House of Commons - Defence

Select Committee on Defence Eighth Report

SMART PROCUREMENT/SMART ACQUISITION

80. Since the publication of the Strategic Defence Review, the Committee has examined smart procurement on a number of occasions.[195] It has now been rechristened 'smart acquisition'—a change we discuss below. Our last Report on the MoD's annual reporting cycle[196] describes the initiative's essential features[197]—

A through-life approach to managing procurement projects

'Incremental acquisition'

A partnering approach between industry and the MoD, including industry involvement in new multi-disciplinary 'integrated project teams'

Clearer accountability and responsibility for projects

Less-inflationary procurement contracts

Streamlined acquisition stages and processes for different types of equipment

Converting the Procurement Executive to an agency (the Defence Procurement Agency), to give it a clearer 'supplier' role in relation to the MoD 'customer'

Smart procurement was intended, according to the MoD's mantra, to deliver equipment 'faster, cheaper, better'.[198] With the structural and procedural changes required for the initiative now in place, we sought to examine how well it was satisfying these aims.

Faster and Cheaper?

81. We have previously expressed reservations about the way the MoD has claimed credit for how the initiative has reduced the timescales needed for developing and producing new equipment.[199] The MoD's latest Performance Report cited an example of five years being cut from the process for acquiring the Future Offensive Air System.[200] We recognise that affordability constraints inevitably mean that there will be limits on the extent to which quickening of the acquisition processes might be translated into earlier delivery, but in our Report last February we highlighted how the speeding up of the Future Offensive Air System programme had not brought forward its in-service date, and had instead deferred the date when key decisions would need to be made.[201] More generally, the Major Projects Reports continue to show delays and missed deadlines on many equipment programmes (Figures 2 and 3).

82. We also have some reservations about the cost savings claimed for smart procurements. At its launch, the MoD estimated that smart procurement would save £2 billion over 10 years. In our previous report on the MoD's reporting cycle, we welcomed the potential for such savings, which were potential (rather than actual) savings founded on funds removed from projects' budgets.[202] We called for future annual Performance Reports to provide details of the achievements of smart procurement, whether already realised or in the form of future budget reductions.[203] We note that, 12 months on, the 1999-2000 Performance Report lists three examples of such achievements, but provides no overall 'score' for the initiative.[204] Separately, however, we have established that over the two budget-setting rounds since the SDR, the MoD has identified costing reductions attributable to smart procurement on a range of individual projects, which in total have removed £2 billion from previously planned budgets for the 10 years to 2008.[205] In the recent Spending Review, the MoD envisaged £750 million of savings in the three years to 2003-04—an additional £50 million a year on top of the savings previously profiled for those years to meet the wider £2 billion target.[206]

83. But the picture on the savings achieved is not that straightforward. The Public Accounts Committee reviewed progress with smart procurement in its 1998 Major Projects Report, published last July, and noted that some of the claimed financial savings represent expenditure deferred beyond 2008 (the end of the 10 year period of the smart procurement savings target).[207] Of the £2 billion of savings, the MoD anticipated that only 60% would be from programme cost reductions. 20% would come from switching to PFI schemes and public-private partnerships and 20% from rescheduling when expenditures would be incurred.[208] Some of these planned savings represent reduced expenditure over the life of a project, while others would involve additional offsetting costs at a later date.[209] In the Strategic Defence Review, the MoD spoke in terms of 'over the next 10 years ... a reduction of some £2 billion in acquisition costs',[210] but an MoD memorandum to the Committee subsequently talked of 'removing from projected project costings £2 billion which was otherwise planned to be incurred over the 10 year period',[211] and the Performance Report and Investment Strategy contain similarly looser definitions of the target.[212] In such circumstances, future Performance Reports should provide sufficient detail to demonstrate conclusively and fully the timescale, cost and performance benefits obtained from smart procurement. The MoD should also consider how longer term smart procurement performance might be captured in the Defence Statistics reports.

