What is core to being an Intelligent Customer?

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Priscilla Blair
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1 March 2011 Acquisition Reform What is core to being an Intelligent Customer? Dr Geoff Robins Group Managing Director Defence, Aerospace and Communications Abstract There are a number of very significant challenges being faced by the MoD today. The challenge of working within a reducing budget while maintaining operational capability is difficult enough, but at the same time the department is also trying to transform the way in which it manages and undertakes its business in the future. Fundamentally, MoD and DE&S, in particular, need to become leaner and more efficient while retaining its role as an intelligent customer. This paper seeks to examine some of the questions that need to be explored as MoD and DE&S make this transition, drawing upon experience from other industry sectors. The key to such a transformation will be for MoD/DE&S to truly address what is core and what is non-core in each of its supply chain quadrants. This will enable MoD to effectively source non-core services and capabilities externally from the private sector and at the same time set in place plans to focus on sustaining world class capabilities in its core roles.

2 1. Introduction There are a number of very significant challenges being faced by the MoD today. The challenge of working within a reducing budget while maintaining operational capability is difficult enough, but at the same time the department is also trying to transform the way in which it manages and undertakes its business in the future. Fundamentally, the underlying direction of travel is for the MoD and DE&S, in particular, to become leaner and more efficient. However it is critical that DE&S retains its role as the intelligent customer if we are to ensure that the UK has the military capability it requires to meet its foreign policy objectives. Given this backdrop this paper seeks to examine some of the questions that need to be explored as MoD and DE&S make this transition, drawing upon experience from other industry sectors. In this respect Atkins, the largest independent engineering services company in Europe is ideally positioned. Atkins works across all major infrastructure sectors: Rail, Energy, ways, Water, Defence, Security, Aerospace and Communications both within the UK and across the world. Our role in these sectors is to Plan, Design and Enable major and complex multi-disciplinary projects, ranging from the Olympics, widening the M25, the design of the London Crossrail project, through to new nuclear build programmes. Fundamentally we are objective and impartial and we have no conflict in the downstream manufacturing or construction activities that take place in the sectors in which we operate. We strongly value this independence as do our clients who recognise the value this impartiality brings particularly when making important investment decisions. 2. Context DE&S Operating Costs Annual spend on defence equipment and support supply chain When we look at the annual defence budget spend on equipment and support, some 90% flows to the defence industrial suppliers whether that be to prime contractors, OEM s or SME s and approximately 10% or some 1.5Bn is spent by DE&S in managing the procurement and support function. Controlling this spend is now the utmost priority and the recent Strategic Defence and Security Review has started to address this by essentially reducing the overall size of the triangle. However such an exercise also needs to address the role and size of the procuring function and in particular, given today s economic pressure, how thin can it become while retaining its ability to remain an intelligent customer. Given this context this paper seeks to look at the scope being addressed by the DE&S organisation and how it might adapt given the current financial constraints and pressure to optimise delivery. Defence equipment and support has an annual spend 14.5Bn* 10% of this is operating costs 90% lies within the supply chain *MoD consolidated departmental resource accounts 2009/2010

3 3. Supply Chain Portfolio From our experience, many organisations involved in large scale, complex procurement and support activities manage their supply chains on a portfolio basis. They more often than not use a version of the 4-box model which in its simplified form, segments the supply chain into the four distinct sectors set out below: Value Leverage (Modified) Off the Shelf e.g. Armoured Fighting Vehicles Unmanned Aerial Vehicles Strategic New build / ly modified e.g. Nuclear Submarines Complex Weapons Complex Routine Off the Shelf e.g. Support consumables Bottleneck Bespoke, one-off design e.g. Bespoke computer systems Non - Complex Risk Strategic - value / high risk typically complex procurements frequently delivered by monopoly suppliers comprising of new build or highly tailored products to meet specific client requirements. Here the focus is on developing sustainable long term relationships with strategic suppliers. In defence, examples would be equipments such as Nuclear Submarines or Complex Weapons. Leverage - value / low risk complex procurements, this is typically where there are a handful of suppliers who can supply similar types of product and buyers have real leverage over the supply chain. Many equipments here are already off the shelf but requiring some level of customisation. Defence examples here would be AFV s, UAV s, etc. Routine - These are low value / low risk commodity type procurements. Buyers here implement effective category management, aggregating volumes with other organisations achieving economies of scale and consequently better prices and conditions. Many of the procurements here are true COTS. Defence examples here would be standard items of military equipment through to commodities. Finally Bottleneck - value but high risk is the one area of the supply chain which all organisations wish to avoid. This is the area where the low-cost, bespoke, one-off design from the manufacturer fails to materialise and frequently has knock on effects to programme timescales and ultimately capability delivery. In Defence terms there is a clear need to ensure that we maintain sovereign capability in key areas. For example the formation of Team Complex Weapons around the time of the previous defence industry strategy reinforced this area as strategic rather than an area where leverage could be sought. But equally the decision that armoured vehicle manufacture can take place with assured off-shore suppliers has placed this capability in the leverage sector. Clearly each of these sectors demands a different approach both to managing the supply chain for that sector and the way in which to approach acquisition and support. It s also useful to know just how much money is spent in each of these sectors and is the balance right between say the strategic sector where contracts are typically not competed and the leverage sector where competition is the order of the day. The remainder of this paper will concentrate on the top two elements of the 4-box model; those involving complex procurement. While the other two quadrants are no less important in terms of saving money, they should be easier to manage and control once the right commercial regime has been established.

