Select Committee on Public Accounts Thirty-Second Report


MINISTRY OF DEFENCE: MODIFYING DEFENCE EQUIPMENT

THE FUTURE MANAGEMENT OF MODIFICATIONS

37. We asked the Department how the complex matrix of responsibilities at each stage of the modification process had developed and whether there were counter-productive competitive tensions in the system. The Department told us that the arrangements reflected the fact that responsibility for planning and undertaking modifications rested in different parts of the Department and that, traditionally, each of the armed services had been entirely responsible for the budget for the support costs of their equipment. They acknowledged that these arrangements meant that there was no incentive for people to converge and or adopt common procedures and that such cross-organisational processes had led to inefficiencies.[38]

38. We asked the Department what steps they were taking to align managerial and financial responsibility to ensure that modifications were progressed efficiently and cost effectively. They replied that the first and biggest step was the Strategic Defence Review decision to form Integrated Project Teams with a through-life cost focus and which would move from the Procurement Executive to the newly formed Defence Logistics Organisation once the acquisition phase was complete and the equipment in-service. The Teams would be headed by empowered team leaders and contain representatives from industry, the Support Authority, the Operational Requirements community and other interested stakeholders. The Teams would thus bring together all of the people with budgetary and management responsibility for an equipment and, in the Department's view, would do a great deal to improve on the current situation by providing an incentive for people to resolve differences of view more efficiently. They did, however, agree that without suitable computer systems it would not be a practical possibility for the Integrated Project Teams to have an overview of the modification process.[39] The Department told us that ten pilot Integrated Project Teams had already been established and that all of the Teams would be in place by April 2000.[40]

39. The Department added that the Teams would be tasked by clearly identifiable customers: Operational Requirements staff for modifications in the early phases of an equipment project; or the armed forces for equipments in service. It would be for the customer to prioritise the various modifications which he wished to see on his equipment and to provide funding to enable the Integrated Project Team to deliver these. Resource allocation would thus rest with those who would benefit from the modification. The Department considered that this approach would begin to provide quite a healthy system of incentives and improve the prioritisation of modifications.[41]

40. We questioned the Department over whether the Integrated Project Team model incorporated all of the advantages of the United States equipment management system. The Department responded that they had looked at the United States system very carefully, had drawn as many strengths from it as seemed compatible for the United Kingdom and would stay in close touch to ensure they did not miss either lessons which had already been embodied or ones which the United States would learn in future. The Department also stated that they were keen to learn from commercial experience, particularly their ability to record information and know exactly what was happening with huge inventories of assets.[42]

41. We asked the Department whether they saw any obstacles or problems introducing their new approach. They stated that they did not see any fundamental difficulty of principle but that they could see a few problems training people to work in new ways.[43] They recognised that such a culture change would be a lengthy process and that, whilst they would have a very good programme for training people and would provide the management incentives by resource accounting, sensitive issues remained. For example, they still had to tackle the need to physically re-locate staff as responsibility transferred from the Procurement Executive to the Defence Logistics Organisation. The Department assured us that they did not dismiss such issues as mechanics but recognised them as important to delivering the desired outcome from the initiatives.[44]

42. In answer to our questions about the extent of industry involvement in the modifications process, the Department told us that there certainly should be involvement from industry not just in their role as design authority but also in managing obsolescence, particularly of electrical components. The Department said that this was becoming more and more of a serious issue and one where they could not generate in-house the necessary expertise. Rather, the Department said that they no longer wanted to rely on military specific components which were far too expensive and which nobody wanted to make but that they wanted to contract with the manufacturer to provide "black boxes" on a form, fit and function basis. This would mean that it was the manufacturers job to predict obsolescence, manage the repair loop and possibly even own the equipments. The Department recognised that adopting such an approach was a big change.[45]

43. Responsibility for the design integrity of modified equipment is clouded with uncertainty.[46] We therefore asked what steps the Department had taken to clarify precisely where the balance of responsibility lay between the Department and industry. The Department acknowledged that they retained responsibility for the safety of the equipment because they had a duty of care to the people who manned it and to the general public and that they could not divest themselves of this responsibility. They added that, as a general principle, the term "Design Authority" did not have any meaning in law but that for individual equipments the responsibilities placed on industry would have been made clear in the specific contract.[47]

