Examination of Witnesses (Questions 80
- 99)
WEDNESDAY 3 MARCH 1999
SIR ROBERT
WALMSLEY, KCB
and MR PAUL
HATT
80. My final question is about ship modifications,
and I suppose it is a question for Mr Hatt really. Bearing in
mind that ship modifications and shipbuilding are much better
done at Tyneside than anywhere else in the country, and I can
vouch for that, commercial yards, as we know, are constantly changing
their manpower cost structures and they are really getting things
down to the wire in order to be able to compete. Why is it then
that you do not deal in actual tender prices but that you still
use the outdated concept of man-weeks?
(Sir Robert Walmsley) I know Mr Hatt will probably
want to answer this, but I think I should and I am going to cheat
because I have just been advised that DRUMM will come in in three
to four years and not one to two. Shipbuilding, we used to use
these very quaint units of man-weeks, but at least we have now
got to man-hours. There is a reason for that. It is when we are
dealing with Rosyth and Devonport, as you know from other sessions
of this Committee, the actual cost of a man-hour varies depending
on the workload in the dockyard at the time. Therefore, if we
are undertaking a modification which is essentially the same,
fitting a new gunnery control system to a Type-42 Destroyer, it
is exactly the same number of man-hours, but the cost depends
on the other workload, so the first thing we need to do is to
negotiate the man-hours. It also provides a direct comparison
of course between Devonport and Rosyth in a way that pound costs
do not, but I absolutely agree with you, that once we get into
competitive warship refitting, then we are in pound notes.
Mr Davidson
81. I wonder if I could start off by following
a point that was raised by Mr Campbell about the question of British
Aerospace testing the competitors. Maybe you could just give me
an indication of how many occasions there have been when the Design
Authority or the company that had the lead role did actually say,
"Yes, this is actually far better than we are proposing and
it is far cheaper, so you should certainly go ahead with that",
and what sort of balance is there because you can see there is
an obvious clash of interests there?
(Sir Robert Walmsley) First of all, I am not aware
of any instances where a firm has said, "My bid is too expensive.
Please give the work to someone else". I did mention in answer
to an earlier question that one of the least satisfactory parts
of this is that modifications tend to have to be designed and
developed by the original contractor, so the original contractor
may have been selected by competition, but you are sort of stuck
with him whether you like it or not. If it is a huge computer
program, it is no good going to somebody else and saying, "Could
you modify this for us?" partly because they may not own
the intellectual property. When it comes to embodying the modifications
though, we do have a mechanism for seeking a competition and perhaps
Mr Hatt could explain that.
(Mr Hatt) There are two things. First of all,
we try to put pressure on, if you like, the Design Authority,
it must be said, through having, as Sir Robert described, the
DERA which deal with technical matters, but also, as the Report
indicates, there is sometimes a service engineering modification
route which can be a competitor to the Design Authority's suggested
modification. That is one part of the answer, if you like. The
other part is that we keep within government the so-called third-line
capability at places like RAF St Athan an ability to service and
upgrade and do very deep work on aircraft, Royal Air Force aircraft,
and that is in direct competition to what industry offers and
we are able to run competitions which sometimes industry wins
and sometimes it does not for specific work packages.
82. I am not clear whether or not that answer
contradicts the answer given by Sir Robert. I was specifically
asking whether or not there are situations similar to the example
which has been quoted where you do actually have a bid which has
come in from somebody else and where you have a Design Authority
bid. Sir Robert seemed to be saying that the non-Design Authority
bid never worked. I would have thought you had "daft"
stamped across the front of your head, if the Design Authority
always wins, because they are telling you the alternative is never
ever good enough. Surely you have to smell a rat somewhere there?
(Sir Robert Walmsley) I do, and it is probably
my fault for not explaining it properly. What Mr Hatt was describing
was the competition to embody the developed modification, a hugely
expensive activity which is straight production work, if you like,
where there is a ruthless competition. Thank goodness we have
third line, which is partly what it is for, to keep monopoly suppliers
under control. The Royal Air Force do jolly well and the integrity
of their accounting systems is quite sufficient to convince industry
that the competitions are fair and square. What I was responding
to was your question which was, did I know of a case where somebody
said, "I reject my own offering in favour of somebody else's",
I just do not know of any. What we try to do is ask the Design
Authority to undertake a modification—GR 4 is a very good
example, a hugely complex undertaking—and as Mr Hatt said
it will use DERA to check whether it is a realistic technical
proposition and we will use the best methods available to us to
make sure that we are not getting ripped off by the Design Authority.
First of all, that consists of a great deal of sub-contract competition.
On avionics, there are many companies in Britain which can provide
the avionics associated with GR 4, we can insist that they do
not take into their own house, so to speak, production work which
they could quite sensibly compete for on a make or buy basis.
