment in this combined entity is good and smart. We have stopped counting thenumber of times both politicians and officials have peppered prepared statements, papers and ad hoc commentswith references to both science and technology and research and development, transposing both terms andusing them as interchangeable descriptors of the same phenomenon. Indeed, the White Paper talks of securinga 1.2% (of the defence budget) investment in science and technology whilst the Minister, Peter Luff, talksabout the Paper’s clear, quantifiable commitment to research and development.10

30. Why is this important? Firstly, in effective programme and project management of through-lifecapabilities, understanding the scientific and technological advances within a specific area, both now and thoseexpected in the future, must be a good thing. Indeed the Ministry of Defence’s DSTL organisation spendsmuch of its time doing just this, with a budget of about £400 million per annum. By some calculations, thisequates to about 1.2% of the defence budget. So, if the Department is talking about ensuring that this proportionof its budget is committed in perpetuity to science and technology it may well be just referring to theorganisational activities of DSTL. A recent report by the US Defense Science Board has underlined the growingchallenge of the DoD’s monitoring developments in the civil world of potential relevance to defence,11 a taskthat requires R&T attention also in the UK.



31. This is different, though, from research, applied research and development within projects. Theaccounting treatment of projects means that most costs associated with applied research and development findtheir way into the cost-base, capital budget of a particular activity whilst true research costs are usuallyabsorbed as a cash-based corporate function. The applied research and development costs within UK defenceprogrammes and projects are significantly above £400 million per annum, suggesting that science andtechnology and research and development are profoundly different things, yet on occasions treated as one bygovernment. Is this cynicism, gentle ignorance or confusion on behalf of the Ministry of Defence? It is notpossible to provide an answer at present, but the messaging is generating broad confusion within the industrybase that may drive corporate investment decisions resulting in a set of unintended consequences for both thepolitician and Serviceman.

Sacred Truth Ten: The Faith that SME’s will help to Build a New Jerusalem

32. The final sacred truth is that the small to medium-sized business sector in the UK is possessed ofenormous flexibility, innovation and untapped capabilities which will, somehow, transform the defenceacquisition process and development of capabilities. The White Paper talks of SMEs in almost hallowed tonesand, whilst there is some evidence that SMEs can be flexible and responsive to very good effect, most researchand development, for example, is either sponsored or undertaken by larger, international companies. Moreover,whilst smaller businesses are often considered a source of innovation, within the defence space, most smallercompanies come to market through the sponsorship or patronage of a larger prime contractor or integrator.Indeed, quite often it is simply because the smaller business is part of the larger company’s supply chain thatthey are able to be innovative as defence solutions are generated. Certainly SMEs are unable to mount thesustained and complicated marketing efforts that are often needed for success in the export sector.Consequently, it is a mistake to consider just SMEs, and to focus the development of policies merely for thiseconomic area, without considering the role larger companies provide in bridging the requirements of theDepartment to the skills of the niche, small specialist provider. Rather, defence capabilities have to be seen asa complex value chain whereby prime contractors, other large businesses and SMEs all combine to generateeffective defence solutions. Focusing on just one component of this value chain is, at best, dysfunctional.

Conclusion

33. People in medieval times sought to turn lead into gold, seeing it as both desirable and achievable. Sinceat least the 1980s, defence acquisition reform has been a similar phenomenon in the UK and the US. In ourview, it has had all the success of alchemy. Rather than learning from this, decision-makers seem to beembarking on yet another quest.

34. Our concern here has been simply to stress that defence acquisition aimed at providing forces withleading technologies is a complicated business where a readiness to accept some failure is needed. Most of thewords above can be seen as negative in tone, so we conclude with ten statements which we suggest form amore suitable guide for the future.

— When using competition, the government should calculate the likely effects of a competitionon market structure, and should be focussing more attention on how effective procurement canoccur without competition being used;

— There is a need to recognise that outsourcing which preserves flexibility is likely to be expensivebecause of the risks which the supplier must carry;

— Project management metrics of time, cost and performance must be viewed as only part of thelonger and wider story;

— The subjective term “value for money” should be outlawed for a period to put pressure onministers and officials to say precisely what they mean;

— When the UK opts for technologically-demanding requirements, all defence stakeholders,including parliamentarians, should recognise a readiness to tolerate significant technologicaland managerial risk;

— The MoD’s performance in major projects should be seen in the context of other departments’efforts and of the fate of major projects in civil engineering and information systems in theglobal civil sector;

— There should be recognition of the stresses and even contradiction between working withEuropeans and the US on major defence projects;

— There should be more emphasis on stability and the delivery of core business in an ethos ofpublic service within defence, and recognition of the dangers of incessant change efforts;

— The different roles of research and technology and of project de-risking and development shouldbe clear in the minds of MoD officials and ministers as well as in the MoD’s budgetstructures; and

— The emphasis on the potential contributions of SMEs should be moderated and more attentionpaid to how they operate with other companies higher in the supply chain.



References

1 For a sense of the UK firms that have abandoned either their independence or the sector, see “AcquisitionFocus Group and the Defence White Paper”, RUSI Defence Systems, Spring 2012, p.16

2 Office of Fair Trading, Assessing the Impact of Public Sector Procurement on Competition (London: Econ,2004, pp.1–2

3 Michael Bell, “Leaving Portsoken: defence procurement in the 1980s and 1990s”, RUSI Journal, Vo.145No.4, August 2000, pp.30–35

4 The US plan is to spend $8.2 billion on the development phase and $24.16 billion on the procurement of 122aircraft: Government Accountability Office, Defense Acquisition: Assessments of Selected Weapons Programs,Washington DC, March 2012, p.117

5 Office of Fair Trading, Assessing the Impact of Public Sector Procurement on Competition (London: Econ,2004) p. 25.

6 Government Accountability Office, Defense Acquisition: Assessments of Selected Weapons Programs,Washington DC, March 2012, pp.19–29.

7 See B Flyvbjerg, N Bruzelius and W Rothengatter, Megaprojects and Risk: an Anatomy of Ambition(Cambridge: CUP, 2003).

8 For a recent reference see Testimony of Michael J Sullivan, Joint Strike Fighter: Restructurng AddedResources and Reduced Risk, but Concurrency is Still a Major Concern, Government Accountability Office,Washington DC, 20 March 2012

9 Charles Haddon-Cave, The Nimrod Review, An independent review into the broader issues surroundingthe loss of the RAF Nimrod MR2 Aircraft XV230 in Afghanistan in 2006, London, Stationery Office, 28October 2009

10 Peter Luff MP speaking at the NDI Annual Conference in Bristol on Wednesday 14 March 2012.

11 Report on the Defense Science Board, Basic Research, Washington DC, January 2012,http://www.acq.osd.mil/dsb/reports/BasicResearch.pdf

Written evidence from Prospect

Introduction

1. Prospect, the union for 16,000 professionals in the Ministry of Defence and the UK defence industry,welcomes the opportunity to provide evidence to the Defence Committee on defence acquisition. Over anumber of years we have encouraged debate and discussion in a broad-based non-partisan fashion to make thecase for an adequately resourced defence sector.

2. Since the publication of the Strategic Defence and Security Review (SDSR) and the National SecurityStrategy (NSS) the Government appears to be trying to undo what improvements there have been in theapproach of the Ministry of Defence (MOD) to defence acquisition. The lack of acknowledgement thatimprovements have been, and continue to be made, at program and project level is driving the development ofa Materiel Strategy, which has the clear and sole aim of transferring the MOD’s entire intelligent customercadre, and giving control of some £20 billion of defence expenditure, to the private sector. That, coupled withthe drive to cut the Defence Equipment and Support (DE&S) by 28% in combined military and civilianheadcount before the strategy is even implemented, is not only undermining the ability of DE&S to remain theMOD’s intelligent customer for defence procurement and support, but may already have led to the organisationbeing unable to maintain a safe and professional approach to meeting its required outputs.

3. In our view, the publication of the White Paper, “National Security through Technology”, gives thedepartment no clear direction and does not provide a framework for the defence industry to plan much furtherahead than the next strategic defence review.

4. The prolonged period of paralysis since the Defence Industrial Strategy was last reviewed, along with thelaunching of an unplanned and poorly managed reduction of the civilian workforce has resulted in a catastrophicloss of key personnel from the department, which undermines commitments to act as an intelligent customer.

5. To reform the government’s approach to defence acquisition Prospect recommends two changes. Firstly,if government is to act as an intelligent customer it must take urgent steps to halt the haemorrhage of stafffrom the civilian workforce. This means reviewing the cuts program and addressing the collapse in moralesince the SDSR announced that one third of staff would be made redundant. Secondly the government needsto take steps to safeguard the defence industrial base by adopting an active industrial policy that promotes highvalue manufacturing jobs.



6. The evidence contrasts the approach of the Secretary of State for Business Innovation and Skills (BIS)who is encouraging the development of an active industrial policy and the preferred choice of the MOD whichis to procure defence goods “off the shelf”.

7. In conclusion we highlight capabilities that are either under threat or have already been lost as a result ofthe SDSR and how the White Paper is failing to safeguard the UK’s preeminent position in high value defencemanufacturing and research and development in technology.

Intelligent Customer

8. The White Paper, “National Security through Technology”, recognises the critical importance of anintelligent customer role in providing in-house knowledge of defence technologies, developing research intechnologies where the market is unwilling or unable to do so and understanding the market-place. However,the rhetoric of the White Paper stands in stark contrast to the reality on the ground in the MOD.

9. The first round of voluntary releases from the department was oversubscribed as MOD personnel queuedup to leave. Many of those unable to secure a voluntary release, because their skills were viewed by thedepartment as too valuable to lose, have left anyway, not wishing to remain in an organisation that is headingfor disaster. Natural wastage in Year 1 of the Voluntary Early Release Scheme (VERS) is 8,000, which isdouble the number expected to leave over the entire job reduction program. The MOD has no idea what skillshave been lost and what damage has been done to its ability to act as an intelligent customer. It is highly likelythat MOD will re-hire many ex-employees as highly paid consultants to perform the functions they recentlyheld as a government employee. The loss of corporate knowledge, particularly amongst the age group 40 to50, will take years to recover from, if ever.

10. This comes at a time when an external review is highlighting significant improvements in DE&Sperformance in its key role of providing program and project management. The NAO Report on MOD MajorProjects shows a marked improvement in recent projects, with cost overruns on projects approved since 2002running at 2.8%, compared to 16.8% for projects approved in 2001 or before. Further vindication of theimprovements in performance being made came from the benchmarking report by Human Systems Ltd, aninternationally recognised organisation. For the second year running DE&S came in the top ten of fifty sixorganisations, ten of whom manage projects with similar scale, risk and technical complexity. Both PUS andCDM welcomed these results and their significance.

