Reforming defence procurement

Defence is a unique industry. It turns over around £22.5bn annually and employs over 100,000 people in highly skills, high value add jobs.

But its an industry that can’t always play by standard business rules. Its customer base is limited by political vagaries and national security concerns. Supply chain visibility is clamped by control of classified information.

And it is particularly susceptible to cuts in government spending since, despite efforts in recent years to boost exports, HM Government remains the most important customer for most UK-based defence suppliers.

Government knows this – and has known it for some time. The decades since the end of the Cold War are littered with evidence of attempts to feather declining defence spend with the maintenance of national security requirements in order to establish a fit for purpose, efficient method for buying defence capability.

But all this effort has had limited success. There is still a widely accepted need to radically reform defence procurement – the inefficiency of which is thought waste between £1.3bn and £2.2bn a year.

Defence Secretary Philip Hammond has acknowledged: “Waste on that scale is unacceptable at any time; more so at a time of acute pressure on the public finances.”

Debate over the requirement for reform of defence procurement, and how it should be managed, has been reborn with renewed intensity in post-recession, austerity Britain. Especially since the 2010 Strategic Defence and Security Review slashed the UK defence budget 8% over four years.

But although heavy cuts have been made to defence expenditure, the Ministry of Defence still has a £160bn 10-year Defence Equipment Plan to fulfil.

The question is, with every penny of spend being inspected for its value for money for the tax payer proposition, how can government award contracts effectively and fairly while also seeking security and economic benefits?

The challenge, it has been realised, will require business acumen and commercial savvy. Which is why MoD now finds itself in the final stages of picking one of two potential models for procurement reform: DE&S+ or GOCO – the latter being the hot favourite for implementation in 2014.

GoCo vs DE&S+

GoCo – standing for Government-owned-contractor-operated – is a defence procurement model devised primarily by Bernard Gray, the chief of defence material.

His plan has been almost 20-years in the making, and is based on the model used by the Atomic Weapons Establishment, which safeguards the UK’s nuclear warheads at its Aldermaston, Berkshire base. In 2o12, a leaked report indicated that government was serious about making it happen.

The plan will see the demise of Defence Equipment & Support (DE&S) as we know it and the purchasing arm of MoD will be reborn under the GoCo brand.

The Defence Reform Bill in July this year, dotted the ‘i’s and crossed the ‘t’s from a legal point of view for implementing GoCo but its adoption is not yet a done deal, there is another option in the wings.

Some defence experts prefer the DE&S+ solution.

The DE&S+ option is favoured by some, who have concerns that too much private sector influence in defence acquisition might call the integrity of government defence spending into question as well as skewing the dynamics of competition in the defence sector.

DE&S+ would create an external non-departmental public body to manage defence procurement with a private sector partner in a support and guidance role.

In June this year, Defence Secretary Philip Hammond introduced the Better Defence Acquisition White Paper to parliament – a document which outlines the rationale which will guide MoD through a final year of consultation on defence acquisition reform and the choice between GoCo and DE&S+.

The SME factor

A significant consideration in the refinement of defence procurement reform plans will be the impact of the new model on small and medium sized companies in the defence supply chain.

A number of recent initiatives in recent years have tried to put these SMEs in line for more direct benefit from lucrative government defence contracts, but it will likely always be the case that a few sector Primes will account for the lion’s share of the defence budget.

The question is, can the trickle-down effect on the supply chain be better incentivised, measured and reported in give great clarity around the wider economic benefit of government defence spending on the UK economy.

Michael Maiden, chairman of Northern Defence Industries, a regional trade body for

defence, security and space sector SMEs is ambivalent as to whether DE&S+ or GoCo should win out, and says the choice will require a fine balancing act of financial, military and political interests. “But what is clear,” he continues, “is that DE&S cannot continue as it is and things have to change.”

Mr Maiden is hopeful of the benefits that reform will bring to the supply chain. “If successful, the relationship with industry is sure to be at the centre of the way the new organisation does its business and, as a subset of that, the part that SMEs play in the enterprise needs to be explicitly factored into the policies and procedures that govern the way the new organisation operates,” he says.

David Burrows, sales director at SME defence manufacturer DMS Technologies agrees but place a number of provisos around the extent to which procurement reform will really change visibility of opportunity and cash flow in the defence supply chain. “It all depends on the amount of budget [government] have and the spares and requirements they have every year.”

As Mr Burrows observes, visibility and efficiency in meeting those requirements will always be subject to international, diplomatic, political and military decisions and the speed at which they unfold.

Reform of defence procurement is therefore undoubtedly necessary, but will always be subject to those unique industry characteristics which are not present in other walks of business.