City Forum - 07 February 2006
Minister for Defence Procurement, Lord Drayson, addresses the City Forum
Lord Drayson
Investing in our Defence future
Good afternoon. I am delighted to be here today to take part in the discussions on the implementation of the Defence Industrial Strategy. As most of you will know when I took up my job as the Minister for Defence Procurement I agreed with John Reid that the production of the Defence Industrial Strategy should be my highest priority. I gave the MOD and industry a tough challenge, to produce a gritty strategy by Christmas. We can all be proud of ourselves for having achieved this. However, I also made clear the Defence Industrial Strategy had to be a framework for action for both government and the Defence Industry. It needed to be not only a diagnosis of the issues facing the industry but also set out ways to tackle them.
Consequently I expect the DIS to frame the whole approach of the Ministry of Defence and Armed Forces and those who would supply it, allowing industry to plan, jointly with us, for the long term. It must be used to provide the framework for project decisions. Procurement performance - whether our projects deliver on time and to budget - will be the real way in which the DIS is judged. It is a step change in approach with a focus on “Team Defence”, a team including the services, civil service and industry who work to deliver the defence vision of a force for good in the world. It is time for our Defence Industry to be publicly recognised as a key player in this team. Today I would like to focus on what Team Defence means, focusing in particular on the supply chain and partnering.
Team Defence did an excellent job in delivering the strategy which has largely been welcomed. But one criticism that has been made to me is that the DIS said little explicitly about the SME sector. Media coverage of the DIS tended to focus on the implications for BAE Systems and other prime contractors. However, just because a company is not mentioned specifically does not mean that the DIS does not apply to it. The Strategy is for everyone in the industry throughout the supply chain.
Having started and built technology companies myself I know how difficult it is to cope with the bureaucracy and complexity of dealing with government departments. I also know that without a dynamic and innovative SME sector, like any industry, the defence industry will stagnate and become inefficient and complacent. I am committed to making the MOD easier for small companies to do business with. I recently visited a very impressive engineering company in Poole, South Dorset Engineering, which brought home to me how much our Armed Forces rely on the army of specialist suppliers and how we ignore their needs at our peril.
In part, concerns that we ignore the supply chain and SMEs are a perception problem. In fact last year the MOD let contracts direct to SMEs, amounting to about half a billion. But it is also a criticism I can understand. As you are aware, the DIS was completed in a short period because industry was crying out for the clarity it needed to take future investment decisions and we had important decisions on major programmes, such as the carriers, which needed to be taken in the context of a strategy. This meant it was not possible to engage directly with every defence supplier, but we have tried to capture as full a perspective as possible of the whole industry’s concerns, not just the biggest companies. We have engaged as extensively as we could, working through the Defence Industries Council and the National Defence Industries Council at which the Defence Manufacturers Association (DMA) was represented. As a former Chairman of the Bio Industries Association I am clear that trade bodies such as these have a important role in ensuring that their members, of all sizes, are properly represented and that they establish good working relationships with their industry’s customers. As we were working on the DIS I personally met not only representatives of the DMA and SBAC but also a significant number of Tier 2 and 3 companies. Many of the concerns they raised were familiar to me as a technology entrepreneur looking for a route to market.
As we now move towards the implementation phase of the DIS we will be concentrating more on the underlying industrial base, I expect we may need to change some of our organisation’s focus on ‘key suppliers’ to ‘key supply chains’, and broaden our engagement. Part of the DIS will also be an effort to communicate more clearly what our processes currently are, who does what in acquisition, and our future plans, all of which may help smaller companies without the spare capacity to maintain continual communication with us to understand where the opportunities may be, and who to talk to if there is any confusion. With this in mind we have issued on the web a Who’s Who in the MOD to make it easier for companies to identify the right contact points.
