In the line of fire

Tough new targets on project overruns backed by a 45 million investment in training to improve cost forecasting skills will be introduced by the Ministry of Defence in response to claims it wastes 2.5 billion each year on procurement.

Speaking exclusively to Project on the eve of the election, Paul Drayson, the outgoing Minister for Strategic Defence Acquisition Reform, admitted that the complexity of projects, coupled with unrealistic cost estimates, had led to unacceptable overruns.

He added that the problem has been heightened by intervention from ministers, defence chiefs and senior civil servants delaying projects to make short-term budget savings but adding significantly to costs in the long run.

Lord Drayson was responding to a government-commissioned report by former MoD official Bernard Gray, which claimed that operations in Afghanistan were being compromised by an incompetent Ministry of Defence equipment programme that is 35 billion over budget and five years behind schedule.

Mr Gray asked: How can it be that it takes 20 years to buy a ship, or aircraft, or tank? Why does it always seem to cost at least twice what was thought?

Even worse, at the end of the wait, why does it never quite seem to do what it was supposed to?

Lord Drayson agreed with the reports findings that MoD decisionmaking systems contain incentives which create the conditions for overruns; that project costs and technical risks are not assessed rigorously enough at the outset; that projects over budget are delayed rather than cancelled, which also increases long-term costs.

But he defended overall performance and told Project that the MoD has responded well to the reports findings and that a number of improvements are underway.

These include stricter controls over the entry of new projects to the procurement programme and a greater onus on producing realistic cost estimates at project inception, and also on cancelling projects that overrun.

There will be new rules to stop defence ministers and civil servants delaying projects to achieve shortterm savings and tough new targets on overruns, with cost increases limited to 0.4 per cent a year and annual slippage limited to just 0.8 months.

This compares to an annual cost overrun of 5.6 per cent and slippage of 5.9 months on the 15 biggest defence procurement projects in 2008-09.

Lord Drayson said the Strategy for Acquisition Reform places focus on transparency around project planning and an ongoing commitment to a rolling 10-year budget plan.

Any attempt to delay spending or cut budgets and the implications of such decisions would show up in an affordability report presented annually to Parliament.

Challenges

In his report, Gray says average delays on projects are five years, while average cost overruns add up to 35 billion. The cost increases due to these delays range from 900 million to 2.2 billion per year. The report, commissioned by previous Defence Secretary John Hutton, identified areas where the acquisition process could be improved, including a need to bring equipment plans into line with likely resources; and a need to improve programme planning, management and delivery.

It also acknowledged the many complex challenges impacting on the delivery process.

The Type 45 Destroyer, for example, has around 80 per cent of its equipment new to service, which inevitably carries a high level of project costs and technical risks.

But Lord Drayson told Project these challenges rarely feature in the mainstream media, leading to a skewed view of MoD effectiveness.

He believes the departments track record is defendable and is looking to build on progress so far, which has seen it deliver 98 per cent of equipment needs to desired performance levels.

But there is still work to be done. A recent National Audit Office (NAO) report described the current defence programme as unaffordable and even with initial plans to reduce the deficit, a budget shortfall of between 6 billion and 36 billion remains.

In 2008-09, costs on the 15 major defence projects examined by the NAO increased by 1.2 billion, with two thirds of this increase (733 million) directly due to the decision to slow projects. One example of a project slowed is the Queen Elizabeth Class aircraft carrier programme. The go-slow approach is forecast to save 450 million in the next four years but is forecast to add 1,124 billion in costs in subsequent years. This is a net increase in the forecast cost of 674 million, which the NAO rates as poor value for money. Amyas Morse, head of the NAO, added: The Ministry of Defence has a multi-billion-pound budgetary black hole which it is trying to fix with a save now, pay later approach.

Gray Report: key findings

• Average major acquisitions are 40 per cent over budget and on average 80 per cent later than first estimated.
• Total cost overruns are 35bn and average time overruns total five years.
• Delays are standard across the board and not the result of a small number of legacy projects.
• Poor estimating of likely costs is the main reason for cost overruns.
• There are too many types of equipment being ordered for too large a range of tasks at too high a specification.
• The current programme is unaffordable.
• Competition for limited funding creates a systematic incentive to underestimate the likely cost of equipment.
• The current system is not able to flush out an early stage the real costs of equipment.
• The process of over-ordering and under-costing is not constrained by fear on the part of those ordering equipment that the programme will be lost.
• A bottom up aggregation process makes it hard for top down strategic guidance to control the balance of investment.
• There is insufficient clarity over which systems need to be the most technologically advanced and which could be used sensibly with an 80 per cent solution.
• There is a blurring of roles and accountability between specifiers of new equipment and those tasked with procuring it.
• There is a need for a greater level of resources and skills in programme and project management, finance, cost estimating, engineering and contracting.