84. When we put it to the MoD that its recent MoD pronouncements suggest that it may be redefining the cost savings required of smart procurement, the Department told us that the £2 billion savings represent the net change in the cost of projects over the 10 years, and that this would not mean that the programme overall had become £2 billion cheaper, because the savings on particular projects "have given us headroom to put other elements in".[213] We welcome the fact that smart procurement savings on individual projects will not be translated directly into cuts in the overall equipment procurement budget — there are many areas of deficient military capability that will take years to rectify, even in the most benign of budgetary circumstances. This serves however to contribute to the difficulty in identifying unambiguously that the savings claimed for smart procurement are genuine, which fuller reporting would help demonstrate.

85. The most recent Public Service Agreement (for 2001-02 onwards) now includes a target for achieving smart procurement savings—£750 million over the three years to 2003-04[214]—providing a basis for such performance reporting in the near-term. Before that, there had been no specific smart procurement target in 1999-2000, although there had been targets for maximum slippage and cost overruns for the projects covered in the annual Major Projects Report.[215] The MoD missed one of these project slippage targets (Figure 2), but in the Performance Report it does not quantify by how much these targets were 'missed' or 'met'.

Figure 2: PSA Targets for Major Projects

	Targets		Results
	1999-2000	2000-01	1999-2000
Average in-year slippage (for 'new' projects)	£ 1 month	£ 10 days	'met'
Average in-year slippage (for 'existing' projects)	£ 10 weeks	£ 4 weeks	'missed'
Average cost overrun	nil	nil	0.2% decrease

86. Analysis of the Major Projects Report 2000 does not provide much illumination, primarily, it would appear, because the basis for including projects in the Report changed during 1999-2000. It used to include the 25 largest projects, but now covers the 20 largest projects that have passed their 'main gate' assessment stage (now the first point at which target in-service dates are defined).[216] The Major Projects Report 2000,[217] published last November, reports an in-year cost improvement for these 20 'main gate' projects of 0.2%,[218] but slippage of 3 months for 'post-smart procurement' projects and 3.2 months for 'pre-smart procurement' projects.[219] Performance on the 'new' and 'existing' projects of the Public Service Agreement, it would appear, is not the same as performance with 'pre-' and 'post-smart procurement' projects of the Major Projects Report.

87. The situation is made more confusing still because the corporate plan and the annual report[220] of the Defence Procurement Agency use a third set of data. The DPA's key indicators monitor project performance for cumulative (rather than in-year) cost and time overruns for MPR projects, and exclude projects that have entered service during the year.[221] The Agency has also had to recast its targets to reflect the change in the definition of MPR projects during the year (Figure 3).[222]

Figure 3: The Defence Procurement Agency's project cost and timelines targets, 1999-2000

	Targets		Results
	On a pre-MPR 2000 basis	Recast Targets
Average cumulative slippage	26 mths	19.9 mths	21.8 mths
Average cumulative cost overruns	4%	5.7%	3.5%

88. Despite the difficulty in reconciling the MoD's performance data, the results do indicate satisfactory performance against targets for cost overruns, if not on delays. There should in future be a better performance in meeting target in-service dates than was previously the case, because the basis of measuring slippage in future Major Projects Reports should make it easier. Specifically, the target in-service date will be that set at a project's 'main gate' approval (rather than when the project first gets off the ground, as was previously the case). Nevertheless, the increasingly demanding targets for reducing both cost overruns and delays (in both the Public Service Agreement, and within the DPA's Corporate Plan) are a welcome indicator of the MoD's confidence in being able to secure improvements in the way its projects are managed. Improvements in these areas would be an important step towards meeting the smart procurement objectives of reducing projects' timescales and costs that underpinned such targets.