Team Defence extends well into the supply chain, including not just SMEs but also the university sector, to identify the sources and sites of key capability and technology, I am sure Roy Anderson will elaborate on this shortly. We are also working with the big primes to understand and manage their supply chains better, in ongoing work. This is not just about driving unnecessary cost out of supply chains – though that is often necessary – but also ensuring that the companies in the chain that add most value receive the appropriate rewards. More work is needed in this area, and the DIS commits to this being taken forward. There is no single model of how SMEs and big primes should relate – or indeed how the systems integration of platforms should relate to the prime contracting entity – but as a general principle we would expect SMEs and primes to work ever more closely together, to manage the whole military capability they supply to the MOD throughout the life of that system.
In the DIS we assess carefully which capabilities do need to be retained onshore on national security grounds, taking into account advances in improving assurances of security of supply, and the nature of the market in different sectors. Intellectual Property Rights are often a key consideration here, as whether or not we can gain sufficient understanding to modify our equipment through-life to meet UK national requirements can be a deciding factor. As far as our own Intellectual Property policy is concerned, we published this last year. I am very clear that IP and Design Authority issues are increasingly important in Defence and when I scrutinise projects, sound IP arrangements are one of the first things I look for. We currently spend around 5-6% of the research budget with SMEs and as we increase the proportion available to competition, such companies will of course have the opportunity to win even more.
In areas such as CBRN Force Protection, where there is a healthy competitive global market place and the UK is a world leader, we have a vibrant industrial base characterised by a significant numbers of SMEs working directly with the MOD. Scott Health & Safety Ltd are a good example of this. They provide the General Service Respirator (GSR) which is coming into service this year. They provide a proactive, innovative and flexible service – the respirator is expected to enter service on-time and the company is working hard with the MOD project team on ways to reduce the Whole Life Costs of the respirator – which they have been successful so far in reducing by an expected 45% (some £150m).
In other sectors, such as maritime, the DIS identifies the need for the industry at the top level to consolidate and for major changes in the relationship between the industry and Ministry of Defence. We are now driving forward with this work but as we do so it is important we do not forget companies such as MSI who will provide the Royal Navy with the 30mm DS30 Mk2 Automatic gun – currently being fitted to the Type 23 Frigate in a £15m contract. This innovative gun and particularly its electro-optic sensors are providing capability against the increasing threat posed by fast in-shore small surface vessels. If we lose sight of companies in sectors where the focus can naturally be on the major primes, we do so at our peril.
SMEs also play a critical role in our ability to respond quickly to Urgent Operational Requirements on operations. For example G3 Systems took only three months from the start of the process to develop and deliver a computer tomograph- a kind of “super X-Ray” - to the British Military Hospital in Iraq on 1st April 2005.
In making Team Defence a reality through-out the supply chain we also need to see changed behaviours from SMEs and the Trade Associations that represent them. The MOD can not do this to industry. I would like SMEs and the Trade Associations to become more proactive. The best already are. There are opportunities to work with the MOD for the SME community, but these have to be taken. The MOD’s Commercial Services Group have a Defence Suppliers Service, and they run “meet the buyer” days, but without SMEs making themselves available to talk to us, we will not know if we are using the whole supply base effectively.
SMEs should be talking to their Trade Associations, or the Society of British Aerospace Companies (SBAC) who work a great deal with SMEs; I know for a fact that they have a Conference on the 1st August to look at supply chain relationships. Also SMEs need to use their links and make personal relationships. In the DIS we have set an agenda for an open and transparent relationship with industry, and we will honour that- but we can only do it successfully if the whole defence industrial community is prepared to make this change too.
We are also looking for changed behaviours from the major primes and the way they interact with their supply chain. As the DIS makes clear the over-arching competitive model still exists, and Prime Contractors need to ensure that they run open and fair competitions so that SMEs have the opportunities to gain Defence business. As I have already alluded to we are working with the major primes to help us understand the whole of the supply chain. We need to understand the totality of supply chain relationships and currently we don’t. We can only do that if Primes work with us to help understand where innovation truly lies, and where the areas of potential vulnerabilities exist.