Conclusions

44. The current complex and fragmented approach to modifications reflects the historical evolution of the Department but has hampered flexibility and introduced inefficiencies into the modification process. We welcome the steps the Department are taking to review their modification arrangements, and in particular their willingness to learn from United States and private sector experience in addressing the shortcomings. We recommend that the Department build on this encouraging start to ensure that all of their management processes align closely with overseas and commercial best practice.

45. It is clear to us that the Department regard the setting up of Integrated Project Teams, comprising all relevant stakeholders in the modification process, as the single most important initiative to emerge from their review of their organisation and procedures. We welcome the intention that each Team should be managed by a single leader with authority to resolve the counter-productive tensions and arguments which characterise the existing processes.

46. The Department explained that they were taking steps to establish a clearly defined customer organisation to help to prioritise potential modifications and to allocate funding for these. Responsibility for delivering what the customer wants, and hence for managing modification activity, will rest with Integrated Project Teams. These developments place funding responsibility with those who stand to benefit most from modification. We suggest that the Department put in place mechanisms to quantify the benefits achieved, disseminate best practice and set challenging targets for the newly formed Integrated Project Teams and their customers to achieve in progressing future modification activity.

47. The establishment of Integrated Project Teams is a significant step in the direction of better modification management. And the Department recognise that more needs to be done to ensure real gains in process efficiency. It will be important that the new computerised logistics Information Technology systems meet the emerging needs of Integrated Project Teams. Additionally, the Department need to ensure that they have suitable unified business processes in place to enable these Teams to make best use of the improved information as the systems come on stream. We note that the creation of a single Defence Logistics organisation was specifically aimed at unifying business processes. We will look for evidence that this objective has been implemented successfully and that the Department will be able to provide quantified examples of the efficiencies and improved operational effectiveness achieved.

48. We are pleased that the Department recognise that introducing the initiatives outlined represents a significant cultural change and that the full achievement of this cultural change will be a lengthy process. However, we note that several of the initiatives comprising the overall change package have already been implemented or are expected to be implemented in the near future. For example, the WRAM logistics Information Technology system is already operational and LITS soon will be; the first resource based accounts will be produced for the financial year 1999-2000; and Integrated Project Teams will be fully in place by April 2000. We therefore look to the Department to be able to demonstrate to us that some of the expected benefits are realised quickly.

49. The working relationships being established by the Department and industry also provide an opportunity to reduce both modification timescales and costs. We welcome the Department's intention to work more closely with industry and commend the Department's commitment to involve industry increasingly in managing aspects of equipment support, and in particular electronic obsolescence. We expect to see demonstrable benefits from industry's closer involvement in equipment support activity and their membership of Integrated Project Teams. In particular, we look to the Department to ensure that industry's expertise is utilised in identifying proposals for "economic" modifications drives down running and maintenance costs.

50. Overall, we expect the Department to set clear and quantifiable cost, timescale and operational benchmarks against which they, and we, can assess their success in achieving their aims of improving equipment management (including modifications) as set out in the Strategic Defence Review. We observe that so far there is an unquantified linkage between the specific initiatives referred to and the beneficial impacts they are expected to deliver. Where savings have already been factored into the Department's future financial planning assumptions, as with the new logistics Information Technology systems, we look to the Department separately to identify the scale of the expected benefits and savings, and to ensure that their management information reporting arrangements can attribute quantifiable benefits and savings to the specific actions they have taken.


38   Qs 50, 55, 125 Back

39   Qs 2, 49, 72 Back

40   Qs 51-52, 109 Back

41   Qs 3, 73 Back

42   Qs 75, 87 Back

43   Q106 Back

44   Qs 108-109 Back

45   Qs 48, 116 Back

46   C&AG's Report, para 2.20 Back

47   Q4 Back


 
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Prepared 27 August 1999