89. We were told by our MoD witnesses that the Department was looking to broaden the scope of its monitoring of its project management performance. In its 1999-2000 Performance Report it set out data for 100 projects, which puts a better light on the MoD's achievements—an average in-year slippage of only 0.6 months and a reduced average cost in the year of 0.6%.[223] This was part of a more detailed analysis by the MoD of the major programmes with expenditures expected to be greater than £100million, which would encompass quality and reliability, as well as time and cost.[224] The Permanent Secretary told us that—

225

We welcome the wider data capture in the MoD's monitoring of its project management performance, the results of which, we were told, will be made available to the House.[226]

Better?

90. Since its inception, smart procurement has been founded on a need to prevent recurring criticism in the NAO's annual Major Projects Reports about cost overruns and time slippages.[227] How the initiative would deliver 'better' equipment has been less apparent. Some aspects of smart procurement would clearly help to create the necessary conditions for this—a through-life approach, partnering with industry to define requirements that are achievable, and 'incremental acquisition' which could allow equipment to be fielded where without it moving the specification bar ever higher might prevent the equipment ever clearing it. Indeed, we heard that smart procurement savings would be claimed where savings resulted from capabilities for equipment being reduced, provided wider operational capabilities were not lost—

228

91. Whether 'better' equipment will be acquired, however, is as yet difficult to demonstrate. In a number of cases in the last year or so, requirements have been scaled back and interim capabilities sought as part of an incremental acquisition approach. An example was the Bowman communication system where its security requirements were curtailed to make the programme more affordable, and delivery earlier than it might otherwise be.[229] In our report last year on Major Procurement Projects, we cautioned against such relaxations if the result were a capability with a functionality little advanced from its predecessor systems, or one unable to counter new and sophisticated communications threats.[230] In the particular case of Bowman, the changes belatedly being introduced in the management of the project were largely aimed at rescuing the programme from the mire rather than delivering better equipment. More generally, it seems to us, there may be a fine line between acquiring better equipment through incremental acquisition and settling for 'worse' equipment by reducing its prospective potency, range or other capabilities. This is an issue that will remain at the heart of our annual examination of major procurement projects.

Smart Acquisition

92. The MoD has now redubbed smart procurement as 'smart acquisition'. This was intended to reflect the whole-life nature of the equipment acquisition cycle, which includes its in-service support managed by the Defence Logistic Organisation. The creation of the DLO was part of the reforms introduced with smart procurement, and about a quarter of the 138 'integrated project teams' now operate within it. The £750 million target for the next three years is for savings on the procurement budget,[231] but the MoD told us that it is looking to develop performance measures to cover the in-service performance and availability of equipment, to reflect the wider remit of smart acquisition. [232]

93. The DLO itself already has two key targets—the PSA target of reducing non-explosive stocks by £2.2 billion by April 2001,[233] and a reduction in DLO 'output cost' of 20% by 2005. [234] Our recent report on the lessons of Kosovo highlighted how close the MoD came to running out of some munitions, and the cost (£234 million) of the MoD's 'urgent operational requirements' to buy new equipment or replenish low stocks. We discussed the criteria the MoD was using to identify surplus stocks,[235] and although apparently sensible the Department will have to maintain a cautious approach to this exercise.[236] As regards the DLO's efficiency target, Mr Tebbit told us that—

237

We have got an awful lot of stuff we do not need and do not use. Getting better at supporting equipment does not necessarily mean buying more spares. When we get a more transparent supply system we will know what we can get from industry...[238]

195 Most notably in our reports on the Strategic Defence Review and the Annual Reporting Cycle Back

196 Second Report, Session 1999-2000, op cit, para 129 Back

197 Good descriptions of what the initiative is about can be found in those reports, and in the NAO's Major Projects Report 1999 (HC 613, 1999-2000) Back

198 The Strategic Defence Review, July 1998, Cm 3999, para 161 Back

199 Second Report, Session 1999-2000, op cit, para 132 Back

200 Cm 5000, para 80 Back

201 Second Report, Session 1999-2000, op cit, para 132 Back

202 ibid Back

203 ibid, para 133 Back

204 Cm 5000, para 80 Back

205 Ev p71, para A3; and HC Deb 14 March 2001, c 602w Back

206 Ev p71, para A3 Back