4 4. What core roles should an Intelligent Customer retain? Core activities are those that are central to an organisations purpose. From our experience, many industrial organisations see this as a fundamental Make / Buy decision. The make element is why the organisation exists and leading organisations focus their efforts solely on being world class at their core tasks and processes. In so doing, leading organisations then outsource non-core activities to equally focussed and efficient third parties the buy element. Make Buy Core Decider Role (Retained internally by MoD) Activities which are fundamental to MoD s purpose where the unique expertise only resides in MoD e.g. Military capability and requirements management Managing the portfolio of military capabilities to meet UK defence planning assumptions Managing the definition and trading of military requirements Acquisition policy and strategy Policy and strategy concerning sovereignty and long term strategic supplier management Non Core Provider Role (Externally sourced) Activities which can be sourced from third parties where: A competitive market for best practitioner expertise exists, driving innovation and cost advantage Switching costs are relatively low so MoD can change if supplier underperforms A specialist supplier exists, better placed to maintain a critical mass of skills across a wider market base When applying this logic to MoD it is clear that the identification of military requirements is a core function and must remain so, as military requirements are fundamental to the MoD and the unique expertise in identifying them only resides in the MoD. Equally the overall acquisition policy and strategy must remain a core activity. Here we are looking at issues such as which capabilities and industry sectors are sovereign and long term strategic management of the supply base, an example perhaps being in migrating a capability from the strategic to the leverage sector, perhaps over the timeframe of a decade. For the non-core or provider role, it is about the MoD, and DE&S in particular, identifying those activities where there is a competitive market for best practitioner expertise and then competing those activities. Having a competitive market drives innovation and efficiency in the private sector which the MoD can then benefit from. It is important to note that non-core doesn t mean that the activity is not important; on the contrary, it means that it can be carried out more effectively and efficiently by a third party and it s the combination of core roles supported by non-core roles which makes the MoD an intelligent customer. Leading organisations follow this route not only to improve delivery but also to reduce cost.

5 5. Strategic Sector If we now look at the Strategic segment of our 4-box model, for MoD and DE&S in particular, managing the strategic supply base is a huge challenge requiring specialist skills to sustain long term relationships. With strategic or typically monopolistic suppliers competition at the first tier is difficult to achieve, consequently MoD needs to continue to work closely with the Primes to drive competition into the supply chain to deliver better value for money at Tier 2 and below. However, in this market segment experience from other sectors would suggest that duplication of programme and project management activities is non-optimal and is better conducted in the supply chain. For example, in the transport industry it is normal to outsource significant responsibilities in project and programme management to the supply chain resulting in a much thinner core client. Industry also regularly reviews what is contracted in the Strategic segment in order to ensure value for money is being achieved and that other contracting options are not being overlooked. This is potentially an area that might now be revisited by MoD in the light of its stated intention to buy more commercially off the shelf (COTS) equipment in the future. It is also interesting to note that Min DEST has recently appointed Lord Currie to chair an Independent Review of regulations used by MOD when pricing work procured under single source conditions which typically amounts to 8.7Bn annually, a significant proportion of the overall annual spend. Our experience from other industries is that more contracts are placed competitively e.g. the NDA which placed 73% of its contracts by value, competitively in 2009/10. In maintaining its intelligent customer capability DE&S clearly needs to retain its understanding of critical technologies and technical areas as it is unable to rely on a competitive market space to develop these. This includes the complex engineering and systems integration issues associated with the procurement and support of military platforms as well as specific niche technology areas. However, industry experience would also suggest that using outsourced engineering and technical services such as independent safety assessment, reliability analysis and performance modelling are a perfectly viable model rather than retaining such capability in-house. Value Supply Chain Portfolio Leverage (Modified) Off the Shelf e.g. Armoured Fighting Vehicles Unmanned Aerial Vehicles Strategic New build / ly modified e.g. Nuclear Submarines Complex Weapons Complex Routine Off the Shelf e.g. Support consumables Bottleneck Avoid Bespoke, one-off design e.g. Bespoke computer systems Non - Complex Risk Core Decider role (examples) Relationship management Sustaining long term relationships with strategic suppliers Commercial management Effective competition at Tier 2 and below Through-life availability-based contracts Critical technology & technical areas Understanding of critical technology, engineering and systems integration issues Non Core Provider role (examples) Supply chain activities Duplication of activities carried out by platform primes or system integrators Acquisition and support of routine Government Furnished Equipment(e.g. for the legacy Naval Fleet) Non-critical technology & technical areas General engineering and technical services

6. Leverage Sector In the leverage segment the client is more often buying off the shelf and is able to construct effective competitions. This is equally true for MoD.