Partnering
The other area where the DIS has raised concerns is around partnering. There are those who have suggested this is simply about increasing the MOD’s reliance on major monopoly suppliers in key sectors. However, this fundamentally misunderstands what partnering is about. When I worked in the bio-tech industry partnering was one way in which we delivered long term complex development programmes with the major pharmaceutical companies. From personal experience I know it was not a soft touch but a robust and rigorous commercial arrangement where, like a successful marriage to last for the long term both sides had to stay sexy. This is what the MOD means by partnership – performance on both sides delivering real benefits to both. This is vital if partnering is to be successful and is why I am taking a personal interest in ensuring that the partnering arrangements we develop with industry are robust and binding.
I see the work we are doing with Agusta Westland to develop a more open, predictable but demanding partnered relationship to realise business transformation within the company as the model. The concept is simple – in return for a long term relationship on certain aspects of our helicopter needs – AW deliver a significant improvement in their performance for us. For this to work absolute clarity is needed up front about what each side expects and how they can be held accountable for delivering it.
As well as partnering with industry, I would not be surprised if a longer-term, systems-focused perspective for through-life capability management led to more partnering, or other closer relationships, within industry - horizontally and vertically. Practically, MOD’s own engagement in this may often be through joint management of the supply chain with partners at the prime level, or with systems integrators, but all companies will have their part to play – competing vigorously, where this will get us the best value and best technology; cooperating heartily, where this can best ensure the continuous development of our systems throughout their lives.
We are exposing more than ever before about our forward equipment plans – and I have indicated that we will, at the sector and project level, continue this process, to enable our suppliers to make informed decisions which should encourage partnership. At the project level, too, we are ready to consider sharing more, in order to meet our mutual objectives. In return, we expect our suppliers to increase the information they give us, to help confirm the overall coherence of what we are aiming to achieve together. We acknowledge that we have to protect commercial data, just as industry needs to protect our own information. And industry needs to acknowledge the health warning; planning data is just that, and plans may change over time.
Where such exchanges need to tackle particular sustainment or efficiency issues, we will continue to consider establishing dedicated teams to work with specific companies, individually or collectively, to analyse the issues and chart a way ahead. We have appointed Allan Nicholl, formerly Future Artillery Weapons Systems Team Leader, to head up such a team to look at the difficult issues around key complex weapons capabilities. Elsewhere, besides specific days for sharing information with invited industry – and there are rights and responsibilities attached to this greater level of transparency, it is not the kind of thing we could publish to the whole world. We want a framework that will improve and develop our knowledge, understanding, and relationships with key suppliers throughout the supply chain, focusing on mutually beneficial improvements in decision making and performance, and improving risk management across our portfolio. What I want to see is the MOD adopting an account management approach for major key companies. Of real significance, we want to identify in even more detail critical sources of key capabilities and technology. We will shortly be discussing the mechanics of this with the National Defence Industries Council.
Conclusions
The DIS framework for action is demanding, and wide-ranging and embraces all of Team Defence. The MOD, for its part, is already changing to ensure it lives the Defence Industrial Strategy in action. The Enabling Acquisition Change Team, under Tom McKane and reporting to the Permanent Undersecretary, is conducting a review from first principles of the wider acquisition construct and will give final recommendations by May. The Directorate of Defence Acquisition, working to the Acquisition Policy Board which I chair, is coordinating all the various urgent improvements we have committed to, as well as the sectoral work and the further work to investigate underpinning technologies and innovation, and is reporting good progress to date. There will no doubt be bumps on some of these tracks, but I am committed to keeping us on course. Just as we delivered the DIS in 2005 I am looking to apply it to transform defence procurement in this country in 2006. If we succeed we will see the results in our improved performance from 2007 onwards and real benefits for those parts of industry which have engaged actively.