11. The implications of this loss of key personnel should cause the Committee grave concern, and not justbecause it will bring to a halt the improvements being made. The MOD faces the prospect of a serious accidentor a major mistake in the provision of support to frontline service personnel. This will be the direct result ofthe rapid and unplanned loss of experienced and skilled staff from the MOD. This is an urgent and seriousproblem that the MOD must address before further cuts in civilian staff are made. MOD should make anassessment of the loss of personnel, both through the first round of VERS and as a result of natural wastage.Indeed, the Committee may wish to give consideration to the Haddon-Cave report recommendations whenconsidering reforms proposed by Gray and Levene. Prospect believes that the environment being generated bythe SDSR, Defence Transformation and the Material Strategy is mirroring that created by the changeprogramme which led to the Nimrod disaster and increasing the likelihood of another serious accident.

12. It is clear to us that the department is making no serious attempt to address the problem of staff morale,a problem which is being compounded by changes to the civil service pension scheme, a pay freeze with a capon earnings to follow for the next two years. At a time of great upheaval and adjustment within the departmentthe trade union side is concerned at the poor level of engagement with senior management in the MOD.Prospect has alerted the department to this problem many times with little or no response from the MOD orthe current Secretary of State for Defence.

13. To assess the morale of civilian personnel Prospect conducted a survey of our members working forMOD or MOD agencies last October, there were 947 responses. We found:

— 77% do not have confidence in MOD departmental management to deliver the changesrecommended by Lord Levene.

— 92% do not believe MOD department management is acting to sustain morale and commitmentto the MOD.

— 63% would choose to leave MOD if they could find similar work for similar pay elsewhere.

— 81% thought MOD would be a worse place for specialist civil servants to work in five years’time.

— 89% do not think that the MOD can achieve the staff reductions it is implementing withoutaffecting support to the frontline.

14. The Prospect survey results were then reinforced by the outcomes of the Department’s own “Your Say”questionnaire3 carried out as part of the civil service wide people survey. With 32,992, a response rate of44%, the defence specific questions produced the most worrying responses:3 MoD Your Say Autumn 2011 Survey Report



— Only 13% of MOD staff [12% of DE&S staff] believe Defence Transformation will improveworking in the MOD;

— Only 7% of MOD staff [6% of DE&S staff] feel more optimistic about the future of the MODas a result of Defence Transformation; and

— Only 11% of MOD staff [12% of DE&S staff] have seen a positive change in the way mostsenior managers/leaders lead within their particular TLB.

15. Prospect is concerned that there are no avenues to raise our concerns about the ongoing ill-judged staffreduction plan and address the problem of plummeting staff morale. What government needs to do is ensurethat it is able to act as an intelligent customer. This requires developing an in-house capability so that we knowwhat we need, how it works, how we can fix it and how much it will cost. Developing a personnel strategythat works alongside the procurement strategy is a key element in achieving value for money. This approachneeds to be adopted to make the aspirations of “National Security through Technology” a reality.

Reforms Proposed by Lord Levene and Bernard Gray

16. The Gray and Levene reforms are a work in progress. Prospect broadly welcomed the Levene report asa step in the right direction in dealing with the bureaucratic structures in the MOD. The main concerns ofProspect, along with other defence unions, are around MOD’s ability to implement the recommendations,especially as this ability will be so heavily dependent on cultures and behaviours that sadly are rare in thedepartment currently.

17. Prospect welcomes the acknowledgement in the report, that MOD’s senior leadership who understandthe detail of defence should take the lead in making defence reforms work rather than an external group,4

but that recognition is needed that the challenge is huge and getting the support of staff will be impossiblewithout leaders demonstrating the right behaviours. Managing performance is often talked about as being keybut there is little evidence of it being applied by MOD’s senior leaders. Prospect is concerned at the amountof external assistance being brought in to support the reform agenda which is clearly contrary to Levene’srecommendations.

18. Prospect is encouraged by the emphasis on “people issues” throughout the Levene report.5 In our vieweffective implementation of the recommendations, such as those around career management, will requireadditional resources. With MOD’s HR function already being halved to meet the “Next Generation HR” targets,and line managers already struggling to balance their increasing “people” responsibilities with their other tasks,Prospect fears that the laudable aims of the report will run into the sand when faced with the realities of thesignificant headcount reductions that are already underway.

19. There are some aspects of the Levene report that Prospect are concerned with, in particular thedowngrading of the Head of Science, which in our view is a retrograde step at a time when there is littleunderstanding in the department of the skills that that are needed for work undertaken by the MOD. Howeveroverall there are many proposals that could represent a step in the right direction.

20. Prospect welcomed the Gray Report6 when published and in particular the recognition of the conceptof “conspiracy of optimism” and how that was engendered by single service rivalry. There is, however, noindication that this has been addressed to date or will be addressed through the Materiel Strategy. Prospect didnot accept the logic of privatising the organisation and are still of that mind, a view accepted by the MODwhen the report was published.

21. At the time of this evidence submission to the Committee, Prospect have seen no firm reform proposalsby Bernard Gray, therefore it is difficult to comment on these further. It is known that an options paperdiscussing Trading Fund, ENDPB and GOCO as future constructs of DE&S was submitted to the DefenceBoard in the autumn with the hope of an announcement before the end of the year. Prospect argued for theopportunity to submit a trade union perspective with that submission.7 The assurance given by the MaterielStrategy Team was that, once the Defence Board and Secretary of State had directed the option(s) to be targetedfor further work, the options paper and the TU submission would be made public. However, the manner of theannouncement of the Secretary of State’s decision has meant that the Materiel Strategy Team have no mandateto publish the options paper or the associated supporting paperwork, so the opportunity for staff or the tradeunions to fully understand what is being considered, the baseline from which DE&S is being assessed or indeedthe issues that need addressed has not been presented.

22. It is a matter of great concern that the Trade Unions have not been involved in discussions on the reformof DE&S considering the large number of members that will be affected by any change. The track record ofthe MOD in delivering organisational change that improves defence acquisition is very poor. The Committeewill be aware of the current joint private sector/MOD initiative to reconstruct the CAAS organisation. This isaimed at recovering it from the ravages of the poorly managed early exit schemes from the last Departmentalchange programme which led to the uncontrolled loss of the cost engineers and analysts who were crucial to4 Defence Reform, Lord Levene, June 2011, para 14.2.5 Ibid, para 1.13.6 ‘Review of acquisition, for the Secretary of State for Defence’, Bernard Gray, October 20097 Prospect can provide a copy of the union’s submission for information if required by the Defence Committee.



the effective cost control of defence programmes and projects. Much of the current cost over-runs and the“conspiracy of optimism” outcomes can be linked to the loss of this expertise as much of the recentimprovements can be linked to the reconstruction initiative. This is partly because of the lack of criticalengagement in the development of proposals such as those currently being undertaken by Bernard Gray. TheTrade Unions have been successful in arguing for a Value for Money Benchmark (VFMB) to be producedagainst which the other options will be tested and have been given assurances that this would not just be aVFM assessment of the “As-Is” model, but a genuine attempt to identify the “Best DE&S Could Be” as anon-vote TLB, possibly with the CDM as a Principal Accounting Officer to strengthen the relationship withHead Office. Prospect remains concerned, however, that the VFMB will not be properly resourced or effectivelysupported from within the TLB. It would be a step forward for the department if there could be a moreconstructive engagement with staff to shape the new organisation in future years. There would also be agreater chance of staff “buy-in” were the VFMB to be given a fair and level playing field through preparationand assessment.

Industrial Strategy

23. The White paper, “National Security Through Technology”, does not provide the clarity needed tosafeguard the UK’s industrial base. The Minister for Acquisition and the Secretary of State have championed“off-the-shelf” without clarifying which programs or capabilities that industry will need to retain. Rather thandeveloping high value manufacturing, the White Paper is a blueprint for deindustrialisation of the defencesector.

24. This laissez faire approach contrasts with the active industrial policy being promoted by the Secretaryof State for Business Innovation and Skills (BIS).

“Government has failed in the past to use its buying power to work with the grain of British industryand we want to change that. We undertook a big exercise last year looking at public procurementand it was very clear that the way it was done was too transactional, legalistic, short-termist, riskaverse and people were frightened unnecessarily of European Union rules. We were getting thewrong results. So we are determined to look at this, not in a protectionist way, but in a way that ismore strategic and does support manufacturing industry.”8

25. The approach of BIS Ministers is a welcome development within government that does not sitcomfortably with the approach adopted by the Secretary of State for Defence. An active industrial policy thatis complimentary to the approach being developed by BIS would highlight innovative technologies acrossthe defence sector that could be developed either as part of the equipment programme or tailored for theexport market.

26. A key lesson from the economic downturn is the need to ensure that there is a better balance in the UKeconomy between the service sector and manufacturing. The UK defence industry is an important contributorto this sector, accounting for 10% of the manufacturing base and providing many highly skilled jobs. Thisposition will not be maintained unless the Government is committed to providing strategic support. Thisrequires public sector investment in research and development working with defence manufacturers to deliverproducts that are effective and affordable.

27. It also requires a government that is able to sit down with industry and plan ahead. The automotiveindustry has been highlighted by BIS as an example of good practice in the development of a more strategicapproach to manufacturing.9 The industry provides a good comparator for the defence industry employing135,000 people in 3,000 companies. An industry forum, the Automotive Council, provides an avenue for thetype of high-level conversation between industry and government needed to develop a strategy that includes aconsideration of supply chains, the skills needed and advises on assistance required from government.

28. A crucial factor in the industry’s recovery has been an encouragement of constructive industrial relations,which were vital in sustaining the industry throughout the recent recession.

29. There are elements of this design in the defence sector, such as the Defence Industries Council, whichreplicate some of the structures in the automotive industry. But it is striking that one of the key differencesbetween these two sectors is the existence of vibrant UK-based defence companies. Any government investmentin the defence sector will mean UK taxpayers investing directly in the UK economy. However, at present theabsence of an industrial policy limits the effectiveness of this forum to provide the strategic planning needed.Instead, the government is focussed on cost reduction creating an adversarial relationship between industryand government.

30. Active engagement with the workforce is rightly seen by the BIS Secretary of State as an importantfactor in sustaining the automotive industry through very difficult times. But in sharp contrast, labour relationsin the defence sector have become strained. In particular the decision of QinetiQ to de-recognise trade unionssets a bad precedent in a sector that will face further difficult challenges in the years ahead. The Committeeshould give consideration to this very serious and unwelcome development within the defence sector.8 Rt Hon Vince Cable, Secretary of State for BIS, launching the Manufacturing Summit at Bristol and Bath Science Park, 23

February 20129 Vince Cable speech at EEF National Manufacturing Conference—6 March 2012, London



31. “The new approach” to procurement, which underpins the principle of increasing the use of off-the-shelf,does not provide a strategic vision for industry. Instead procurement is subject to a series of abstract tests, thethreshold for which will change depending on the context within which decisions are made. There is noassurance that a procurement decision at an early stage will result in a contract at a later stage. Time will tell,but the new approach looks remarkably similar to the old approach, where procurement decisions are subjectto revision and refinement by Ministers depending on budgetary constraints.

32. There is no evidence that there has been an improvement in the Government’s approach to procurementsince the SDSR. One of the main decisions of the SDSR, to change the specification of the aircraft carrierdesign to allow catch and trap, is rumoured to be subject to further revision, which would be a costly andembarrassing u-turn. Delays in the publication of the Defence Materiel strategy and the PR12 have created anair of uncertainty across the whole defence sector. Businesses are already adjusting their work programmes toreduce exposure to equipment projects falling out of favour and target new business avenues which appear tobe more promising. A new approach would end this period of uncertainty by providing clear commitmentssupported by government funding.

