‘Gray Report’ Diagnoses UK Procurement Ills
(Source: defense-aerospace.com; posted Oct. 20, 2009)
PARIS --- Uncharacteristically blunt and picturesque quotes leaked over the summer had raised expectations that the review of British defence acquisition prepared by Bernard Gray would contain medicine as adept at curing the system’s ills as his diagnosis was at identifying them.

Alas, the 299-page report contains no such miracle cure, and its most innovative recommendation, that defense procurement be outsourced to a government-owned, contractor-operated entity, is unrealistic. Despite all the good that British governments think of outsourcing military operations, there is still no reliable and conclusive evidence that private employees working for profit are more cost-effective than career civil servants at managing defense procurement. Defence Secretary Bob Ainsworth was quite right to reject this recommendation.

But that is not to say that the report should be relegated to a filing cabinet; on the contrary, it should be made required reading in defense procurement circles throughout the world as there has never been an analysis that has so clearly, and so bluntly, explains why the purchase of military equipment is so much more troublesome than that of any other type of capital goods. As not all 299 pages are of equal interest, here are the most significant points in the report’s diagnosis of UK defense procurement ills.

Gray’s diagnosis

-- the Ministry of Defence has a substantially overheated equipment programme, with too many types of equipment being ordered for too large a range of tasks at too high a specification.

-- This overheating arises from a mixture of incentives within the Ministry of Defence. In particular, the Armed Forces, competing for scarce funding, quite naturally seek to secure the largest share of resources for their own needs, and have a systematic incentive to underestimate the likely cost of equipment.

-- Unfortunately the current system is not able to flush out at an early stage the real costs of this equipment, nor does it make effective prioritisation or rationalisation decisions. The process of over-ordering and under-costing is not constrained by fear on the part of those ordering equipment that the programme will be lost.

-- The average programme overruns by 80% or c.5 years from the time specified at initial approval through to in service dates. The average increase in cost of these programmes is 40% or c. £300m. This study also estimates that the “frictional costs” to the Department of this systematic delay are in the range £900m - £2.2bn pa.

-- Defence Equipment and Support, the MoD’s delivery arm, also needs significantly greater skills and tools in a number of areas if it is to be able to deliver effectively on a better-balanced equipment plan. There is a need for a greater level of resources and skills in Programme & Project Management, Finance, Cost Estimating, Engineering and Contracting, as well as a need for better Project Management and Management Information systems.

-- Programmes managed under the “Smart Acquisition” regime that was part of the creation of the DPA performed significantly better than previous programmes. This report is concerned that the disciplines that came from Smart Acquisition risk being lost under the newer governance arrangements.

-- Some suggest that such headline figures are only the result of a few, older “legacy” programmes which have gone badly wrong, and which drag the rest of the portfolio down. Unfortunately, the facts do not really support such propositions. The analysis of the data suggests that the problems are widespread, affecting projects old and new, large and small to a greater or lesser extent.

-- For the UK at least, there is a real concern that being able to try to equip for and conduct current operations, and to fund the development and acquisition needed for long-term retention and regeneration of forces may be too much at current levels of funding. Either we find substantially more money, which, to be polite, seems difficult to imagine in the current economic conditions, or we may be shortly be forced to choose, and the choice will be painful.

-- Or, as one wag, and expert in defence acquisition, recently observed, “the system is failing to produce the equipment we don’t need.”

-- In reality, the “bow wave” [formed by programs that are stretched out or delayed] allows the MoD to maintain a position that a whole variety of defence capabilities are in the process of being procured. This feels reassuring to the country about the size and scope of Britain’s Armed Forces, but the cold fact is that the budget does not exist, and has arguably not existed since the end of the Second World War, to support this level of ambition.

-- The biggest single failure of control has been that the demands of those specifying new military equipment have not been adequately managed and related to available resources

-- The MoD does need better tools for deciding when to accept an “80% solution” to a technical need which is likely to be significantly cheaper and easier to realise than the “100% answer”. In one particular case cited to the Review team, the technology being sought was described as being “just within the laws of physics”. While it might be necessary to pursue technologies to such limits sometimes, it is an expensive and risky thing to attempt, and it is important to be clear on whether or not such demanding requirements are really necessary.

-- Many companies pressed for a reduction in size of DE&S, as its current scale forces industry to match it in resources devoted to programme administration. Others said that they were unclear whether it should exist at all. All argue for substantial reform, in DE&S, and in the setting of the Equipment Programme.

-- The absence of long-term funding guidance for military acquisition poses further problems for effective defence planning. The current annual or triennial CSR process in the UK is not commensurate with planning and delivery of major capital projects which may be delivered over a ten year timeframe, and have significant financial implications (through force structure, contracted support arrangements, etc.) beyond even this horizon.

-- Other countries have started to implement alternative approaches which recognise the mis-match and realistically set expectations of the defence community in the longer term.

-- The inherent difficulties in ensuring that all participants in any collaboration have their interests aligned is widely held to be at the root cause of many problems and, more generally, the view across the MoD and the wider defence industry is that such problems are a characteristic of all collaborative projects to a greater or lesser extent

-- A large number of factors exist from relatively early in a project’s lifecycle that later lead to delay and increased costs. These effectively hide true costs and store up problems for later in a projects life (including support costs whilst in-service) and are incentivised by the network of user / customer / supplier relationships as it currently exists between FLCs, MoD Capability Sponsor, DE&S and industry.

-- There is a widespread perception in industry and within DE&S that the Department is unwilling / unable to offer appropriate financial incentives to attract, retain and incentivise skilled personnel of a calibre commensurate with the scale and complexity of the projects which DE&S is tasked to deliver.


Click here to read the full report (299 pages in PDF format) on the MoD website.


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