We ask for that routinely in the contract. We do everything we
can in a non-competitive situation to get value for money but
it is not as good as competition. That is for the development
component.
83. Okay, but I still have this reservation.
Perhaps I can move on to something else. In paragraph 2.12 there
is a phrase towards the end, "Our analysis showed that collaboration
added an additional level of bureaucracy". I wondered whether
or not there was scope here to reduce that, whether you could
consider just simply proceeding yourself on some of these things
where you had identified a need, rather than spending time in
discussion you simply got on with it and then you might subsequently
have an issue about reclaiming from others?
(Sir Robert Walmsley) We absolutely do, particularly
when the design costs or the development costs, the R&D costs,
are very small, because there is very little benefit in sharing
with others. Because the Royal Air Force has got nearly 300 Tornados
which it wants to keep up to scratch, and that is a very substantial
proportion of the total population, the significant extension
of the production run in terms of modifications does not bring
tremendous benefits. What it does bring, of course, is operational
interoperability and that is really worth striving for with our
partners, so we are not lightly turning away from collaborative
opportunities for modifying the aircraft. We should always keep
that in view, but it simply is not worth pursuing when the R&D
costs are very small and when it is perhaps catering for obsolescence
of a nut and bolt, of itself a British particular feature of the
aircraft.
84. Presumably if you are identifying your
own need for a particular adaptation, amendment or improvement,
there is very little advantage in collaboration in those circumstances
in terms of the discussions? If you want it, why do you not just
do it, and if others decide to do it then you have the system
for recharging them. It seems to me there is a layer of delay
built into that which is completely unnecessary.
(Sir Robert Walmsley) As I have said, we try to
judge it. First of all, can we share the R&D costs, because
that is an economic benefit to us if we can get somebody else
to take a share. I should perhaps mention that Italy have joined
us on the fire modification, we share the cost of that, admittedly
80 per cent Britain, 20 per cent Italy, but nevertheless there
is a benefit. When it comes to timing, we do not want to waste
time talking about them endlessly in Munich, we have a perfectly
respectable route through the United Kingdom but only in modifications,
and we do that.
85. Even for something like the fire modifications,
as I understood the situation, you did have a mechanism for recharging
R&D in arrears should anybody else adopt the adaptation?
(Sir Robert Walmsley) Yes.
86. My point is, if you identify you need
it, why do you not just do it? Don't worry about recharging the
R&D at that stage, if anybody else makes that amendment you
can charge them then, and then you cut out a whole cycle of toing
and froing, which is presumably when the virtual teams come in
since it is international?
(Sir Robert Walmsley) The first point I would
say is that operational interoperability and securing the overall
design standard for the Tornado fleet remains of great interest
to the Royal Air Force. We do like to keep our partners with us.
The second thing is, I very much hope I have not suggested this
extra layer of bureaucracy, inevitable as it is in a collaborative
programme, is allowed to take charge of very small modifications.
That is not the way the Air Force proceeds. What is important,
though, is that they are all recorded in the end on the aircraft
drawings by the Design Authority and arrangements are made to
do that.
87. I wonder if I could turn to paragraphs
2.8 and 2.9 and the issue there about comparing with the private
sector, with the Germans and with the Americans? There seem to
be three approaches which seem to some extent to be mutually incompatible,
and yet in answers to Mr Campbell you seemed to be saying that
our new proposals will incorporate all of them. There seemed to
be somewhat of an inconsistency. Are all these proposals as undertaken
by the commercial sector, by the Germans, by the Americans, all
being adopted by us, and are they not incompatible in some ways?
(Sir Robert Walmsley) We are absolutely not adopting
the German system, which is very different from anything we propose.
It has its strengths but it is completely different from the way
we are going. What I did say was we are trying to learn from the
United States and we have drawn as many strengths from the United
States system as seem compatible to us. I also am very keen on
this commercial aspect because it is right to say their ability
to record information, to know exactly what is happening, with
huge inventories of assets, seems to be way ahead of us, and I
just think that resource accounting and budgeting which visits
the cost of ownership on the actual operator and owner of the
piece of equipment is going to shine a light on that in a way
which we find hard to imagine at the moment.
88. Could I turn to paragraph 4.10 and the
whole issue here of the United States, particularly the Navy,
having a category of modification designed for priority action
and to be economical? I was not clear from what has been said
by yourself so far whether or not you have the same thing and
whether or not there is anybody with that specific responsibility
and, if not, whether that was something which should be given
greater consideration?
(Sir Robert Walmsley) I do not think we have grasped
this yet. The report makes clear that modifications have been
primarily motivated for two things—capability enhancement
and capability sustainment, stopping bits going obsolescent or
trying to bring the reliability up to what it was supposed to
be. I think a third component of modification in the future which
we will find astonishing we do not have now is the cost of ownership,
and once we have this resource accounting and budgeting there
will be an absolute incentive on those responsible for managing
these modification programmes to reduce their cost of ownership.