33. There is a conflict between the government’s “new approach” and its objective of supporting the exportmarket. The defence industry is reliant on the “home market” to sustain product development that is attractiveto the export market. Redundancies following the publication of the SDSR have underlined how crucial MODcontracts are to the broader industrial base. Prime contractors have made many thousands of employeesredundant with many more jobs lost in the supply chain.

34. There is no guarantee that in the long-run an increase in the use of off-the-shelf will increase value formoney. The defence market is not a typical product market. Defence goods need to be adapted for the UK’sneeds, equipment has to anticipate threats from hostile enemies therefore there is a limited supply of potentialdefence products from a narrow group of companies based in NATO supporting countries. There can be noguarantee that the UK will be able to buy the products it needs at a price it can afford. Long-term serviceagreements may be subject to restrictions on access to intellectual property that may drive up costs. To maintaina UK-based defence sector industry requires a reliable stream of work. An increased use of off-the-shelf willresult in a smaller defence sector with less people employed in well-paid jobs.

35. The use of Urgent Operational Requirements (UORs) provides some limited lessons for a futureprocurement strategy. However UORs by their nature are reactive to a “real-time” situation. They demonstratethe ability of industry and civil service personnel to work together to solve a problem, which are valuablelessons that could be developed further, but UORs are not intended to replace platforms developed over manyyears; they are used to supplement capabilities already in use. Weapons and munitions need to be deployed intheatre at the right time, which requires strategic planning, an assessment of the risks and an identification ofthe capabilities which are required to anticipate these future threats.

36. Strategic planning also requires consideration of “through life capability” and future development.Because UORs are designed for immediate use, there is little need to consider long term use. Weapons used inthe theatre are unlikely to be retained after a conflict. The replacement of equipment procured in this way islikely to be costly and is unlikely to represent value for money.

37. UORs place great strain on the resources of the MOD. Teams focused on a rapid turnaround ofcapabilities required for immediate use can divert resources away from long-term program work. An endemicproblem with MOD’s approach to acquisitions has been an inability to see through a project from development,to procurement and construction, those responsible for initial planning have often moved on to new projects.An adoption of UORs working methods will not tackle this problem. Off-the-shelf projects will still requirelong-term planning and in-house experience to guide projects through all the stages of acquisition.

Threats to Jobs and Future Capabilities

38. The table below provides a summary of some of the job losses and future threats to capabilities sincethe publication of the SDSR. These are areas where Prospect members work, so it is not intended to representa comprehensive list of all sectors currently facing job losses. The Table highlights several areas of concern.

39. There is great uncertainty over the future of shipbuilding. Prospect is concerned that there is insufficientwork to sustain all UK naval yards when the carriers have been completed. Under the “Terms of BusinessAgreement” (TOBA) all the redundancy and closure costs will be met by the taxpayer, which may provideperverse incentives for industry to close naval shipyards and make skilled workers redundant rather than pressfor new shipbuilding work. Prospect has called for government and industry to be open and transparent on thefuture of shipbuilding.

40. The defence sector’s science and technology base has been eroded by successive budgets cuts, whichpre-date the SDSR. Defence research depends on a reliable source of public funding to thrive. A reduction incapacity inevitably limits the scope and coverage of future research work. Similarly funding in the broaderacademic community is subject to funding cuts and resource pressures. The 20% cut in the research budgethas led to 2,100 job losses at QinetiQ the leading private sector research organisation. There can be little doubtthat scientific expertise has been lost which cannot easily be replaced or regenerated at a future date. The



government cannot act as a disinterested party in the future evolution of QinetiQ. There is a need to identifythe science skills needed to sustain the UK’s sovereign capability in research development.

41. The loss of design capability in Land vehicles is a serious loss of sovereign capability. The decision ofBAE Systems Global Combat Systems to transfer their centre of excellence to Sweden shows that cost is notthe key driver of company decision-making in this sector.

42. Defence training has been harmed by the government’s failure to be clear about its future capabilityneeds. Training organisations need to know what capabilities are required to be able to plan ahead.

Jobs Lost or underCompany Name threat Capabilities under threat

BAE Systems Surface Ships 1,500 under threat Shipbuilding capability in Portsmouth under threat.Possibility of at least 1,500 job losses.

Babcock: Faslane, Rosyth, Unknown Babcock had committed to MoD savings in theDevonport region of £1BN through the Terms of Business

Agreement (ToBA), to build the aircraft carriers.How savings are to be achieved is unclear.

BAE Systems Global Combat 760 As a result of losing the FRES contract and delaysWeapons with the Warrior project, 760 jobs were lost and sites

closed at Leeds, Leicester and Wolverhampton.Sweden is to become the centre of excellence forfuture Land vehicles. Capabilities under threatinclude, vehicle manufacturing in Newcastle, andmunitions.

BAE Systems Military Air and 5,400 Jobs lost as part of cost savings. In December 2010,Information BAE announced 2,400 redundancies because of

government decisions to scrap the RAF Nimrod fleetand the early retirement of Harriers jets and vehicles.A further round of 3,000 cuts announced by BAESystems affect Typhoon and Hawk production atBrough, East Yorkshire, Samlesbury and Warton.

Cobham Defence 150 under threat Last 12 months of work, short time workingintroduced. Combat controls at Blackburn is underthreat.

Babcock REME Training 194 under threat The training contact had been outsourced from VTFlagship. One of the training sites could close withpossibility of redundancies, at least 194 jobs at risk.

Nord Anglia 50 Nord Anglia had now moved out of the UK with theHQ now in the Middle East. Closure of MATRIXProgramme South Wales and Farnborough.

QinetiQ 2,100 “Emerging Technologies” whole team disbanded in2010.

Vector Aerospace 77 under threat due Following the takeover of Vector Aerospace byto relocation Augusta Westland, helicopter maintenance is being

transferred from Almondbank in Perth Scotland toAugusta Westland’s base in Yeovil. Lynx and SeaKing maintenance is under threat because of thischange.

3 April 2012

Written evidence from Alenia Aermacchi

1. We welcome this opportunity to contribute to the inquiry in response to a question specifically to informthe Committee’s thinking about how modularization could play a most valuable role in Acquisition, and toprovide examples of modularization we have worked on.

Modularization—Overview

2. Alenia Aertnacchi has considered the current rate and pattern of technological change as it pertains toplatforms, weapons systems and electronic systems. As a general principle, during a period of rapidtechnological change it is more sensible to invest in weapons and systems technology rather than in highlyexpensive, specialized platforms. Modularization allows the development of weapons and platforms to bepursued at different rates as appropriate. Furthermore, we consider that, as a nation plans for a smaller FutureForce, qualities of adaptability, agility and affordability are likely to be of principal concern. It is often thecase that modularization can provide Defence with the right mix of these three qualities. Finally, becausemodularization builds a level of inherent flexibility, into the Acquisition process, it also acts as a way of



mitigating the likelihood of mistakes made in the acquisition process becoming ruinously expensive and hugelydamaging in the future. Many of the recent MoD acquisition failures bear out this assessment.

3. Modularization delivers adaptability and agility for three principal reasons, First, if based off a robust andrugged platform, modularization enables Defence to be able to turn the platform itself to a variety of tasks,enhancing its adaptability and agility. Second, as weapons and electronic systems themselves rapidly evolve, amodularized solution enables Defence to upgrade and develop the capability of each system discretely as thisbecomes necessary. Thirdly, modularized systems can be operated from a variety of appropriate ground, sea orair platforms.

4. Modularization delivers affordability in three principle ways. First, by being able to task a single platform(such as a plane) across a wide spectrum of activities (Air Transport, Intelligence Surveillance andReconnaissance, Command & Control, FIRES, Tactical Operations & Air Manoeuvre for example), it lessensthe need to have expensive dedicated platforms for each task and/or enables Defence to hold fewer dedicatedplatforms for each task. Second, by ensuring the systems themselves can be upgraded in a discrete, modularizedform, it removes the need for lengthy and expensive upgrades to dedicated platforms and/or the need forexpensive new platforms capable of hosting new systems. Thirdly, it enables a certain universality andcommonality of systems, thereby removing the cost and risk associated with re-designing the same systemseveral times over for different platforms.

5. In addition, Modulatisation can help prevent large acquisition mistakes accumulating to become disasters.This is because it builds into the acquisition process a high degree of inherent flexibility which allows forfuture adjustments to be made without incurring great expense. In this sense it can act as an insurance systemwithin the acquisition process. Very often, serious, cumulative mistakes in acquisition have become significantlydamaging precisely because they did not have this flexibility built in. An historic example would be theMaginot line. When constructed in the early 1930s, the forts were virtually impregnable and their guns coulddefeat all known armour. However, German tanks increased their armour rapidly during the following years.The natural and sufficient response for the French would have been to increase the power of the anti tank gunsbeing used in their gun turrets. However, this would have required longer barrels and, because the concretecasements had been built to house the short-barrelled guns of 1929, it was impossible to upgrade the artillery.The huge investment was wasted, and the French-national strategy undermined, because the platform was builtaround the weapon, rather than the weapon being modularized so as to be upgradable and usable from a varietyof platforms. There are arguably plenty of contemporary examples too. For example, industry sources havesuggested that the NIMROD upgrade would have survived if the essential equipment had been Modularizedwhen the platform proved inadequate. Concern has been raised about the lack of a modularized system whichwould allow the upgrading of the Aster missiles, around which the new Type 45 destroyers are designed, oncethe missiles become ineffective as the threat evolves.

6. Of course, there may be situations where a modularized approach is not appropriate in currentcircumstances. However, we consider that modularization is likely to become very much more, rather than less,significant as procurement seeks to dovetail the twin objectives of both delivering leading edge capability andprudent expenditure of financial resources, especially as technological development shifts the emphasis awayfrom a reliance on costly platforms (historic model) to less expensive systems with high frequency developmentcycles (future model). We therefore consider that modularization warrants rigorous consideration across thebroad spectrum of acquisition.

7. A further benefit of a well thought out approach to modularization is that it allows for a more sensitiveapproach to be taken to the utilization of a nation’s legacy equipment and to the stimulation of national research,development and production capability, particularly as relates to weapons and electronic systems. This shoulditself enable further “modularized” thinking, as legacy equipment and new technology can then be appliedacross a range of modularized solutions in combination with foreign platforms which are cheaper, or for whichthere is no satisfactory local source.

An Example of Modularization—The Multi Mission Variant of C-27J

8. Alenia Aemacchi have considerable experience of modularization within our existing portfolio. The C-27J Spartan tactical transport aircraft is itself an agile, adaptable and affordable air transport. solution. Theplatform is robust and, because of its size, ideal for the last “tactical mile”. It has a greater than 70%commonality with the C-130 (Hercules) and is currently deployed with the USAF in Afghanistan, where it isproviding availability rates in excess of 85%.

