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Delivering the potential of additional savings and benefits through acquisition reform

In 2010, two major news stories continue to dominate our headlines: the crippling effects of a global financial meltdown on public spending, and an apparent lack of funding to adequately support our armed forces in Afghanistan. In the middle sits UK Ministry of Defence (MOD) which, until recently, faced the budgetary challenge of funding two medium-scale campaigns running concurrently with the need to implement value-for-money reforms that will generate savings of £3.15 billion by April 2011.

The size of this challenge was amplified when, in November 2009, the National Audit Office suggested that at current spending, UK MOD will overspend between £6bn and £36bn over the next 10 years.

In February 2010, the UK MOD released its strategy on Defence Acquisition reform. The publication outlined the first steps of a transformation programme that would enable it to procure capability which is aligned to a Defence and Security Strategy, in an affordable and efficient manner.

The June 2010 Budget further highlighted the need to cut Public Sector spending, including the possibility of reducing the size of the Public Service organisation supporting UK MOD procurement activities.

Faced with such an extreme fiscal challenge, those transformation programmes already in UK MOD planning have been brought to the fore to deliver immediate efficiency savings that can help ensure funding remains available for the priority operations in Afghanistan.

In this paper, Simon Gregory of VEGA offers some thoughts on how best the UK MOD can deliver against the challenges of acquisition reform while operating under the pressure of severe cuts in public spending.

Reforming Defence Procurement

Around 98% of major UK MOD programmes deliver the operational performance needed at the front line. However, they also tend to increase in cost – by an average of 2.8% each year. And they suffer delay, averaging 5.9 months. It is acknowledged by the UK MOD itself that they must do better, and deliver more projects to cost and time.

“The Defence Strategy for Acquisition Reform” was published in February 2010 in response to this issue. It builds upon previous reforms, and sets out several actions to improve the way capability is delivered. This includes improvements to the way that UK MOD manages its equipment projects, both individually and as a portfolio.

Key activities described to transform the way services and equipment are procured and supported in service include:

• Creating and maintaining equipment and support plans that:
  • Align to Defence strategy
  • Are affordable with likely resources
  • Have the flexibility to reflect changing priorities
  • Assess the realistic costs and risks associated with the capability being procured
• Improving internal acquisition skills and capabilities
• Establishing clearer internal business arrangements
• Embedding a ‘through-life’ approach to managing capability
• Building a more active and transparent relationship with industry
• Making sure the whole of the UK MOD’s acquisition effort (both for equipment and other areas) fully supports wider Defence priorities, including safety, sustainable development, and exportability.

A changing approach to Capability Acquisition and Delivery

The above strategic activities seek to respond to a current acquisition process that, whilst rigorous, has struggled to find the agility and governance to meet to evolving military needs and reduced timescales while addressing the complexity and uncertainty of future warfare.

Thanks to an extensive track record of delivering client-side advisory services in support of MOD acquisition over the past two decades, VEGA is able to suggest further opportunities to deliver this reform and assure the agility required of it.

1. Flexibility in the acquisition cycle

The current acquisition cycle is rigorous (and highly prescriptive) for good reasons, but locks UK MOD acquisition into a timescale for procurement that may be detrimental. For example, the recent economic downturn has resulted in significant reduction in commercial cost in most areas including ship building. It has been estimated that savings in the order of 25% could be achieved if programmes scheduled to contract in two years’ time could be brought forward to take advantage of such costs. While this might be a challenge in a period of short-term spending restraint, the medium and whole life gains are starkly clear. The economy would clearly gain from this kind of stimulus, and, if properly directed, operational capability would be enhanced much more quickly.

2. Comprehensive and realistic assessment of Pan Defence Lines of Development (DLOD) requirements

Current assurance and approval processes tend to focus on the needs of the equipment Line of Development (LOD) and have a tendency to overlook the others. This has resulted in funding for these wider LODs being undervalued and, potentially more efficient solutions to front-line requirements, being untapped. If programmes captured and considered a comprehensive and realistic view of all requirements, resources and costs at inception and were refined through the lifecycle of the project, then potentially, savings in whole life cost or additional operational benefits could be delivered through implementing change in other DLOD areas such as process improvement, prior to rolling out equipment.