The type of modification work which comes in here, as you see
from this United States AEGIS programme, will then be very much
the target area for the people in charge rather than an interesting
curiosity.
89. I wonder if I could raise one other
point arising from 4.17 and 4.18? I was going to pick up the same
point about man weeks and it is to do with ship building and modifications.
Of course, as everyone knows, it is the Clyde which has the best
ship building and ship repairing facilities in the country. One
of the things I constantly get from staff working there on your
contracts is simply the overwhelming bureaucracy of the whole
system, the drive towards gold plating there seems to be, in complete
contrast, they tell me, to the commercial work that they undertake.
Kvaerner in particular have been very much involved over a long
period undertaking only commercial work but they did get involved
with some naval work and the staff said it was just bedlam. The
number of people who crawled over things and sent paperwork back
and forward, the amendments. I just want to be clear that you
think the standards you are operating are in line with the best
practices of the commercial sector.
(Sir Robert Walmsley) Well, I think that is a
fair comment. I went to speak to Kvaerner and I spoke to the Managing
Director myself and he told me that we were capable of putting
more pages in a specification about a hatch than he expected for
a whole ship, so I asked him to take me through the detail. Once
we started to look at the detail, it all started to look a bit
different, but there is no question about it, that if we build
warships to commercial standards, then we do not need as much
bureaucracy, as it is called, but for "bureaucracy",
read "tight specifications", and there is no doubt about
it, that Kvaerner had quite a difficulty in constructing the HMS
OCEAN's hull. It was not anywhere else where a ship was launched
and was holed on launch. Now, I have a great respect for Kvaerner
and a great affection for them, but there is no question about
it, that building this ship was a very demanding task for them
and it has taken quite a long time to bring OCEAN into service,
and I am very pleased that it is now in service.
90. I understand the point you make and
I note the nature of your reply. However, the issue of naval specification,
and I recognise there are some complexities to do with defence
requirements, but they did also outline not just your point about
the hatch, but they were talking about pumping facilities, motors,
various things that they said they could produce commercially
or buy in commercially for a tenth of the price with the same
output, yet the specifications were so complicated, so difficult
and so gold-plated and in many cases elaborately being engineered
that it was just inordinately expensive, far, far more expensive
than they thought was reasonable in the circumstances. Yes, there
was obviously tension because they were having to take on new
work and so on, but I am not entirely satisfied that the naval
procurement process has actually got to the best standards of
the commercial sector yet. Would you accept that there is a tremendous
amount to learn about procurement and these sorts of issues?
(Sir Robert Walmsley) I absolutely readily admit
that we have a tremendous amount to learn about procurement and
related issues. I also believe that we can adopt commercial standards
in warship design, as we did in the ship that was constructed
at Kvaerner's, but where I think I would perhaps just show a little
bit of resistance is the concept that there is a great deal of
gold-plating in our warships. I know by international comparisons
that our warships are produced for the Royal Navy at a very, very
competitive price. I simply do not understand how it is possible
to spend as much money on nuclear submarines as other countries
do. We would not know how to do that if we tried. When we look
at what has been achieved on the Type-23 programme on the Clyde,
I know that we are not gold-plating those designs because I have
seen what has happened to the price. We discussed with the shipyards
whether there are any sore thumbs in the design which is causing
them to, so to speak, spend money where it is not going to yield
any benefit. Then I come back to my hatch. The reason our hatch
specification is so complex is that we do not want the hatch to
blow away with the slightest sign of over-pressure. That is a
lesson which has been learnt by people years before me, that a
very small over-pressure on a big hatch will blow it off if you
do not have eight clips on it, and that is why we insist on eight
clips. That is the conversation I had with the then Managing Director
of Kvaerner, and he understood that our specification had been
honed out of real battle experience, but I still accept that sometimes
they are too complicated and we are getting rid of naval engineering
standards even as we sit here and we are removing them, so I take
the lesson on board, but I just resist it a little.
Mr Twigg
91. Sir Robert, you have painted a very
interesting overall picture and we could not disagree with what
you have said. The DRUMM project, how important is that to you
to make the necessary changes we all want to see?
(Sir Robert Walmsley) It is something I am not
an expert in. I can only say that so many of the questions that
have been raised this afternoon we discussed in the Ministry of
Defence as I prepared myself for this meeting and the DRUMM project
was the answer to better information, and I am quite clear that
one of the many components of getting this better is not just
better organisation, but it is better information, so the DRUMM
project is important, but I cannot describe it in detail.