9. We are able to take this rugged Air Transport and add capability to the platform through a modularapproach—transforming it into a truly expeditionary and multi-mission platform. We have achieved this througha palletized roll-on/roll-off solution that allows customers to bolt on additional modularized capability. Suchcapability, because it is independent of the platform, can make maximum use of the customer’s own electronicand weapons systems.

10. While. we are not at liberty to disclose the specific capability in a public document, it is sufficient tonote that the Italian Air Force have taken advantage of this modular approach and have successfully deployeda roll-on/roll-off pallet for C-27J that provides significant communications and electronic warfare capabilitythat would previously have required the presence of a least one other expensive dedicated platform.



11. The palletized/modularized solutions for C-27J will give customers the ability to bolt on the followingadditional capabilities:

Command & Control Pallet

Capabilities:

Line of Sight & Beyond Line of Sight Communications Airborne Rebroadcast (Analyze andDisseminate)C2 Node (Multi-datalink)

Results:

True Force MultiplierNATO & US Network InteroperableUtilize UK Legacy Kit

Intelligence Surveillance and Reconnaissance Pallet

Capabilities:

EO/IR (find/track/collect)SIGINT (Find/track/collect)Video Downlink

Results:

Organic ISR capabilityPersistent ISR (6–9 hrs)Real-time connectivity

FIRES Pallet

Capabilities:

Indirect PGMs—Low Collateral Lethality Direct (Gun)—Suppress and Neutralize

Results:

Organic AIR FIRES capabilityLeverages C-27.J flexibility and deployability Low Collateral damage and accurateLong range (15km @ 18kft)Common with US Fleet

To give an indication of what we mean by roll-on/roll-off pallets, our aspiration is that in some instancesaircraft reconfiguration would be possible in as little as approx 4 hours.

12. The benefits of a multi mission modularized platform can be seen in the hypothetical case, say, of aSpecial Forces insertion into hostile territory. Three basically identical. C-27Js furnished with the relevantpallets could: 1) Insert and Extract the troops (Air Transport), 2) Provide Force Protection as and when required(FIRES), 3) Monitor activity in a wide arc around whatever operation was going on (Intelligence SurveillanceReconnaissance), 4) Co-ordinate (Command & Control). In this example, one platform takes on a role thatpreviously might have required four specialized, dedicated platforms. The same range of utility could be appliedin, for example, a counter piracy operation.

How a Modularized Approach might be Applied in the Case of Maritime Surveillance

13. There are certainly advantages to using a dedicated platform for Maritime Surveillance (such as ourATR72). Like C-27j, ATR72 is proven. The aircraft accounts for approx 80% of the civil market for twin turboprops and therefore it is tried and tested and enjoys a robust and reliable supply chain. Per flight hour it is lessexpensive to run than a militarized platform such as C-27J, although, equally, it is less rugged and does nothave the same built in redundancy etc.

14. However, if modularization were a principal consideration, in addressing either a dedicated platform suchas ATR72, or a Maritime Surveillance pallet for C-27J, significant thought could be given to the employment ofUK legacy equipment in order to maximize the conceptual benefits of a modularized approach.

15. If modularization were to be prioritized, it would be worth considering that, if the UK held C-27J inits inventory, supplemented by Maritime Surveillance, Command & Control, Intelligence Surveillance andReconnaissance and FIRES pallets, it would require far fewer dedicated platforms for each of these tasks andit would be able to augment its Air Transport capacity at the same time. In this sense, by way of example, thebenefits of adopting a modularized approach would be to deliver the only single platform within 2 Groupsinventory that was able to fulfill all of its tasks—a truly efficient modularized workhorse.



I hope the Committee will appreciate that the above conceptual thinking is intended in the spirit of theDefence Committee’s desire to stimulate debate. If requested, Alenia Aermacchi would of course be happy tofollow up any points mentioned above in a more detailed manner.

May 2012

Written evidence from Jag Patel

Issues for Consideration

Materiel Strategy and Acquisition Process

1. A lot of energy is being expended on the Materiel Strategy which is examining the future operating modelfor DE&S which is likely to include the involvement of the Private Sector in performing some of its equipmentacquisition functions.

2. Such is the diversion of attention away from other policy priorities that in its recent White Paper, theGovernment completely ignored the urgent need for the existing, flawed procurement process to be replacedby a new process which will deal with persistent delays and cost overruns.

3. The Chairman of the Defence Select Committee has stood alone in raising the issue of reform of theprocurement process in recent years and has impressed upon the Executive to devote more effort to sortingthis matter out.

4. In their rush to reduce the headcount at MoD, the Government even went as far as to make members ofthe Defence Acquisition Reform Programme team at Main Building redundant!

5. In your report, you might like to consider asking the Government why it does not attach the same levelof importance to reform of the procurement process as it has done to establishing a new business model forDE&S.

Identical bottom-line Selling Prices

6. In my written evidence paper for the Inquiry,10 I have discussed the disastrous consequences of disclosingthe budgeted expenditure figure emanating from the approvals process in the ITT—at paragraphs 6a and 77to 89.

7. Also see Figure 1.

8. This has come about because ministers and senior civil servants in the previous administration (and beforethat) allowed themselves to be persuaded by skilfully crafted arguments put forward by the Industry lobby inclosed forums like the NDIC.

9. The practice of disclosing the budgeted expenditure figure originating in the Forward Equipment Planshould be discontinued immediately.

10. In his “Balanced Budget” statement to the HoC on 14 May 2012, the SoS indicated that the ForwardEquipment Plan will be reviewed by the NAO to confirm its affordability and that he will “….. publish itsverdict on the plan together with a summary of the plan itself” for the benefit of industry.

11. It is not at all clear if the budgeted expenditure figure or associated year-on-year financial funding profilefor each acquisition programme is considered to be “security and commercial sensitive” and whether it willbe published or not.

12. The SoS continues to be under phenomenal pressure from Industry to publish this data which allowsthem to use failed practices of the past with impunity. This fact is confirmed by the fourth bullet point ofADS’s written submission to the Inquiry, on page 15, which calls on the Government to “…… identify futurepriorities and the future resource allocations to address them”. Also see Sir Brian Burridge’s answer to Q5from the Chairman during oral evidence taken from Industry on 10 May 2012 which makes the same point.10 Not printed



Figure 1

Indentical bottom-line Selling

Prices quoted by Biddrs

denying IPTL the opportunity

to choose the preferred

SI&WLS Contractor on the

basis of price

competitiveness

Irrespective of which Bidder

is chosen as the preferred

Contractor, he has no

incentive to perform the

moment all five Competitors

have disappeared suddenly.

13. In your report, you might like to consider asking the Government if it has decided to discontinue thispractice, and if it has, when.

Mandating First-tier Competitions in the Selection of Subcontractors

14. In my paper, I have suggested that competition is not being applied in the selection of first and lower-tier Contractors. Instead, they are chosen using the “old boy” network or during a gathering at the 19th Holelimited to the great-and-the-good from subsidiary companies wholly-owned by the Bidder or other favouredschool-tie chums—at paragraphs 6e, 99 to 102 and 124d.

15. Whereas it has been a core policy objective of this Government (first mentioned in the CoalitionAgreement) to ensure that small and medium sized enterprises are allowed a greater share of public sectorspending, it is not at all clear how the Government intends to go about achieving this objective, as it relates tothe defence budget.

16. It has long been established that Government are very good at making high-level ministerialannouncements without filling-in lower-level policy detail which is essential for the successful implementationof reforms to public policy.

17. In my paper, I have done exactly that—fill-in lower-level policy detail underneath high-level ministerialstatements made in White Papers in such a way that acquisition officials at DE&S working on the front lineare able to understand the link between the two and act in a way that delivers results against the high-levelpolicy objective.

18. At paragraphs 102 to 114, I have explained how to increase the participation of highly innovative SME’s,including COTS and MOTS equipment manufacturers in the equipment supply business.

19. In your report, you might like to consider pointing the Government in this direction.

Widening the Field of Suppliers Beyond the Select Few

20. At paragraphs 6d and 55, I have accused the Select Few of engaging in anti-competitive practices suchas predatory pricing for the purpose of shutting-out lower level Contractors from entering the defenceequipment business and also trying to snuff them out.

21. My proposals on how to widen the field of suppliers at Prime Contractor level is set out at paragraphs56 to 58.

22. In your report you might like to ask the Government on how it intends to provide for the widest possibleparticipation of the UK’s defence industrial base in each equipment acquisition programme by potential newentrants to the defence market.

23. My view of who the Select Few are is contained in this article from the Guardian newspaper:

24. http://www.guardian.co.uk/news/datablog/2010/dec/01/mod-top-suppliers-bae



Making False Claims in Management Plans

25. Currently, there is absolutely nothing to stop Bidders from making false claims about the maturity oftheir starting points for the Technical Solution in Management Plans submitted as a response to the ITT—apractice which has led directly to initial programme costs being grossly underestimated by the CAAS team atDE&S.

26. Please see figure below.

The risk that false claimswill be made about thematurity of starting-pointTechnical Solutions isextremely high.

But because theassociated cost of theProgramme of Work tobridge the shortfall cannot

be manipulated, Bidderswill themselves have toface the consequences ofmaking false claims - notDE&S.

Full technical specificationto be acheived for the endof the second Contractperformance phase.

27. And yet it is the policy of this Government to, not only substantially increase the number of people withinthe CAAS team, but also inject some professionalism into their performance—at considerable further cost.

28. At paragraphs 38 and 39 in my paper, I have explained why it is no longer necessary for people in thepay of the State to be engaged in estimating the cost of equipment programmes—because it will now beprovided by competing Bidders based upon the cost of executing the Programme of Work during the follow-on Contract performance phase.

29. In your report, you might like to draw the attention of the Government to this vital point.

Discontinue the Practice of asking for Management Plans

30. At paragraphs 6c, 12a and 49 in the paper, I have discussed the pitfalls of asking for a plethora ofManagement Plans as a response to the ITT.

31. The alternative is to require Bidders to submit a comprehensive, fully costed and priced Programme ofWork in Microsoft Project, as discussed at paragraph 43.

32. In your report, you might want to consider asking the SoS to discontinue the practice of asking forManagement Plans.

Stop the Practice of simply “Searching and Replacing” the Project Name

33. At paragraph 6f, I have discussed the consequences of digging out old ITTs from the archives, dustingthem off, searching & replacing the project name and despatching them off to Industry.

34. The risk of using this quick and easy approach is that tried-and-failed techniques from the past will belocked-in at the expense of the latest acquisition methods and Best Practice developed most recently.

35. In your report, you might want to consider asking the Government to direct acquisition officials at DE&S to stop this practice immediately.

Enticed into Partaking in Detailed Design Decisions

36. At paragraph 6m, I have revealed the clandestine practice of Bidders trying to contrive situations whichwill entice acquisition officials into partaking in detailed design decisions relating to the evolving Technical



Solution with the objective of using this involvement to coerce acquisition officials into raising ContractAmendments much later on—with a consequential increase in costs.

37. Acquisition officials should limit their involvement to the elements that I have outlined at paragraph 169and 170 to avoid this pitfall.