6 6. Leverage Sector In the leverage segment the client is more often buying off the shelf and is able to construct effective competitions. This is equally true for MoD. However, there will always be some degree of customisation for the UK military user introducing a degree of modification technically a modified off the shelf purchase. The availability of a competitive market means that MoD/DE&S does not need to have such an intimate understanding of the technologies and engineering. A good example of this is in the information and communications sector, where commercial developments both provide a competitive market space and drive technological development. It is in these leveraged markets that DE&S therefore needs to sustain a smaller set of core roles as an intelligent customer. It is perhaps in the leveraged sector of the supply chain that DE&S has the opportunity to make some fundamental changes to the way it which it currently undertakes its business and draw more heavily on industry expertise whilst maintaining high level control of the programme. This is particularly true if, as the Defence green paper indicates, the UK will move more to COTS procurement and only commit to development if there is a strong export potential. In such a radical shift of buying pattern the practice and experience in other industries such as civil nuclear, oil & gas and major infrastructure development are highly relevant. In these commercially orientated industries there is a stronger focus on acquiring off the self and willingness to trade requirements to an 80% solution, hence minimising the modified elements and the subsequent cost and time impact. The recent armoured fighting vehicle procurement of Scout is a good example of where MoD/DE&S achieved a competitive leveraged market space rather than migrating this capability to the strategic sector as was signposted in the previous Defence Industry Strategy. Value Supply Chain Portfolio Leverage (Modified) Off the Shelf e.g. Armoured Fighting Vehicles Unmanned Aerial Vehicles Strategic New build / ly modified e.g. Nuclear Submarines Complex Weapons Complex Routine Off the Shelf e.g. Support consumables Bottleneck Bespoke, one-off design e.g. Bespoke computer systems Non - Complex Risk Core Decider role (examples) Portfolio & programme management Managing the (high level) programmatic balance within a military capability area Crown agent Retaining sufficient capability to act effectively as a crown agent (e.g. safety authority & financial management) Niche sovereign technology Understanding key niche technologies (e.g. crypto & electronic warfare) Non Core Provider role (examples) Procurement & project management Structuring and managing complex procurements Engineering & technical services Provision of general engineering and technical expertise

7 7. Implications and Challenges This paper has sought to set out some of the challenges facing MoD/DE&S in its transition to a thin client while retaining its role as an intelligent customer of complex defence equipment and capability. In undertaking such a transformation there are examples that can be drawn from other industrial sectors that can be used to help optimise a long term solution for MoD. In this context the simple four box model has been used to highlight the following: In the strategic buying segment there is a need to ensure that alternative procurement models are evaluated and if possible elements should be moved to the leverage segment In the leverage segment there is potentially even greater opportunity to change the current contracting regime, given the stated move to more COTS procurement. In the routine segment there are clearly efficiencies that can be achieved once the right commercial framework and discipline have been established In an ideal world items in the bottleneck segment should be migrated to other segments. However, given the complexity of MoD equipment there will inevitably be procurements of this nature; these demand tight fiscal control and regular go/no go assessment decisions Underlying all of the above is the need for the MoD/DE&S to maintain its position as an intelligent customer. Experience from other sectors would suggest that this can be achieved by also using the supply chain to provide expertise in areas such as project management and engineering support, over and above the current trend of simply outsourcing support functions and roles. The key to enabling MoD/DE&S s to move to a thin intelligent client is to truly address what is core and what is non-core in each of its supply chain quadrants. This will enable MoD to effectively source non-core services and capabilities externally from the private sector and at the same time set in place plans to focus on sustaining world class capabilities in its core roles Clearly there will be many challenges in such a transformation particularly with the current operational imperatives (e.g. Afghanistan) and budgetary constraints. However such a transformation will lead to a highly skilled, more agile and thinner DE&S which utilises the private sector to help deliver capability efficiently and effectively to the user at lower cost.

8 For more information please contact: Dr Geoff Robins Managing Director Defence, Aerospace and Communications Atkins The Hub 500 Park Avenue Aztec West Almondsbury Bristol BS32 4RZ Tel: +44 (0) Atkins Limited except where stated otherwise. The Atkins logo, and the strapline Plan Design Enable are trademarks of Atkins Limited. This publication is printed on 9lives 100 paper. It is produced from 100% DSC post consumer recycled fibres. The process is chlorine free, made without the use of chlorine chemistry. The supplier of 9lives 100 is accredited with the ISO standard and is NAPM approved.

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