92. That is a bit of a worry for myself
because throughout the Report there are comments and recommendations
made about the information available. In fact I think you made
a comment before that the reporting arrangements were very much
pen and paper and here we are having a need to see these improvements
with information systems and it is vital to getting things right
and improving efficiency, but you do not seem to have a grip on
actually what it is about and what it means because management
information is so much more essential these days, especially in
this type of area, that I am a little bit concerned about how
much emphasis is being put in from the top. I may be being unfair
to you because you have got lots of other things to look after
as well, but it does worry me a little bit and maybe you would
like to comment further on whether you think you may need to get
yourself further up to speed with it or whether you feel confident
that those who are dealing with it are on target and doing everything
that is necessary to bring about these improvements.
(Sir Robert Walmsley) I am absolutely confident
that those who are going to depend on this system to deliver the
improvements that I have tried to outline this afternoon have
a detailed grip of DRUMM. When I said I did not have the detail
of it, I meant that if somebody took me into a description of
how many terminals it had or what the cost was, I could not answer,
but I know that DRUMM has got a functionality which is absolutely
essential to delivering better information to this programme,
that those who are responsible for DRUMM, who have DRUMM in their
budgets, are the people who own the support money for the Army
and, therefore, have a direct incentive to make DRUMM work. I
know that the systems exist to connect all the Army units and
we have talked a lot about locating Bedford trucks this afternoon
and that requires a very, very comprehensive Quartermaster General
and Land Command Communications System and I know that exists,
so it is a cross-Army system involving the two big commands involved
in materiel management and they have every interest in the world
in making sure that they deliver the performance I have outlined.
93. I will not go back to the Bedford trucks
because we have been over that, but how confident are you then
that things are going to improve? Maybe you could just outline
to us how you know that. In the meantime, it is going to be three
or four years until DRUMM, which is quite some considerable time,
so how are things going to move on in that time and what has been
put in place to bring about these improvements?
(Sir Robert Walmsley) Well, it is a very big organisation.
I did say that DRUMM would be finished within three or four years
and I have now been told that it is costing £168[6]
million, but of course the other services are making efforts as
well. I hope it does not sound rather partisan of me if I say
that the Fleet Air Arm have introduced a system called Work Recording
and Asset Management and that is in place now and is delivering
the improvements and providing the structure which will prevent
us losing configuration management control of the Mark 2 Sea King
airborne early warning aircraft, so that exists now and we will
not have to wait until the end of DRUMM for that, but it is completely
independent. UPKEEP, which is the naval system for ships, exists
now.
94. But that gap that DRUMM is going to
fill, how is that being dealt with at the moment? I understand
what you are saying, but there is still a gap there, is there
not?
(Sir Robert Walmsley) Well, first of all, the
organisation is being simplified. I mentioned that the chain had
four links and that will be down by April of next year to, I think,
just three links and perhaps with the prospect of coming down
to two. I am absolutely clear that whether they are computer or
pencil and paper systems, the less intervention there is between
the person who generates the data and the person who needs to
use it, the more likely it is to work, so the pencil and paper
system is being streamlined, and of course I am being a little
bit unkind because actually at any individual location it will
be logged and recorded on the computer, but I am trying to not
leave you with the impression that it is a pan-Army system at
the moment. It requires manual intervention and by reducing the
number of reporting points, that will be simplified and, therefore,
I am quite confident that that is a big step towards making it
more successful.
95. Have you any views then on the sort
of efficiency savings you could make given that you have not actually
got the sort of information which would deal with some of these
costs of duplication, et cetera? Have you got a view on efficiency
savings because again the NAO say in their Report that a single
percentage point efficiency saving in the use of modification
resources revealed more than £12 million annually, which
is quite a big incentive?
(Sir Robert Walmsley) Well, that is absolutely
true, that if you take a percentage point of any large sum of
money, it is still a very large sum of money.
96. So you are comfortable with that sort
of cut and you think that could be done?
(Sir Robert Walmsley) Absolutely, and IT systems
are not a source of overall additional expenditure. When we make
an investment in an IT system, we expect it to deliver benefits
and it is best if it delivers benefits to those whose budgets
are going to have to pay for it.
97. Have you got any targets yourself set
at the moment?
(Sir Robert Walmsley) The targets are implicit
in the budgets which came out of the Strategic Defence Review.
98. So that is regardless of the information
you may have got?
(Sir Robert Walmsley) Well, that took account
of these IT investments which themselves had to be loaded into
the budget at the expense of efficiencies because an IT system——
99. Well, you are going to resource accounting
of course, so have you taken account of that in terms of taking
account of capital expenditure and revenue expenditure, et cetera?
Have you looked at that in terms of revenue savings, not just
talking about capital savings, but revenue savings and is there
greater efficiency?
(Sir Robert Walmsley) I do not think we probably
did because we were in a cash regime at the time we took the decision,
and it probably would not have been possible two years ago when
we were thinking about the investment decision and DRUMM to move
forward into an accounting system which did not exist.
6 Note by Witness: The cost of DRUMM, is in
fact, £140 million not £168 million as stated. Back
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