38. In your report, you might want to consider drawing the attention of the Government to this matter.

Allowing Technical Risks to Accumulate

39. The Gray Report was clear on the contribution made by technical risks to the incidence of delays andcost overruns on equipment acquisition programmes.

40. At paragraph 6q, I have highlighted the dangers of allowing technical risks to accumulate towards theend of acquisition cycle.

41. DE&S’s publicly declared approach to dealing with technical risks is to identify, reduce and (desirably)eliminate risk progressively to a level where they are considered to be manageable, and therefore, acceptableat the time of committing substantive funding at Main Gate.

42. This is to be achieved by taking Bidders from one competitive phase to another specifically to compelthem to progressively undertake and conclude work with attendant higher risks as early in the acquisitionprogramme as is practicable—leaving only unfinished, low risk work for completion by the single SI&WLSContractor until after Main Gate to increase the likelihood of the project being brought-in within strictperformance, schedule and Through Life Budget boundaries set at Main Gate.

43. If for any reason, scheduled work for previous phases is not completed by the Contractor (or he isallowed to rescind on work commitments), then risks accumulate dramatically and have an unerring habit ofcoming to the fore immediately after down-selection to the single SI&WLS Contractor has been made.

44. A key behavioural characteristic of Contractors is that that they will always choose to reveal “showstopping” risks after (never before) down-selection to the single SI&WLS Contractor has been made to fulfiltheir business objective of “growing” the Contract through Contract Amendments—which has been a significantcontributory factor in the incidence of cost over-runs reported by NAO during the past four decades. Indeed,it is the very existence of Contract Amendments and PDS Contracts that causes Contractors to conceal “showstopping” risks in the first place!

45. In your report, you might want to draw Government’s attention on how to go about dealing with technicalrisks correctly.

Applying the Principles of Natural Justice

46. A side-effect of the practice of digging out old ITTs from the archives, dusting them off, searching &replacing the project name and despatching them off to Industry is that the Principles of Natural Justice arebeing routinely violated because selection criteria essential to inform the decision on down-selection phase-by-phase is omitted—leaving Bidders in the dark as to what evaluation criteria they will be measured against.

47. I have discussed this issue at paragraphs 13 to 15.

48. Equally important is that the Marking Scheme which, I have designed and described at paragraphs 139to 141, should be revealed to Bidders in the ITT—not concealed, as it currently the case.

49. In your report, you might like to consider highlighting the importance of this issue to the Government.

Urgent Operational Requirements

50. I have discussed the downside of acquisition of equipment through the UOR process at paragraphs 172to 177.

51. Today the Government is left in the embarrassing position of having to gift-aid equipment procuredunder UOR procedures to indigenous security forces upon conclusion of expeditionary operations to avoid itimposing an unaffordable maintenance and support cost burden on MoD’s core budget if repatriated to the UK.

52. This is because in their haste to deliver equipment to the front line rapidly, acquisition officials (aidedand abated by Industry) have chosen not to procure Support Assets together with the prime equipment—onlyto discover that they have had to pay “through the nose” much later on for procuring the same.

53. In your report, you might want to consider reminding the Government of this disaster and putting inplace a methodology, as outlined in my paper, which will get it right next time.

54. It is not clear if the “Balanced Budget” speech in the HoC will correct this failure in the applicationof policy.

June 2012



Written evidence from Christopher Donnelly

Acquisition—Fundamental Principles

A. Introduction

1. Acquisition is fundamental to our national security. It contributes to advancing UK Interests as animportant means of both deterring and countering threats and creating or exploiting opportunities. It underpinsour defence and deterrence postures and, through this, much of our leading-edge industrial and commercialcompetitiveness.

2. Acquisition is not just about the process of buying military hardware. Acquiring capabilities and capacitiesinvolves all aspects of our national political economic and social systems. Acquisition is one of the principalcompetencies of government, experienced by the public in the delivery of the products and services they expectfrom their MPs.

3. Confusion often arises between the terms procurement and acquisition.

Procurement is simply buying a service or a piece of equipment.

Acquisition involves knowing the whole life-cycle (see endnote 1) of the set of capabilities andcapacity needed and the best means of delivery, employment, support and disposal.

Procurement is measured in cost, acquisition is measured in value.

4. Acquisition is a large and truly complex problem. It cannot be reduced to a simple, short brief. This paperis an attempt to draw out some of the basic principles so that an Inquiry, which may perforce have to be limitedin scope, can avoid the pitfalls of oversimplification or tunnel vision. Further papers will expand on theissues raised.

B. Acquisition is an important element of the Strategic Deterrent

5. The ability of a state to demonstrate its capacity to produce relevant equipment and effect when requiredis in itself a very important element of deterrence and influence. Today, our ability to deter strategic threatsdoes not just reside in our nuclear weapons. They will not deter Al Qaeda. On their own nuclear weapons forma brittle countermeasure. In managing an existential crisis it is essential to have a conventional “escalatoryladder” that permits resolution of the problem before nuclear weapons are resorted to. Unfortunately, recentwars we have consumed the conventional component of our deterrent so that we no longer have this escalatoryladder. Attempts to sustain a replacement programme have generated the cost overrun that MOD is strugglingto address.

6. When the 16th Century Venetian Republic was threatened by France, the Doge staged a convincingdemonstration of his Arsenale’s capacity to build a new war galley from scratch during the few hours it tookto hold a state banquet for the French king. The French were duly deterred without the Venetians having tobear the cost of maintaining a larger fleet in being. Acquisition was recognized as a fundamental strategic assetsimilar in importance to the fleet itself.

7. The Doge had also demonstrated that he understood the crucial difference between capability and capacity.The French had always known that the Venetians had the capability to build galleys. That did not deter them.It was the demonstration of capacity which did the trick.

8. The distinction between capability and capacity often seems to be lost in today’s defence debate. It is notenough to be able to say: “We have preserved a capability”. This is only an unrealised, and perhaps even anunrealisable, potential. The UK today is not as fortunate as the Venetian Republic. The industrial part of ournational infrastructure is only a shadow of its former self. Over the past 15 years we have subjected our nationalacquisition capacity to a sequence of disastrous top-down reforms, which have done nothing to improve ourstrategic situation but have generated huge transformation costs and demoralized the professionals involved. Itis now evident that this is a strategic failure which is having a serious impact on the UK’s national security.

9. Today, our conventional forces (supplemented perhaps by our unconventional abilities, such as the abilityto track down and seize financial assets) are arguably a more important deterrent against most threats than ournuclear weapons. If we assess that the capacity to make equipment is very important, then restoring thiscapacity (or creating it in the case of new types of equipment needed to counter new threats) must not onlybecome a priority for the Defence & National Security budget. It should be reflected in the Education budget,the business and innovation budget, indeed in the economy generally.

Security cannot be generated unless there is an adequate and appropriate source of supply.

C. Acquisition and our Competitive Stance

10. In recent years Whitehall has lost all understanding of the concept of “Competitive Stance” and theextreme importance of this for establishing our place in the world. In today’s world there is no country withwhich we are not competing.



11. The UK used to have a clear understanding of the importance of our Competitive Stance. In the 19th

Century the key role in maintaining this was played by the Royal Navy. The RN had to be bigger than theworld’s next two largest navies combined, irrespective of whether these were allies or not. Our shipbuildingcapacity was seen as a crucial strategic asset, and when, for example, Vickers built warships for others, suchas the Japanese, it was ensured that these ships were not as capable as those built for our navy. More recently,the Soviets could be seen to supply their allies only with equipment inferior to their own.

12. The US Government has not lost this understanding. The USA regards its pre-eminent position in themanufacture of military equipment as its principal security asset. Their strategy is to maintain a generationaladvantage over everyone else. No country is to be allowed to get near the performance of the US’ militaryequipment. The US will therefore do its utmost to destroy any competitor, whether ally or opponent. Thestrategy is guarded by Congress and enforced through the Defense Technology Security Administration and itsMilitary Critical Technologies List (MCTL). This controls all US citizens’ access to discussions with any othernationality about anything technical.

13. France established an Economic Warfare Department some 30 years ago, and the German EconomicsMinistry discharges a similar function. These appear to make full use of opportunities accorded by the EC.Japan, S Korea, Russia and China all employ economic warfare. The UK felt it important to have an EconomicWarfare unit in WWII, but no longer.

14. A review of our current national defence industry from the point of view of re-establishing ourCompetitive Stance gives cause for concern. Much of UK defence industry is no longer UK owned. Industrythat is U.S. or French owned is unlikely to be doing its best for UK PLC. For example, the last 20 or so jointprocurement projects with the US have produced nothing of substantial value to the UK. JSF is the latestexample. Congress has refused to authorise the release of the key software codes which would allow the UKto take control of the development of the aircraft we are buying. The version the UK needed has beenabandoned. The more than £3 billion spent supporting the US R&D has been poured down the US drain. Whathas the UK got in return for this investment? Understanding “Competitive Stance”, and having a clear idea ofour own Competitive Stance, could have stopped this.

15. Simultaneously, the enforcement of EU regulations further damaged our Competitive Stance. The EUwas committed to creating a United States of Europe with homogeneity across all markets, so the UK couldnot be allowed to dominate French or German defence industries and had to be restrained. Unlike the USCongress, Parliament failed to understand this, and failed to consider legislation to protect UK interests.Interestingly, France and the Netherlands both exempted themselves from the EU defence regulations.

16. Our whole national policy and strategy need to be re-developed on the basis of our Competitive Stance.This is the fundamental thing we have lost from our political culture, and it is absolutely fundamental to anyreview of our defence acquisition policy. Parliament can play a significant role in re-establishing our newcompetitive stance as Congress does in the USA. Understanding our Competitive Stance will enable us tomake judgements as to what is or is not in our national interest. This will produce in turn an industrial policysuited to the post-industrial state we now are. For example, we need a new MCTL like the US’ (we abandonedours in 1995).

D. Defence Economics—the awkward facts

17. In a world where we measure progress primarily in terms of steadily increasing wealth and technologicaladvances, defence has a particular problem. Firstly, increasing wealth means higher and higher labour costs. Inthis environment, organisations that can reduce labour costs (eg by using computers and robots, or byoutsourcing production to China etc) do well. But if an organisation must have people, then to cope with therising cost of qualified people it must either have an increase in its budget or it will inevitably have to shrinkor lose quality.

18. Secondly, technological advances tend to reduce the cost of equipment if that equipment can have amore or less stable level of performance. In real terms, TVs and washing machines get cheaper every year.But if that equipment needs to improve its performance significantly year on year because it is in lethalcompetition with an opponent, the cost of the equipment will increase by about 8% per annum above the costof average inflation. This reflects the higher cost base of the “high-technology” component in the economy.Much military equipment falls into this category. When the ever more costly equipment is not just used butconsumed, and in quantity, as is the case with military equipment, the problem is exacerbated.

19. These factors hit Defence hard. But, they also affect the Health service, for reasons remarkably similarto Defence’s (their evolving lethal competitor is new strains of infection, coupled with an ever bigger and morevulnerable, ageing population which consumes drugs and services). But the Government has made thecommitment to meet the costs of Health inflation. It has not done so for Defence inflation.