The PM perspective

Bill Egginton, Lecturer, Cranfield, Defence and Security

Defece projects are complex. They are delivered against rigorous requirements, inevitable time constraints and constrained budgets.

Moreover, they comprise not only the equipment outputs that we often read about the vehicle, the helicopter, the jet, the ship but also the co-ordination of other so-called defence lines of development (DLoDs) such as the training, the infrastructure, the information, the doctrine and so on, that are essential for the successful delivery of a complete capability solution.

The range of defence projects is vast. They comprise investments of several tens of millions (a very small project by defence standards) to several billions. And there are lots of them over 900 project lines make up the current equipment programme.

The importance of project management knowledge, skills and experience has been recognised by the MoD and now forms part of its corporate competency framework; and clear progress has been made in improving project performance. But the story is more complicated than that. The MoD is a very large and diverse organisation, and the maturity of its project management varies from some very mature, to other less mature areas.

The development of people across the department including Front Line Commands that perform the user role and staff many of the DLoD projects is essential. The management of projects as standalone initiatives is rare.

More likely is the need for co-ordination and integration of projects certainly across DLoDs and, in some cases, across capability areas, hence recent steps to introduce a programme approach to capability delivery Through Life Capability Management (TLCM) based on the principles of OGCs Managing Successful Programmes.

Pressures

Successful project and programme delivery requires a consistent internal way of working, and structures that enable people to work across organisational boundaries. That is not easily done when MoD is at one and the same time a military HQ and a government department.

In addition, there will always be more project opportunities to fill capability gaps than funds available, and with an already overheated equipment programme, a Strategic Defence Review looming and pressures on budgets likely to increase further, consideration of how strategic portfolio management might be used to improve alignment of investment to strategic priorities is an ongoing debate.

And then there is the relationship with industry. At the end of the day, the MoD is first and foremost a customer as evidenced in the recently defined Unified Customer construct.

It goes without saying, but is worth repeating, that defence capability whether its new, updated or upgraded does not happen. There is the need for better project without the contribution from industry as a supplier. MoD must therefore act as that intelligent customer working with industry. This requires an effective customer-supplier relationship and an understanding of MoDs role in dealing with industry. It also needs the right behaviours.

Behaviours built on objectivity, honesty and transparency not easy in any organisation, but increasingly recognised as essential if MoD is to take a more strategic, pan-defence view of its business.

• Contact Bill Egginton at b.egginton@cranfield.ac.uk

Key recommendations:

1. Strategic Defence Review to be held in the first session of a new Parliament

   a) The output of the reviews should be fully costed and audited.

   b) These costings to include 10-year defence and 20-year equipment budgets.

2. A rolling 10-year budget should be agreed for the MoD

   a) Budget to be enshrined in law.

3. An Executive Committee of the Defence Board should be formed to be accountable for an affordable Equipment Programme

   a) Ministers, the Services, industry and others would be expected to offer direction or views in the process of the formation of the plan, rather than after its creation, to ensure a balanced and affordable plan was produced.

4. Clarify roles and create a real customer-supplier relationship between the capability sponsor (MoD centre) and project delivery (DE&S)

   a) Clear ownership of each project/requirement to be allocated to a single individual within the defence staff capability team, including business case formulation.

   b) Changes to requirements, programme delays, etc to be specifically and realistically costed and included in the next iteration of the plan. If any increases threaten affordability (as is likely) cuts must be made elsewhere.

5. Revise aspects of the Approval process to improve decision-making

   a) Projects pre-Main Gate should be included in the plan at 90th percentile cost.

   b) No business case should be accepted, nor requirement included in the overall plan, other than on the basis of costs derived as above.

6. Further cost reductions within in-service support should be pursued vigorously and the aspirations of TLCM should be reappraised

   a) Significant further external work should be commissioned as a matter of urgency into the costs and function of in-service equipments.

7. Improve the ability of DE&S to deliver efficiently on new equipment and support

   a) Develop better skills in the workforce. Significantly increase programme and project management skills within DE&S at all levels of the organisation.

8. Change the status of DE&S At the very minimum it should become a Trading Fund.

Lord Draysons response: In full: forecasting change

The Defence Equipment and Support (DE&S) section of the Ministry of Defence has delivered eight out of 10 projects on time and nearly nine out of 10 to cost. 98 per cent of our equipment meets the desired performance, while independent benchmarking has placed DE&S in the top quartile of international organisations managing complex projects.

