Summary

141.  2002/03 saw significant further improvement of the MOD's management tools and processes, helping to deliver significant efficiency gains. Implementation of Resource Accounting and Budgeting was completed across all the Department's activities. We introduced a sustainable development strategy. Defence Internal Audit confirmed that the Department was successfully using the Balanced Scorecard approach for improved strategic management. Corporate governance and risk management arrangements were further strengthened.

Resource Accounting and Budgeting (RAB)

142. Although the Departmental Resource Accounts for 2001/02 were qualified by the National Audit Office, the Comptroller and Auditor General congratulated the MOD on encouraging RAB progress to date. The qualification was in respect of two remaining specific supply system issues (MOD assets held by industry and stock); and a £602M overspend against resources voted by Parliament due in part to the decision made late in the year to take Sea Harrier out of service earlier than planned. This was a considerable improvement compared to previous years. The Department has continued its strenuous efforts to further improve the Accounts, enabling the Comptroller and Auditor General to remove one of the previous qualifications. However, despite significant improvements in the accuracy and reliability of our stock management information, further progress is still required in this area before this, the only remaining qualification in the Accounts, can be lifted. We expect to achieve this in the Accounts for 2003/04. (See also the Comptroller and Auditor General's Report in Section 2 of this publication). With the introduction of RAB for the Equipment Plan and as the financial basis for project approvals, the Department effectively completed during the year the transition to operating on a RAB basis for all its day-to-day activities.

Efficiency

143.  The Department's new efficiency reporting mechanism, designed to capture output gains from efficiency as well as input savings, began in 2002/03. It seeks to analyse each of the key business processes that support the delivery of military capability and identify appropriate targets against them in order to drive improvements in their efficiency and effectiveness. Targets have been set against five key processes, and performance against the PSA target is measured by a weighted average (based on the resource costs of the processes concerned) of performance against these targets.

144.  Overall, the Department remains on track to achieve an average of 2.5% per annum efficiency gains over the four years to 2005/06, with 2.7% achieved in 2002/03. Performance against the overall target for each of the processes (personnel and training, acquisition, operational and logistic support, management support and infrastructure) is shown in Table 18.

145.  There are also efficiency achievements that fall outside the system. For example, an initiative by the Defence Logistics Organisation to develop a common gearbox build standard across the Challenger tank fleet improved the reliability and sustainability of existing gearboxes and will thus reduce the need for new purchases. Also, it is estimated that implementing suggestions made to the award-winning staff suggestion scheme - GEMS - in 2002/03 will achieve efficiency savings worth around £9.5M per annum.

Defence Logistics Organisation (DLO)

146.  The DLO's Business Change Programme is an important element of the overall Defence Change Programme (see paragraph 175 below). Between April 2000 and March 2002, the DLO achieved 5.6% of the required 20% Business Change Programme savings. The Treasury has now agreed that the balance of the strategic goal to be achieved by March 2006 can be regarded as a further 14% output efficiency against a revised baseline of planned expenditure in 2002/03. The revised baseline makes the tracking of future efficiency gains simpler and more reliable. The 14% target reflects the change in the Cost of Capital rate from 6% to 3.5% from April 2003, which makes it harder for the DLO to achieve savings from asset reductions. The overall efficiency challenge for the DLO is unchanged.

147.  The acceleration of existing improvement programmes (including reduced costs for warship maintenance, the restructuring of the Tornado aircraft maintenance programme and stock and asset disposal programmes) enabled the DLO to make 3.5% savings in 2002/03 against an in-year target of 2%. This leaves a balance of 10.5% to be achieved by March 2006.

Safety, Health, Environment and Fire

148.  The Department continued to ensure the occupational health and safety of Service and civilian personnel and others affected by the Department's activities. We participated in the Government's Revitalising Health and Safety agenda and played a full part in the development of targets and strategies that make up the Framework for Sustainable Development on the Government Estate. The Government has set priorities for social progress, effective protection of the environment, prudent use of resources and the maintenance of high and stable levels of economic growth. These have become known as the UK's Sustainable Development objectives. Based on the Government model, the MOD developed a sustainable development strategy, overseen by the new Sustainable Development Steering Group (SDSG). More details on Health and Safety, Environment and Fire Safety issues and activities can be found at Annex D.

Performance Management

149.  Development of the MOD's performance management regime, using the Defence Balanced Scorecard, continued during 2002/03. The Scorecard was further adapted to meet the Defence Management Board's priorities for the year and again formed the framework for the annual Departmental Plan. All eleven Top Level Budget Holders, including the single Services, and an increasing number of lower-level organisations continued to improve their performance by actively using scorecards for strategic management. And the process for providing performance data to the Defence Management Board was given 'Substantial Assurance' by Defence Internal Audit in September 2002. Subsequently, the Defence Management Board's focus has shifted from reviewing historical trends to a more forward-looking perspective with assessments now covering the four years of the annual planning round, allowing for longer term issues to be identified and tackled earlier in a more programmed manner.

150.  The MOD employs a wide range of data validation arrangements and, in accordance with good corporate governance practice, much of the internal validation of MOD's own systems - including Operational Capability Audits and Internal Audit Reviews - is managerially independent of the organisations being assessed or else is subject to wider scrutiny through, for example, the National Audit Office or the House of Commons Defence Committee. Certain data systems are also subject to National Statistics benchmarks as the Defence Analytical Services Agency is part of the Government Statistical Service.

Corporate Governance

151.  During the year, the Department continued to develop its system of internal control to achieve compliance with Treasury requirements for Central Government. In particular, risk management was successfully integrated into the Department's performance management system, with performance monitored and discussed quarterly at Defence Management Board meetings, including consideration of key risks. Mechanisms were developed to strengthen the management of scientific risks, particularly to Service personnel health, and in safety and environmental matters. The system was fully operational by 31 March 2003.

152.  The roles of the Defence Audit Committee and Defence Internal Audit continued to be refined. The Defence Audit Committee sits at the heart of the assurance process, considering inputs from a range of sources across the span of the Department's activities, and the programme of Internal Audit moved to a risk-based approach. In addition, assurance measures were developed to ensure that the important projects and programmes carried out by the Department do not suffer from any of the common causes of failure identified by the Office of Government Commerce and the National Audit Office. These activities, combined with major audit and assurance work, enabled the Department to produce its first fully compliant Statement of Internal Control for 2002/03 (as set out in Section 2 of this document).

Last Updated: 3 Dec 03