20. Over the last 20 years we have reduced our defence expenditure and the size of our Armed Forcesconsiderably, but we have maintained the same organisational, manning and equipment model—a model whichwas designed for an armed forces of half a million and a budget of 5% of GDP.

21. But, as we move to a defence budget of under 2% of GDP, the very model of our defence breaks downcompletely. A process of reducing forces to support ever-smaller numbers of ever higher-performance



equipment, plus the ever-increasing “labour cost” of the soldiers, sailors and airmen trained to man thisequipment, brought us over the last 20 years to a crunch point. The SDSR took us beyond that point. We havecome to the end of the line. We cannot meet today’s challenges by another round of balanced reductions andincremental change. This latest budget cut forces us to change our fundamental organisational paradigm fordefence, and therefore also for defence acquisition.

22. We are not the first country to face this problem. Most of our European allies reached this crunch pointa decade ago, did not recognise that they had to change radically, and now maintain forces that still cost a lotof bucks, but produce very little bang. By contrast, in other parts of the world, faced with the same calculation,many of our rivals and opponents have chosen to refocus their rivalry and competition from classic militarypower to other “weapons”—economic, political, cyber, bribery, corruption and information warfare. They haveworked out where their interests lie; they have a coherent strategy and can think and act strategically. Weneed to be aware of this, aware that future conflict will not only be a matter of “kinetics”, and adjust ouracquisition accordingly.

23. When it comes to contemplating radical change, we must recognise that we are all shaped by our personaland institutional experience, long-standing and cherished traditions, vested interests—and all the emotionswhich accompany these things. It is vital that we realise how, as a result, most of our current model oforganisation and acquisition reflects the industrial society and mass industrialised wars of the 20th Century.We knew who the enemy would be and how the conflict would be fought, and we organised ourselves to matchthat enemy, based on our industrial capacity. Because of this experience, most people accept our current militarysystem as “normal”. They are just not aware of the extent to which our recent past has shaped our presentmilitary system and our perceptions of future conflict. It has become clear to us all that future war cannot bepredicted, but that it is not likely to be a re-run of WWII, nor the WWIII we expected. But our defenceinstitutions, procedures and habits of mind do not yet reflect this reality. Our current acquisition system isgeared to an industry we have lost. We can no longer replace by ourselves even the equipment we are currentlyusing up on operations.

24. The painful truth is that, on 2% of GDP we can no longer maintain a “robust” defence structure, ieorganise and equip our Forces to match all the potential opponents and cope with all the non-combat tasksthey might face in the future. We must not fool ourselves that we can ignore this reality by relying on atechnological advantage over a future enemy. Pretending that we had a meaningful technological advantagewas often used to justify reducing forces in the past. There might have been a grain of truth in this when wehad a highly-developed and effective R&D and corresponding industrial capability, when we could expect awar where platform matched platform and weapons matched weapons and the contest would be decided onthat basis. But the conflicts of today and tomorrow are a clash of intellects and of systems, and an asymmetricclash at that. We have been drawn in recent conflicts into using our weapons (and especially our platforms) intasks for which they were never designed. It is an expensive waste—of equipment and manpower—which wecannot afford, and it does not confer the advantage we need. In Afghanistan, it has been estimated that it hascost $100 million to kill each “Taliban”, and we contribute to this ridiculous cost-per-kill figure, howeverquestionable a metric it may be.

25. But it is hard to face up to the implications of the UK’s fundamental loss of capability and capacity. Ifa post-industrial state spending only 2% of its GDP on defence cannot have a “robust” defence structure itmust build a force for every campaign, and not get into campaigns it cannot build for. This is what is meantby moving to an “adaptable force”—ie maintaining a military core on the basis of which forces appropriate tothe (unforeseen) need can be generated quickly and effectively (and reduced when the issue has been dealtwith). This means we need an alternative to the system of committing money one year at a time and anunderstanding by the Treasury that they must invent a new, dynamic means of investing in security, recognisingthat it is not simply an insurance premium overhead or drain on the economy. As we move to an adaptableforce structure in the coming months and years it will have a revolutionary effect on our acquisition.Unfortunately, this reality has not yet been fully understood or acted upon in Parliament, Government, ourdefence establishment and industry.

E. Campaigns, rather than Operations, as the best way to approach deployments and tackle problems.

26. There are different understandings of the term Campaign. Ours is best expressed by the considerationthat a military operation stops when the last bomb is dropped, as recently in Libya. But a campaign wouldcontinue until the strategic objective is reached- in this case a healthy, prosperous, stable Libya.

27. If “Campaigning” is going to be the basis of our interventions, we will need to create a “strategiccampaign plan” to direct the campaign. This is a mix of different forms of power that we can generate (acquire)in time, at a cost we can afford, in a system we can manage, and sustain and replace it all. This is applicablefor activities to “prevent” problems as well as for those in which an enemy is engaged. A campaign also needsa “campaign infrastructure plan”, including the acquisition of equipment, products and services, determiningwho is to provide what, and including intellectual services (eg information warfare). This also raises the issueof Capability vs Capacity: How many campaigns can we support concurrently?



F. Acquisition Strategy for a Campaign Equipment Plan: Cold War v Op Banner

28. MoD has lost the knowledge of how we maintained two parallel and very different acquisition systemsfor waging the Northern Ireland Campaign and for deterring the USSR. Our Cold War acquisition model wasbased on maintaining deterrence through a conventional military force, constantly renewed on a 25-year cycle,and a nuclear delivery system protected by dedicated conventional assets, on land, at sea and in the air. Fordeterring this permanent, patent threat to our national existence, it made great sense to spread out productionruns over decades, reducing the burden of defence to an acceptable “peace-time” level. By contrast, the Sovietover-investment in the military instrument produced impressive armies, granted, but resulted in the downfallof the state itself.

29. Simultaneously, the UK set up and ran for 38 years a highly responsive acquisition system which wasable to provide equipment to the troops in Northern Ireland in a matter of days. The “Wheelbarrow” robot forIED destruction took only 5 days from the first requirement being established to a functioning prototype beingdeployed to theatre. A similarly responsive system was set up to support the 1982 Falklands War deployment.This acquisition process was grounded in “war-time” attitudes and procedures. Better was seen as the enemyof “good enough”. Prototypes and lash-ups were provided at very short notice to the troops, enabling them toexperiment and identify the modifications they needed, which were made quickly and easily.

30. Unfortunately, the OP BANNER acquisition model has been abandoned, leaving MOD to pursue a“Grand Acquisition Strategy” based on countering the old existential and peer-level threats, rather than thebroader range of real threats and challenges which currently affect UK Interests. MOD had sustained twostrategies, processes and budgets throughout OP BANNER in order to acquire the different forms of powerneeded to address simultaneously the existential Soviet threat and the N. Ireland troubles caused by failures ofgovernance. Failure to continue this two-track strategy has led us to consume our very expensive peer-threatequipment in failures-of-governance conflicts in Iraq, Afghanistan and Libya. Efforts made to introduce asimpler, responsive ad hoc UOR process, rather than generate a coherent and cost-effective campaign equipmentplan as part of an overall campaign plan, demonstrate the failure to understand the acquisition lessons of theNorthern Ireland experience. Several thousand costly UORs have now been processed by MOD in supportof Afghanistan.

G. Acquisition Methods and Processes

(a) The Governance of Acquisition

31. The UK Grand Strategic process has failed, as was confirmed by the previous CDS and by the recentPASC reports. MOD is not excluded, since it actively destroyed its Strategic Planning system, rendered theDefence Engineering & Science Group non-viable, destroyed UK Defence research capacity and abolished thecritical military post of DCDS(Commitments). Governments must accept responsibility for this, but Parliamenthas failed to address the matter and help Government to remedy the situation. The Civil Service has also failedto advise Government and Parliament on the matter. There has been no effort to sustain the industrial,commercial and Academic contributions to the enterprise. The de-industrialization of the UK, with the resultantcollapse of the Defence industrial base, makes the current MOD acquisition programme irrelevant.

For details of the formal acquisition process, see Endnote 2.

(b) Acquisition turbulence.

32. MOD has persistently changed its provisioning organization and processes in response to evident failures,frequently identified both by NAO and by Parliamentary Committees. Few, if any, of these attempts haveimproved the situation and some have exacerbated the problems. With another attempt now underway, reachingin desperation for the management consultants will not solve the problems. They usually bring in more“management”, less technical capacity, no technical improvement, and increased costs to insure against the riskof criticism.

(c) Requisite Variety.

33. MOD requires a range of acquisition processes appropriate to the systems to be acquired. “One size fitsall” has NOT worked, and WILL NOT work. The failure of our >£100 million investment in managementconsultants in an attempt to solve MOD’s acquisition disasters demonstrates the need for a range of processesspecifically tailored to the needs of MOD.

34. One of the factors which contribute to the selection of an appropriate acquisition process is the customerstance. There are (at least) three types of customer: an ordinary customer, an intelligent customer, and anexpert customer.

(i) An ordinary customer sees the kit, likes it, buys 20 or 200 without modification. This is easyas long as the necessary quantities are available when needed.

(ii) An expert customer wants unique kit which confers a special advantage of some sort. This isalso relatively easy, albeit expensive. But it is justifiable for small quantities if the requirementis specified wisely.



(iii) An intelligent customer is one who wants to modify kit (or build it from scratch when it is notunique, just because it suits him to do it). This is the area where most of the difficulty lies andmost of the really expensive mistakes are made (think aircraft carriers, Nimrod, FRES).

(d) Management methods

35. MOD’s acquisition management methods must similarly reflect the needs of acquisition, not the desireof the senior civil service for conformity with performance management. Acquisition requires strategicmanagement across the whole security community, management which involves the community, motivatesthem through their participation and welcomes their creativity. Lives depend on it.

36. The reduction in our acquisition budget will require new forms of partnership involving Government,Industry/Commerce and Academe to generate the systems needed. The acquisition budget will need to changeto multi-year, dynamic financing to reflect the uncertainty in the campaigns that must be undertaken.

37. Acquisition is a socio-technical, not simply a technical, process. Because it involves the complexinteraction of people and equipment it requires a good knowledge of systems engineering by all involved.Project management is but a small part of acquisition, rather than the dominant role that is now allotted to itin MoD. This is challenging, for the majority of acquisition projects are now controlled by technically ignorantmanagers. They believe that it is unnecessary to have technical knowledge of the equipment or experience ofthe markets which it services. They assert that they only require a “business knowledge” to enable them tomanage any business or government enterprise. They have flourished by marginalizing the technicallycompetent and by suppressing the sources of innovation, ie researchers and users

(e) Systems Identification

38. Acquisition processes are necessarily creative, rather than procedural. Through “systems identification”the acquisition community must first decide what is the nature of the systems to be acquired for a campaign,identifying the attributes of each system and its interaction with other systems in service or likely to beacquired, in order to determine the campaign acquisition strategy

39. Systems Classes. There are two classes of systems, each requiring a very different acquisition strategy:

(a) Engineering systems; these have a limited use for a given purpose, eg a rifle, boots. Theyconstitute a “static requirement”, ie their use is unlikely to change over the life-cycle of theequipment. They can be complicated or simple in design.