Support for the operation in Afghanistan is equally impressive, where we have approved over 3.2 billion of Urgent Operational Requirements (UOR s) since the operation began. This includes over 700 upgraded protected vehicles since 2008, a picture which hardly accords with the mainstream media view of the MoD's effectiveness in this area.

Nevertheless, it is entirely right that the MoD's procurement of and support for military equipment is scrutinised. For, in 2008/09, the average in-year cost variance across our 15 largest projects (which had passed their main investment decision) was 5.6 per cent; average project slippage in-year was 5.9 months.

We have found that it is the largest and most complex projects which create the cost and time issues projects which, in some cases, began before the bulk of our most recent acquisition reforms.

The very complexity involved in these projects is, of course, part of the problem. With the Type 45 Destroyer, for example, around 80 per cent of the equipment being fitted is new to service (such as the gas turbine engines, radars and the main weapon system). The new technologies for the Destroyer are necessary for battle-winning advantage, but the cost growth on the project has been substantial.

Yet, as Bernard Gray's independent report into defence acquisition made clear, some problems are of our own making. He found that MoD decision-making systems contain incentives, which create the conditions for overruns; that project costs and technical risks are not assessed rigorously enough at the outset; that projects over budget are delayed rather than cancelled, which also increases long-term costs.

The Gray report revealed an organisation aware of its own need to improve. The MoD has responded well to his analysis, and improvements are underway.

We are injecting an extra 45 million into skills, with particular attention to cost forecasting. The recent Strategy for Acquisition Reform, meanwhile, sets out how it will strengthen the MoDs decision-making framework. Central to this is transparency around planning. We will demonstrate annually to Parliament that we have an affordable 10-year equipment and support programme. The Treasury will provide a 10-year planning horizon on which to base the programme. The National Audit Office will audit the affordability report each year. on cancelling projects that

What this means is that defence ministers, chiefs and senior civil servants will no longer be able to delay projects in order to achieve an affordable budget in the short term. The implications of such decisions would show up in the affordability report. Instead, there will be a greater onus on producing realistic cost estimates at project inception, and also on cancelling projects that overrun.

I believe these steps will build on what we have achieved to date. They are reflected in new project performance targets allowing average annual cost increases of only 0.4 per cent and average in-year slippage of just 0.8 months. For an overall programme that is not overheated, we can meet these targets.

The independent perspective

Trevor Taylor, Professorial Fellow, RUSI

The Ministry of Defence has got itself into a position where its equipment procurement plans significantly exceed the resources likely to be made available to it, given the state of national finances. The 2009 report by Bernard Gray into defence acquisition, the National Audit Office and the House of Commons Defence Committee have brought this into the open, and the next defence review will either have to direct the downsizing or cancellation of projects or provide more money.

This over-commitment has come about most obviously because a number of important defence projects have increased in cost and, although the MoD cannot expect better than level funding in real terms, the Ministry has been reluctant to make financial space through cancellations. There are various reasons for this, including penalty clauses in existing contracts, but political considerations also have a place: governments do not necessarily seek out the job loss announcements associated with the abandonment of major defence projects. But why do defence projects increase in cost above that forecast? Is this not after all what good project management sets out to avoid? There is extensive evidence that, in Defence, the parameters of time, cost and performance have frequently been set before adequate technological and engineering de-risking has taken place. The acquisition system as a whole has incentivised earlystage optimism and commitment in both government and industry, with government setting ambitious requirements and firms offering low costs and prices. Risky behaviours have conspired against principles and process a point alluded to by Bill Egginton.

Activity

Authoritative guidance on de-risking is available from the US Government Accountability Office but more activity in this area prior to the MoDs Main Gate approval point would mean projects staying longer in exploratory phases where they might be thought more vulnerable to shrinkage or abandonment. It would also mean their relying more on non-capital funds within government (which are particularly scarce).

A final consideration to be made is as to why MoD requirements are so often so ambitious, especially as the Ministrys record of delivery on smaller and more modest projects, including most Urgent Operational Requirements, is good. Here a significant element is the UK policy direction that UK forces should be broadly comparable with those of the US. The US puts much more money into defence, pushes the limits of technology, and normally accepts significant cost increases. In 2009 the Government Accountability Office reported that the top 96 US defence programmes had a cumulative cost growth of $296 billion and an average delay of 22 months. While the UK persists in seeking to match its forces against those of its larger ally, it can expect similar challenges.

Trevor Taylor Professorial Fellow, RUSI How unique are the challenges facing the MoD? What lessons can the profession take away from the Gray report and similar reviews?

Your say - email your views to james.simons@corpnews.co.uk

• Trevor Taylor is a Professorial Fellow at the Royal United Services Institute (RUSI ) an independent think tank engaged in defence and security research. www.rusi.org