3. Driving realism into the acquisition cycle – particularly in support of Information Superiority

UK MOD Information Superiority capability operates in a complex environment. This capability, more than any other, requires a sense of realism to be brought into the acquisition cycle. This needs to be reflected in several areas including:

• Undertaking realistic assessment, reporting and ownership of risk within its programmes; not just once, but throughout the programme
• Driving thorough Dependency Management – it is well known that the assessments of the time and effort required to manage interfaces within and between capabilities are systemically unrealistic. Dependencies both within and without the core programme must be properly understood, captured and tracked.
• Adopting the right contracting mechanism for the programme, rather than applying standard or current commercial doctrine. Consider how the contract supports the MOD/Industry partnership throughout the lifecycle of the procurement

Driving realism into the acquisition cycle will result in several benefits, including:

• Better informed options and “trade off” analysis which will allow decisions made in one area to be fully understood across a programme or portfolio (short-term gains in one area may have a long-term impact on another)
• DE&S reducing the number of significant changes to the planned delivery timescale and cost profile as the project progresses through the CADMID/T cycle. This will improve both trust and confidence of the user community, as well as improve the ability of the CAP areas to manage budgets and capability delivery timescales, rather than having to trade off between funding lines as key projects slip or increase in cost with the associated impact on secondary projects.

4. Greater use of early feasibility programmes and simulation

One way to drive realism into the acquisition cycle is to work closely with industry to evaluate the feasibility of options and to allow time for greater experimentation and simulation at the very beginning of programmes. Not only can potential pitfalls be uncovered, but integration opportunities and in-service performance can be evaluated before the majority of costs are incurred. These techniques would also allow greater risk sharing between the contractor and the procuring authority with a commensurate reduction in acquisition costs, while at the same time encouraging greater innovation from industry.

5. Development of coherent and robust Information Management

To ensure the realism required, Acquisition Decision Makers need the most coherent, accurate and complete information available to them to make informed decisions. Recent UK MOD initiatives, such as the Project Support Function (PSF), have provided the appropriate structure, but without the training, tools, skills or knowledge that could facilitate a successful transformation. Change programmes, such as those being led by the DE&S CIO, aim to deliver the required enterprise information management and exploitation capability. However, teams often lack the required skills and knowledge to deliver real benefit.

6. Acquisition Capability

As acknowledged in the Defence Strategy of Acquisition Reform, there is a requirement to improve the core acquisition skills of UK MOD staff including the appropriate introduction of a stronger and more professional approach to programme, portfolio and project management. This issue, when coupled with the downward pressure to cut budgets, including manpower within the defence procurement organisation, will have a significant impact on the ability of UK MOD to procure and maintain capability for its front line commitments.

We strongly advocate the use of an Equipment Project Management approach whereby UK MOD ‘outsources’ significant elements of the acquisition process to an industrial partner through a risk/reward mechanism.

Such initiatives will enable UK MOD to deliver the required capability through an incentivised, dedicated and focused project delivery team made up of the requisite specialist skills and knowledge. This would deliver a number of benefits, including reduced UK MOD management overhead (single contracts) for specialist skills, and would mean UK MOD only incurs ownership costs associated with delivering the project, rather than bearing staffing costs for the period of programme delivery.

Summary

It is absolutely right and proper that UK MOD delivers a strategy tackling how it is to reform the way it procures front line capability. The organisation needs to do all it can to reduce waste and ensure it operates at optimum efficiency. This approach includes placing key activities with those best placed to provide the specialist skills and knowledge needed to undertake the activities.

Working in partnership with the UK Defence Industry, the UK MOD can oversee the application of programme management best practice principles and provide the UK Defence acquisition community with the opportunity to address and tackle the challenges of rising equipment costs and expensive programme delays.

This approach, when viewed within the overall context of the upcoming Strategic Defence and Security Review, has the potential to ensure the “through-life” demands of front line capability are met, while at the same time implementing the much heralded efficiency savings to the UK taxpayer.

Contact VEGA for more information about acquisition reform