With “static requirements” it is essential to avoid “requirement creep” if costs are to becontained. Changing the requirement or increasing the specification half way through theacquisition process can be very costly. So is artificially extending the time frame of the designand production process. There is normally a (frequently unspoken) requirement to minimisesupport costs so as to increase the effectiveness of the force.

(b) Natural systems; these describe equipment which will come to be used for purposes other thanoriginally foreseen. People will learn by using them, so the system needs the capacity to evolve.Acquisition of such “dynamic” systems is complex rather than complicated, ie it is impossibleto predict or describe how their use will change over their life-cycle, only to foresee that it islikely to do so. Software is an obvious candidate for approaching as a natural system requiringan evolutionary approach.

(f) Evolutionary Acquisition

40. The key to initiating a successful acquisition process is to make the correct systems identification fromthe outset, as the two systems require a fundamentally different acquisition strategy that incurs differenttimescales, cost profiles, and possibly total costs, over the life cycle. An evolutionary approach can be used onengineering systems. But an engineering approach cannot be used on natural systems. To do so, to break themdown into small simple components with set specifications (“reductionism”) is to guarantee failure. The NHSIT project is a good recent example of such a failure. The Nimrod MPA project would have benefitted froman evolutionary acquisition strategy.

41. The US DOD insist on an “evolutionary acquisition” approach for all identified natural systems, ie theybuy a few items or the initial elements of the product, use it, learn from its features or performance, thendevelop it further, rather than trying (and failing) to specify all details from the outset. The US DefenceAcquisition University insists on “evolutionary acquisition” for all software. As real evolution is not linear, butit jumps and has extinctions, this approach allows failure to have only a limited effect. Projects that show nopromise can be killed off before they become a ruinous waste of money.

42. MOD had great success with evolutionary acquisition in the torpedo programmes of the 1980s. Theydemonstrated that they could reduce the life-cycle cost and delivery time of the complex software embeddedin the torpedoes by about 50%, and enable it to evolve as measure-countermeasure competition developed.



(g) Agile Funding

43. Funding National Security needs to be dynamic because we can no longer plan for a known threat aswe did in the Cold War. As we have chosen not to have robustness as a strategy, because this is impossible toachieve at 2% of GDP, we have to build for each campaign, so we need new forms of financing for the securityinfrastructure. Private finance is more expensive than government finance, so efforts need to concentrate onengaging the Treasury to develop new ways of financing defence and security. Private City expertise could bevery useful here in helping to encourage flexibility, imagination and innovation in HMT. This underlines thefact that the intellectual capacity/capability to address any security or defence acquisition issue is just asimportant as the industrial, banking or diplomatic capability. This needs Government, Academia, the City,Think Tanks, all to collaborate

(h) COTS, MOTS, GOTS & Bespoke

44. The OECD “Frascati” manual defines everything in the acquisition cycle to enable countries tostandardise their statistics. UK MoD converted to these definitions in 1990. COTS= Commercial off the shelf,MOTS= Modified off the shelf, GOTS=Government off the shelf.

45. Competition in defence acquisition is mad when we are looking for something to give us a comparativeadvantage. A comparative advantage can be achieved by both modification and ab initio design. A reducedbudget means that we need to choose more carefully what equipment we try to adapt or invent. We will needto be able to reduce the proportion of our equipment which is specially made and concentrate more on whatwe can buy when we need it, adapting this for the required purpose. This is actually what we have alwaysdone in major war when we adapt civilian equipment to the current military requirements. The application ofthis principle is most obvious in the Navy, which can benefit most dramatically from this cost-effective wartimeprocedure in today’s time of rapid change.

46. In addition, it is important to invest more in weapons rather than in platforms. Modularised weapons canbe retro-fitted cheaply to a variety of platforms. There are a few notable exceptions to this rule and, in thecurrent situation, there are some weapons systems for which it still makes sense to organise their acquisitionand replacement over long periods—the nuclear deterrent would be one. But for the rest, maintaining anirreducible minimum core of weapons and equipment and designing a fast, efficient system to acquire whatelse we need when we need it (and to dispose of it profitably as soon as its utility is past) would appear to bea sensible option. An ideal ratio of 90% COTS, 9% MOTS, 1% totally new might be a target to aim at.

47. Along with systems identification, Customer Status is the most sensitive issue in the acquisition saga.This is where we need very good people to make the decisions, technically competent. It cannot be done bybureaucrats or non-specialist managers. The system also needs discipline to avoid its being corrupted.

(i) Suppliers (International Corporations vs National networks)

48. Previous MOD improvements have sought to achieve the impossible, by removing risk from the “Owner”or “Customer” and passing it to the Supplier at no penalty in cost, performance, responsiveness, inventivenessor quality. This encouraged the supply industry to pursue the route to monopoly and to forming very largeinternational Corporations of unknown allegiance.

49. Primes were originally important because of their ability to integrate the many components needed forcomplicated weapons and platforms, and to bring these into mass production on a scale appropriate to massindustrial warfare. As the fall in demand for weapons and equipment began to bite after the end of the ColdWar, the UK attempted to create large defence entities to compete with US counterparts, seeing size as the keycompetitive advantage. This strategy failed.

50. The current problem with Primes accelerated in the mid 1990s, when the MoD offloaded onto the privatesector its responsibility, as “owner”, to bear the risk of equipment development. This was at a time whendefence companies were already under great stress from rapid political and technological change. Offloadingproduction could be justified. Offloading risk could not. Whitehall was beguiled into believing that defencemarkets were like civilian markets. They are not. They are always closed, run by political considerations ratherthan purely commercial ones, and canny nations never sell their best kit. As a result of MoD’s policy, manysmaller companies went out of business, often beaten in competition with foreign companies that weresubsidised by their governments in contravention of the EU regulations with which the UK complied.

51. The problem was compounded by organisational reforms which led to the technical deskilling of theCivil Service in this crucial area. The move of the Procurement Executive from London to Bath resulted in itslosing 40% of its technically literate staff. A further reform, as currently proposed, will remove the rest. It isrumoured that, in response to its call for 750 redundancies in Bath last July, MoD received many thousands ofapplications. If MoD cannot recover its position as a technically literate intelligent (and expert) customer itwill continue to be ripped off. MoD procurement will remain dysfunctional until MoD restores its own technicalcompetence. Furthermore, in time such a customer also destroys the supplier’s competitiveness. We cannotsustain a viable Security Industry/Commercial base without a technically literate customer/owner.

52. Big corporations have no incentive to change the current system. They like the bureaucratic model. Itsaves them management effort. They can use their low quality people and retired military to manage the



relations with MoD and keep their best people to handle rich foreign customers who are unhampered by aparasitic managerialism.

53. Today, the concept of relying solely on Prime Contractors is obsolete considering the volume ofequipment we are now acquiring. Primes are needed for only a few complicated systems. For the rest they area massive unnecessary cost. Similarly, large framework contractors and lucrative PFI contracts have done muchto waste money and destroy flexibility and innovation. All tend to destroy true competition. Making Primesand Framework contractors into large, virtual monopolies so as to be more internationally competitive has hadthe unintended consequence of supressing innovation in UK industry. Reducing competition and innovationfurther increases the cost of acquisition. The Primes’ supply chain is just as problematic as MoD’s. It takestwo years for a SME supplier to get accredited to BAE. Primes, even in the USA, are now facing problems inthat they are not getting the diversity of ideas they need to cope with the speed of change in the internationalsecurity sphere.

54. As an alternative, the UK has a lot of small companies who can do a great deal—they are innovative,low cost, effective. They do not like working with large companies. But Government/SCS does not like workingwith small companies and continues to make it increasingly difficult for them. MoD and DfID are alike in this.

55. Since we must move towards an adaptive military model, we need networks of companies that canproduce quickly and in relatively small quantities what is needed for a campaign. Should we not be developingsmall companies’ networks, exploiting a national trait as our competitive advantage? Using this network ofsmall companies will stimulate our intellectual capability and grow the economy in a way that subsidising thePrimes’ monopoly will never do. Monopolies only work when nationalised. Using small companies will needMoD to make a lot of adjustments to its working practices. For example, although small companies can overallbe a lot cheaper, profit margins need to reflect volume. Big companies with huge, long-term orders can manageon 7%. Small companies with small contracts need at least 20%. A reformed DESO would be part of suchnetworks to restore our competitive stance.

H. Regenerating lost Acquisition Capability and Capacity

56. In the last two decades we have reduced our national R&D capacity to such an extent, and we allocateso little investment to R&D in our current acquisition programmes, that we are injecting massive cost, timeand technical risk into those programmes. This has been reflected recently in so many very costly andembarrassing failures that I need hardly labour the point.

57. The national R&D resource was vested in DERA. The privatization which split DERA into DSTL andQinetiq effectively destroyed this resource. DSTL now operates as an internal technical consultancy. If anational capability or capacity is privatised and the new company owner cannot make money out of it, thenthe nation loses that capability and capacity.

58. The UK’s ability to produce inventions and innovations was a major factor in sustaining the “SpecialRelationship” with the USA. Put bluntly, we had something they needed and prized. Now that we no longerhave the R & D capacity to produce many inventions the “Special Relationship” is seriously weakened.

59. It was always acknowledged that the military R&D produced major spin-off to benefit the country. Butit was widely claimed during the Cold War that too much of the UK’s national intellectual capacity was tiedup in defence. However, when the defence investment was reduced and military R&D was lost, intellectualdevelopment and innovation did not obviously migrate to other sectors. No compensatory civil R&Dprogramme was established to serve the industrial base, no extra investment was made in universities to thisend. The innovation seems simply to have been lost. To be sure, there was a growth in financial engineering,but that has not proved an unalloyed treasure.

60. If the above Cold War argument was wrong, this is a most important point to note. It means that reducingDefence R & D has been bad for the economy. Perhaps the unique beneficial effect was because defence wasa national programme, not driven solely by profit but by the commitment and enthusiasm of the participants,motivated to do something they believed in. This expresses the value of Defence, rather than the cost. Anotherlesson that might be drawn from this is that privatisation and introducing business attitudes and proceduresmay not be the best way of improving Defence

I. Engaging the Collective Knowledge

61. Some 90% of the overall costs of any project are determined in the first 10% of the life-cycle. Thosemaking these early decisions need the knowledge to understand the implications of their decisions on the life-cycle costs. Getting the research and development right, therefore, is crucial to containing costs. Establishedbest practice indicates that across a portfolio of technical acquisition programmes some 10% of the cost shouldbe allocated to research, 35% to development in order to contain the system technical risks and ensure deliverytimescales. Arguably, the smaller the budget and hence production run, the larger should be the % allocated toR & D to ensure the minimum of problems with the equipment. Currently, for US defence acquisition, theResearch:Development:Production ratio is 6%:26 %:64%. Today, in the UK, our spending on research hasfallen to a fraction of what it was. It would be important for an Inquiry to establish what the current ratioactually is. The important issue is that current MOD senior management appears to be unaware of the changes



in these ratios or possible reasons for them. Since they affect the volume, balance and health of our acquisitioncapability, this is an unacceptable oversight.

62. Industrial Research Capacity. In 1995 BAE took the corporate decision to get out of aircraftmanufacturing as there was not enough profit margin. The corporate research facility at Bristol finally closedin 2000. Their merger with GEC closed GEC’s research labs, as GEC had earlier closed Ferranti’s labs—achain of industrial mismanagement going back to 1990. BAE no longer has the capability to design advancedmilitary aircraft—no adequate computers, designers, physical engineering infrastructure. The design of allcurrent aircraft currently being produced in the UK is based on work from before 2000, even for UAVs.

J. What sort of power do we need; what “Forces” do we need to exert that power; how do we acquire thoseforces? How do we assess their value? Fundamental questions to underpin an Inquiry.

63. Values and Interests. What are the Interests of the UK that we hope to advance? What values underpinthem? Assessing the value of acquisition Programmes originates with these needs. Who stops to consider thismatter today? Who does the considered thinking in Parliament, Government—MoD, FCO, DfID, BIS, Treasury,Education, …? Everyone assumes we know. But many of our current equipment programmes are based onobsolete ideas and unsubstantiated requirements.

64. Intelligence. We need next to assess what threats, challenges and opportunities we are facing and willface as we strive to advance our interests. Which ones we will deal with by deterrence or prevention, whichby engagement, which ones we will exploit? Only then can we establish what range of different forms ofpower—military and non-military—must we be able to generate to advance our interests, ensuring in theprocess that we can reduce our dependence on industrial warfare which we know we can no longer support.Only then can we create a sensible national strategy, including an industrial strategy. National industrial poweris a key part of our national security.

65. Value Assessment—Volume. What volume of investment in Defence and Security would best advanceour interests or generate real value for money from the investment? How do we (MOD, HCDC) know that weare getting the best value out of 2% of GDP? Would we get better value at 1.5% or 2.5%? If we do not knowwhat we will need to do, ie which kind of threats or opportunities we will need to deal with, there is no frameof reference for making this assessment.

66. Value Assessment—Balance. How do we generate power, use it, sustain it, replace it? This includes acareful consideration of all systems we seek to acquire. The type of tank that we needed when we had 3000tanks is not necessarily the type of tank we need when we have only 300. Defence inflation suggests a next-generation fleet of only 120 tanks. Does this have any military utility? Does it make sense to replace 18adequate warships with 6 advanced but very specialised ships? An alternative perspective is offered at Annexe1. It is also important to assess if the military power we acquire can be used for other things. RAF transportsand helicopters, RN ships, Army logistics are useful for many civil eventualities.

67. An All-of-Government Programme. But power is not just military, and increasing military power doesnot mean that we can automatically compensate for a lack of some other Department’s power by deployingmilitary forces because this is a complex problem. Nor, with their budgets being cut too, can we bank onreplacing military power with FCO or Home Office power. We need to reconsider how to generate nationalpower as a whole.

68. All Governments. Generating (ie acquiring) that national power will involve not just Westminster butalso Scottish, Welsh and NI Parliaments as part of an overall UK settlement. So changing the locations ofmilitary garrisons and HQs, or where equipment is made, or where defence contracts are placed is not just anissue of pork-barrel politics, it affects the common weal. All aspects of Defence and Security, including whatwe make and build, influence the common weal. If benefit derives from basing infrastructure in the UK (andreturning from Germany), then if it is not spread around the UK there will be resentment. Eg of 2500 MoDcontracts recently, only 50 have gone to Scotland. The SNP are making a lot of this. Our security infrastructuredoes not just consist of buying or building equipment. Only 25% of the Defence budget is spent on straightmilitary equipment purchases and the 1.2% spent on research is almost entirely spent in southern England.

69. Power from the wider Economy. As a post industrial state, how can the UK best generate the powernecessary? The UK Security base includes industry, the City and lots of other things. What do universitiescontribute? What is the research base (governmental, academic, private/corporate)? What is our organisational/managerial capacity? How quickly can we generate different forms of power and in the necessary quantity inthe time appropriate to the nature and urgency of the task?

70. Preventing “Own Goals”. Has the UK defence and security base has been strengthened or reduced byprivatisation? The privatisation of DERA failed—the rationale for Qinetiq was that it would “increase thedefence knowledge base by freeing Qinetiq to operate as a company”. The nation is poorer for this privatisation,but some people are richer. Moreover the supply of experienced technical staff able to contribute to Acquisitionhas dried up, to be replaced by project managers with no experience of security.



K. Conclusions

71. The key issues, fundamental to an effective inquiry, which emerge from the foregoing are, firstly, how,in the light of the current financial climate, the turmoil of the ongoing defence reform process, the buying upof our industrial capacity by foreign firms, the loss of technical expertise in MoD and the lack of technicallycompetent leadership, does the UK actually preserve the ownership of the acquisition process?

Secondly, how do we preserve the infrastructure of acquisition which we will need to (re)generate a new,adaptable force, rather than the inventory created by it? We need to preserve this critical understanding andability within MoD. We cannot afford for it to be outsourced. For the good of our national security the UK,through MoD, needs to own this, not a consultancy or an international company.

Endnote 1

Life-Cycle. The life-cycle includes a long period before a system exists and extends to include its disposaland any associated remediation. This is partly associated with the timescales needed for the invention of newsystems, and partly with the time to realize needed systems. New science typically takes some 40 years to seeapplication, engineering some 15 years to mature, and manufacture around five years. Systems based on newservices may see immediate use directly from research; equipment-based systems take much longer to realize,depending on the novel content. Synthesis of extant knowledge allows systems to be realized and acquired ina matter of months; invention takes many years.

Endnote 2

Formal stages of the evaluation process. MOD through its observation of global trends, forecasts thepotential or actual need for new Equipment Concepts, and identifies inadequacies in the current inventory,within its evolving set of Operational Concepts that collectively implement its Strategic ConceptualFramework.

The systems, once acquired, become part of the overall inventory that suitably educated and selectedpersonnel employ to generate the forms of power needed to advance UK Interests in the a range of Campaigns.The inventory is managed as a whole to ensure the availability of the systems and their continuing relevanceto the current Estimate of future capability.

The Estimate Process determines whether to modify systems, either to exploit new technical opportunitiesthat increase the value of the system, or to meet the evolving needs of Campaigns, or to dispose of the systems.Disposal may incur significant costs, generate income or contribute to advancing UK interests. Systemsconsumed in campaigns may need to be replaced, where the Estimate requires this, or replaced by new concepts.

Campaign Planning identifies both the systems needed to undertake the campaign successfully in theCampaign Systems Plan, but also accelerates the Estimate and Conceptual assessment of the value of theInventory.

Annex 1

A RADICAL NEW APPROACH TO STRUCTURING THE ARMED FORCES

The Government’s policy of reducing the financial deficit is essential. Financial strength is the basis ofsecurity. Defence can and should bear its share of both deficit reduction and of revitalising the economy.

However, there has been no strategy in the recent SDSR and ongoing “reform” process in MoD. These areonly cuts driven by financial and managerial considerations. These may well promise some savings in defencecosts but they have produced such drastic reductions in military capability and capacity that our nationalsecurity may be compromised and our Armed Forces irreparably damaged. Furthermore, our economy is beingdamaged by reducing investment in high technology products and services, and by reducing our capacity tocreate opportunities for UK industry and commerce globally. The UK’s Interests are not limited to the physicalterritory of the UK—the UK is now a global “networked state” and economy.

The SDSR and on-going “reform” process also:

— Makes no provision for adapting or regenerating the Forces in time of need or within the timeconstants of modern complex threats and instabilities

— Does nothing to bring about essential innovation in the Forces and in MOD

— Does nothing to stimulate the Economy or critical modern industries

— Guarantees the “strategic shrinkage” of the UK

— Adds to long-term unemployment

— Damages our international standing

— Reduces the linkage between the people and the Armed Services

— Removes the value created by Service from a significant proportion of the disadvantaged insociety



This is unnecessary. There is an alternative, radical, innovative approach to restructuring our Armed Forcesavailable that has not been considered by MOD or Ministers. It would create huge cost savings whilststimulating the Economy and reinvigorating the Armed Forces. If the necessary political will and leadershipexists, it could be implemented rapidly.

In the Cold War, with a budget of 4–5% of GDP, the UK could structure its Armed Forces to match alllatent threats to the country, and also be capable of dealing with unexpected threats, natural disasters and civilemergencies. Today, with an active war underway, a wide range of unpredictable threats and a budget of 2%of GDP, it is impossible to structure our Forces to match all potential threats. A radical alternative approach isto restructure the Forces in a way which will endow them with the ability to generate rapidly both thecapabilities and capacity they need to deal with a threat (or exploit an opportunity in the national interest) asthese arise.

The approach applies to all Services but is most readily evident when applied to the Royal Navy.

This alternative model when applied to the Navy will:

— Maintain the existing capabilities of the RN but expand its capacity, giving it more ships thanat present and a large reserve that can be mobilised (and stood down) rapidly.

— Stimulate R&D in innovative technologies, applicable across all Services.

— Generate new industries with new skills and sustainable jobs.

— Provide the Government with a leadership opportunity in NATO and Europe.

The main elements of the model, which has been developed with the support of the wider maritimecommunity, are:

— Commit to no further specialist surface shipbuilding programmes.

— Maintain the submarine fleet and key specialised vessels in the existing surface fleet.

— Acquire new families of warships based on commercial hulls, with retro-fitted weapons modulesand modularised/containerised equipment for other roles.

— Renegotiate the disastrously expensive and inflexible PFI contracts.

— Develop weapons, sensors and ancillary equipment in modular packages, independent of theplatform (hull), also useable by the RAF and Army, and with civilian applications.

— Break-down barriers to service between the RN, RFA and Merchant Navy through a newpersonnel concept (manning programme).

— Create an adaptable fleet by maintaining a reserve of ships in civilian use until needed.

Most of the elements of this new model have been proven in practice or are being developed currently byother navies. Examples include:

— RN conversion in the Falklands war of MV Contender Bezant (now RFA Argus).

— Management on commercial charter of the RN Ro-Ro fleet; militarized construction, speciallyselected and vetted UK crews, held at 30 days’ readiness for RN war use.

— USN study recently undertaken by DARPA of container ship conversion to strike carrier.

— Russian Navy development of modular containerised weapons systems.

— Soviet practise of building all merchant ships with basic military features, making employmentin war easy and cheap.

— Danish Navy “Stanflex” system of new modular warships.

— Australian and US Navies’ use of converted catamarans for recent operations.

— Experience of UK Merchant Navy crews serving in designated war zones

It is acknowledged that the main obstacle to such a transformation will be “cultural” opposition bytraditionally minded senior officers and some elements of the industry that supply the current products.However, as the alternative may be systemic failure, if strong political leadership can show the way and ensurethat the Services consider this alternative seriously, common sense may prevail.

July 2012

defence acquisition · penny mordaunt mp (conservative, portsmouth north) sandra osborne mp...

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